The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [440]
The rich, however, had been getting very rich indeed as the stock market continued its resurgence after 9/11. A dozen new hedge funds seemed to sprout every day. They were cashing in on all the leverage from the low interest rates the Federal Reserve had provided. So many people were raking in stock options and taking fees of two-and-twenty percent of other people’s money in private equity funds, hedge funds, and funds of funds, that billionaires were becoming as common as raccoons around a garbage can. A lot of the quick-bucks wealth of the new economy bothered Buffett because of the way it had been transferred in massive amounts from investors to middlemen without producing anything in return. The average investor was still getting—of course—the average return, but with all of these fees gouged out.
One of Buffett’s least favorite ways for the rich to get richer was through stock options—since his famous “no” vote on the pay package at Salomon, no other board had ever asked him to serve on its compensation committee. Coca-Cola had given Doug Daft options on 650,000 shares of its stock in 2001. Daft had originally asked to be compensated with stock options that would pay off only if earnings increased fifteen to twenty percent. The shareholders approved it with Buffett staring at his shoes thinking, Okay, this will never happen. A month later, the compensation committee belatedly realized that the target was impossible and Daft would never get paid. It backtracked and bonus-pimped for him, lowering the target to eleven to sixteen percent.34 That was like moving the finish line in a marathon to the nineteen-mile mark. Buffett couldn’t believe it—the shareholders had voted for twenty-six miles and would be handing out a prize after nineteen! Another vote for the rich. So far, Daft had not impressed, and Coca-Cola’s stock had gone nowhere. Watching trophy-sized option payments proliferate despite rising outrage, Buffett felt he had to seize the opportunity he had been waiting for—to finally kill counterfeit stock-option accounting.
Managers loved stock options because of a quirk of accounting history that said that if companies paid their employees with options instead of cash, they booked no cost. It was as if the stock options did not exist. In the “real” world, a privately owned business would instantly recognize this as a bogus idea. If the butcher, baker, and candlestick maker gave away options for shares worth, say, twenty percent of their businesses, they would be acutely aware that they had just given away a chunk of the profits as well.
But the accounting rules had made stock options into play money. Thus, bonus-pimping on an incredible scale had begun to occur in the late 1990s. CEOs had, on average, been paid forty-two times as much as the average blue-collar worker in 1980. Twenty years later, that ratio had increased to more than four hundred times.35 The top-earning CEOs got billion-dollar packages. In 2000, Sandy Weill was paid $151 million at Citigroup, Jack Welch $125 million at GE, Larry Ellison $92 million at Oracle. Although Steve Jobs was taking only a $1 salary at Apple for 1997 through 1999, he got a windfall $872 million stock-option grant in 2000—plus a $90 million Gulfstream jet.36
When the accountants had tried to change these rules in the early 1990s, corporate America, led by Silicon Valley, stormed the gates of Congress, armed with lobbyists and campaign contributions, begging their representatives to save them from the terrible new accounting rules. Until the bubble finally burst in 2002, they had succeeded in stopping those rules dead in their tracks and had almost succeeded in murdering the Financial Accounting Standards Board, the accounting rulemaker, to boot.
Buffett had been writing about stock options since 1993 but now felt the time was finally ripe for change. He wrote a thundering, influential editorial in the