Buffet Says CEOs Are Overpaid

Half of America's CEOs make more than $8.3 million per year, according to a recent study by the Associated Press. Yahoo's CEO was at the top of the list with his earnings of $71.7 million. This is far higher than Alex Rodriguez's $27 million compensation, and he is the highest-paid baseball player. The top CEO compensation is even higher than what an A-list celebrity makes in a typical movie. Not surprisingly, CEOs of energy and oil companies were also high on the list of top compensation.

The Securities and Exchange Commission has established more strict guidelines on reporting the compensation of CEOs. More detailed information has to be given about perks, such as tax payments made on behalf of the CEO and payments made for household bills.

Another part of this story that was nothing new to me was the fact that a very small portion of total CEO compensation is made up of salary and cash bonuses. The rest of the compensation is mostly stock grants and stock options.

"If the minimum wage had risen at the same pace as CEO pay since 1990, it would be worth $22.61 today, according to the Institute for Policy Studies." This is very telling evidence that executive compensation is going through the roof.

What does Warren Buffett have to say about this? In his annual letter to shareholders last year, Buffett said that "too often, executive compensation in the U.S. is ridiculously out of line with performance."

There has been a movement to require more explanation of CEO's compensation packages. There is also growing consensus that CEO compensation should be ratified by an entire board of directors and not just a compensation committee. I think that shareholders will continue to demand better information about the rationale behind compensation packages. If nothing else, shareholders will put a downward pressure on CEO compensation. Warren definitely has the right idea when he says that compensation often doesn't match performance.