The Buffett Bonus Call (BRK-A, HBC)

There is an interesting take out there on Berkshire Hathaway Inc. (NYSE: BRK-A) and on HSBC Holdings plc (NYSE: HBC) over how these firms should pay a high bonus to staff based upon a new economic model of calculating pay.  Reuters noted that consulting firm Stern Stewart’s new Relative Wealth Added (RWA) model showed that Berkshire Hathaway (NYSE: BRK-A) and HSBC Holdings plc (NYSE: HBC) were two of the wort performers of RWA during the 2002 to 2007 expansion, but were the two best performers since.  Anyhow, this is more of a notion over a new pay model and the call here is that staff at these firms should be getting big bonuses under the new model.

There are arguments that are both for and against the idea that highly compensated  people should be tied only to the long-term success of their underlying company.  This has many fair and accurate notions in theory, particularly in the current climate where high pay is often viewed with public resentment.  But there is also the theory that it gives little protection to that same highly paid executive, manager, or rainmaker.

This approach does at least consider individual contributions and does have many merits, but all of these notions in any absolute form still have many objections that still feel like a war on wealth.  It is in a sense putting worker and executive pay up for public and regulatory vote than to shareholder vote.  And it puts all of the burden on the individual even in the “what’s good for the team” notion.

Berkshire Hathaway employees probably have no concern over whether Berkshire Hathaway will be a financial giant down the road.  Even if Buffett himself showed exactly what it would take for all those derivative bets to be a serious loser, that is still likely the case.  And it is at least believed that no single entity in that pot can actually down down the whole ship because of the way the units are structured.  Nonetheless, Berkshire is a very broad mix of portfolio companies and all employees would have to gamble that all of their counterparts at all of the companies are all doing the right thing all the time.

And as far as HSBC is concerned, this is a banking and financial services global giant. No one on the pay-capping mentality in the public will feel sorry for ex-workers of Bear Stearns or Lehman Brothers, but there were many solid employees there who were wiped out in those implosions.  Nick Leeson’s trading loss scandal and management’s subsequent folly of how they released the data took down Barings and wiped out many employee and management fortunes in the process.

There were many fine workers over at Worldcom and at Enron who kept believing what the lying management told them about the business being solid and that they should hold their stock and even buy stock on the way down.

While these are all very unique and not the norm, tying the success of a highly compensated employee (or the long-term rewards of employees) only to long-term performance does have a small notion of a lottery ticket that just comes from a smaller pool of lotto players.  It only takes one piece of really bad fish to empty clean out a whole sushi bar.

If you will recall back in 2001 to 2003 when corporate scandals were wiping out the fortunes of small workers to highly-paid workers, there was even a temporary move where the ‘public safety notice of the day’ was that workers should NOT have too much of their retirement and not to have their long-term rewards tied only to the success of their employer.

Many of these new models are after calls for a realignment of high pay on an issue that has become very politicized.  There are many alternative models like this out there that seek to align highly paid employees with a long-term success of the company that pays them today.  What about when employees become disgruntled, or when a company holds their future fortune over their heads?  That happens.  When companies become disgruntled against an employee, that employee get axed or is forced out.

This argument over pay and over bonuses is one that can go to infinity and it is easy to admit that severe case like Enron, Worldcom, and Barings are unique and rare.

The question is, “Will Buffett write big checks?”… Based upon how the climate is and based upon how he has said that many of the haves need to pay more in tax, it seems unlikely.  Doubly so since he has been so aligned with the Obama administration during the election.  Buffett might just tell everyone, “Sorry folks, take one for the home team.  Not this year.”

JON C. OGG
SEPTEMBER 8, 2009