Munger weighs in on CEOs' big pay packages

LOS ANGELES — With an annual salary of $100,000, Charles Munger is hardly your typical big-company chief executive. But he doesn't exactly need the money.

A founder of the Los Angeles law firm Munger, Tolles & Olson, Munger gave up practicing law in 1965 to focus on managing his investments. In 1978, he teamed up with fellow Omaha, Neb., native Warren Buffett to run holding company Berkshire Hathaway.

The results are the stuff of business legend, and Munger's Berkshire Hathaway shares are valued at $1.7 billion.

In addition to being Berkshire's vice chairman, Munger is CEO of Pasadena, Calif.-based Wesco Financial, an insurance and office-furniture rental business that is successful in its own right.

Wesco shares gained 19.5 percent in 2006, besting the 13.6 percent increase for the Standard & Poor's 500 index of blue-chip companies. Its recent third-quarter profit of $23.5 million reflected a 32 percent gain over the same period a year earlier.

Like Buffett, 83-year-old Munger is a favorite of corporate watchdogs for his long-held view that too many executives feather their own nests at the expense of shareholders.

With executive compensation shaping up as an issue in Congress and at corporate annual meetings this spring, the Los Angeles Times asked Munger about his views on the subject.

Q: How did CEO compensation get so out of whack?

A: Some of the worst sinners are compensation consultants. I have always said that prostitution would be a step up for these people. "Whose bread I eat, whose song I sing."

It isn't that the CEOs are such terrible people. It's that the system, with it's envy-driven compensation mania, has developed to a place where it brings out the absolute worst in good people.

Q: What about corporate directors? There's been a move to pay them more and try to make them more accountable. Would that help?

A: Paying directors more is going to make the compensation excesses harder to fix. The more you pay directors, the more the directors are going to want to pay the CEO. Putting more duties on the directors and giving them more money is like trying to extinguish a fire by pouring gasoline on it.

If I were running the world, I would not allow directors to be paid at all. I would make directors be exemplars and serve just as they serve on the boards of Harvard and Yale.

Q: What about putting limits on how much a CEO can be paid?

A: Congress tried to do that in 1993 by passing a prohibition on pay of more than $1 million. You can see how effective that was. I think you can assume that any law will be promptly evaded.

I don't see blanket limits as a good idea, because it's not the dollar amount that's a problem. No one is the least mad when Tiger Woods earns $18 million. They figure he's earned it.

What makes CEO pay so difficult is that only a few of the people who are earning these huge amounts are actually worth it. Everyone else figures they have to keep up, or recognize that their guy isn't as good. Who wants the recognition that the company down the street has a remarkable CEO, but we have a mediocre klutz?

I like the idea of high pay for people who are really worth it. The problem is that most of them are not. Every mediocre employee who rises through to the ranks to become CEO thinks he should retire rich. It's crazy.

Q: What is the solution?

A: The reason this has grown to such an extreme degree is that it is so hard to do something about it. It's like autocatalysis in chemistry — it's a reaction that just feeds on itself and keeps ballooning and ballooning.

If more executive compensation issues required shareholder approval, I think that might dampen some of the excess. That has been suggested, and there is a lot of discussion around that subject. But there are also a lot of malcontented nuts in the world, and you wouldn't want the malcontents to get too much power.

I don't know. Just because something is a serious problem doesn't mean that you can fix it. There's an element of tragedy in this because some very good people are acting in some very bad ways.

But things are seldom so bad that you couldn't make them worse by a dumb intervention.

Q: You don't seem to have much hope that things will change.

A: There's always hope. But, frequently, when things are very excessive, the correction is very painful. Korea had cowboy capitalism, with low fiduciary standards, and things got worse and worse. They had to go through a total collapse and a huge scandal, but it's now largely fixed.

I would like to see CEOs act as exemplars. I would like them to realize that they are setting an example when they are setting their own pay. But CEOs are very pompous and they assume they are right about everything. Saying that to them would be a total waste of breath.

I don't want to spend my life nattering against my friends' pay. But if you think there's an easy solution, you don't understand the problem too well.

We have had an enormous improvement in the garden variety of corporate fraud in America, in pretending to earn money that you did not. But the next level of reform will be much harder.

In my opinion, not enough executives have gone to jail.