The Advisors' Blog

– Broc Romanek

The title of this Bloomberg opinion piece by Matt Levine catches your eye (here’s a Cooley blog about it). Here’s an excerpt from the piece:

But also: Warren Buffett makes $100,000 a year? Really? I mean, yes, it is famously his salary. But Buffett increases his wealth each year in two ways: He gets paid for doing his job, and also he has billions of dollars invested in Berkshire Hathaway and most years Berkshire’s stock goes up. In 2017, Berkshire Hathaway’s stock was up about 22 percent, meaning that the value of Buffett’s shares increased by about $15.1 billion, to $84.1 billion. So in a sense he made $15.1 billion in 2017, or $15.1001 billion if you include his salary, or $15.10005 billion if you deduct the stamps. That’s a pay ratio of about 282,435 to 1.

Is that the right way to count? Meh. Every year Institutional Investor’s Alpha publishes its “Rich List of the World’s Top-Earning Hedge Fund Managers,” and every year people write stories saying that the list reveals how much hedge fund managers “are paid” or “take home,” and every year I point out here that it is actually mostly a list of how much those managers’ investments appreciated. It is not really how much they are “paid.” But people like to interpret it that way, and you can understand why, since for practical purposes that appreciation is a big part of their economic reward for running their hedge funds. Most years Buffett would be way above anyone on the hedge-fund-manager list, if he counted.

This CFO.com piece claims that pay ratios mislead investors – and this WSJ article posits how to fix misleading pay ratios…