1. Looking at ‘Ratchet, Ratchet and Bingo’:
In his 2006 annual report to shareholders , Warren Buffett had this to say about compensation consultants:
Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.
Buffett went on to explain how these consultants simply make outsized pay in any industry the norm by ratcheting up the average, so that all executives in a given “peer group” have to get what everyone else gets:
Additionally, the committee is told about new perks that other managers are receiving. In this manner, outlandish “goodies” are showered upon CEOs simply because of a corporate version of the argument we all used when children: “But, Mom, all the other kids have one.” When comp committees follow this “logic,” yesterday’s most egregious excess becomes today’s baseline.
During his talk a year ago at the Berkshire Hathaway annual shareholders meeting, when Buffett called these compensation consultants prostitutes, his vice chairman Charles Munger objected. “Prostitution would be a step up for them,” Munger said.