Buffett: Limit CEO pay through embarrassment 

Buffett: Limit CEO pay through embarrassment

Calls himself the 'Typhoid Mary' of compensation committees

By Alistair Barr, MarketWatch

Last Update: 5:08 PM ET May 2, 2009

OMAHA , Neb. (MarketWatch) -- The way to limit excessive executive pay in the U.S. is to embarrass chief executives and compensation directors, rather than imposing more regulations, Berkshire Hathaway Chairman Warren Buffett said Saturday at the company's annual shareholder meeting.

Retention bonuses paid by American International Group AIG earlier this year "had a huge impact" on public perception of executive compensation, Buffett said.

While noting that the public "outrage was probably disproportionate to the actions," Buffett said that wasn't important.

When the public is outraged, Buffett said politicians respond, but he warned that regulations designed to limit compensation in the past backfired.

Instead, Buffett said the largest half dozen or so institutional investors should "speak out on the most egregious cases."

"The way to get big shots to change their behavior is to embarrass them," he explained. "The press has great opportunities for this, but the big institutional investors could help."

Directors on compensation committees should also be targeted because they don't want to be in newspapers looking stupid, Buffett added.

"It would act as a restraining factor that might set in corporate America," Buffett said. "The restraining factor isn't there right now."

A national furor erupted earlier this year when American International Group paid more than $160 million to retain executives at its derivatives unit, the main culprit behind the near-collapse and subsequent government bailout of the insurance giant.

Several bonus recipients agreed to return the money, but the episode has given renewed impetus to long-running efforts to change the way corporate executives are paid in the U.S.

Buffett and Vice Chairman Charlie Munger have criticized excessive executive compensation in the past.

Buffett has served on 19 corporate boards, excluding those of Berkshire BRKABRKB and its subsidiaries, but calls himself the "Typhoid Mary" of compensation committees.

Buffett has only been on one compensation committee and was outvoted quickly on the most important issues.

At Berkshire, Buffett sets salaries and incentives for the CEOs of roughly 40 significant operating businesses. In his 2006 shareholder letter, the Berkshire chairman said the process takes virtually no time, while noting that no CEOs ever left for other jobs in 42 years.

He partly blamed consultants for perpetuating a system that gives CEOs "astronomical compensation" for "mediocre" results.

"Compensation reform will only occur if the largest institutional shareholders -- it would only take a few -- demand a fresh look at the whole system," Buffett wrote in the 2006 letter.