This past weekend Berkshire Hathaway Chairman Warren Buffet had a few things to say about CEO compensation. At an annual stockholder’s meeting, which Mr. Buffett dubs “Woodstock for Capitalists,” Mr. Buffet told shareholders that many CEOs are paid too much. Mr. Buffett also said that stock options are unfair because good executives can be hurt when the market is on a downturn and poor executives can profit during a boom.
Mr. Buffett isn’t alone in thinking that current compensation methods don’t properly reward executive performance. Some experts suggest that stock options indexing might be a possible solution to the problem.
The indexing method evaluates CEO performance against a benchmarking group. CEOs are paid by how well their companies perform against the benchmarking group. The board would issue options but if the company failed to outperform the benchmarking group, the CEO wouldn’t be able to exercise the options. Another variation is to protect CEOs during a bear market. In this case, the CEO could exercise options if the company’s shares declined less than the benchmarking group’s.
Proponents of indexing say it will make compensation packages more fair and reward good performances. They say it will prevent some of the inequities that were recently highlighted in various press reports, including Business Week.
In its annual survey of executive compensation, Business Week cited the CEOs who in the last three years gave shareholders the most for their money and those who didn’t. On the poor performing end there are 10 executives who earned between $8.3 million and $781 million despite the fact that shareholder saw returns of –56 percent to –99 percent. On the positive side, Business Week lists 10 executives who performed well. These executives earned between $1 million and $3.8 million and brought shareholders returns of 8 percent to 211 percent.