Warren Buffett: make sure the CEO loses everything if a bank has to be bailed out

Despite various policy and regulatory reforms to rein in excessive CEO pay, top executives continue to rake in the huge bucks—dramatically outpacing compensation for the rank-and-file employees who keep their companies running. When the company is a bank that relies on a direct or implicit promise to be bailed out by the federal government if it gets in trouble, the perverse incentives are obvious.

As Business Insider noted, Warren Buffett recognized the problem back in 2010. Inside documents of the Financial Crisis Inquiry Commission, he offered this intriguing proposal: should a bank ever need to be bailed out by the government, make its top executives lose their own money. All of it. 

Here’s Warren Buffett himself explaining the idea:

“If you’re worrying about the Bear Stearnses of the world is to have an arrangement in place so that if they ever have to go to the federal government for help, that the CEO and his spouse come away with nothing. And I think that can be done, you know.

Maybe the spouse would do better policing than the regulator.

[…]

I’ve suggested to them that maybe they give back, you know, five times the highest compensation they received in the previous five years or something. It has to be meaningful, but it can’t be so draconian, that you don’t get directors.

You’ll get CEOs. You [don’t] have to worry about that. You have a lot of upside for CEOs, you can give them the downside of, you know, sack cloth and hot ashes, and you’ll still get CEOs.”

For more information, see “Warren Buffett nailed the problem with Wall Street pay—and offered a draconian solution,” Business Insider (2016).