Chapter 29. Corporate Governance: Employees, Directors, and CEOs

Warren Buffett's annual salary for 2008 was $100,000 and his total compensation was $175,000.

Berkshire Hathaway Proxy Statement, 2009

Warren Buffett has often remarked that he loves to run Berkshire Hathaway. Why? It is certainly not his $100,000 salary that motivates him in his roles as Berkshire Hathaway's CEO and chairman of the board. One necessary ingredient to ensure the success of any organization is to have motivated employees and top management. This chapter explains the salient features of Buffett's thinking on how to motivate employees, directors, and CEOs.

Employee Compensation at Berkshire

In 1996, Berkshire acquired the auto insurer GEICO. Immediately after the purchase, a focused compensation plan was put in place. Examining this simple but effective change by Buffett gives us insight into practices designed to motivate employees. The objective of the compensation plan was to keep employees focused on those aspects of the business that are under their control and that have an impact on profitability. Buffett writes, "At GEICO, the bonuses received by dozens of top executives are based upon two key variables: (1) growth in voluntary auto policies; and (2) underwriting profitability on seasoned auto business. Everyone at GEICO knows what counts."[209]

When a compensation plan is that simple and focused, dramatic results ensue. The following reflection by Buffett provides us with a set of principles in this ...

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