Warren Buffett nailed the problem with Wall Street pay ― and offered a draconian solution

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The National Archives did a document dump on Friday, releasing transcripts, meeting agendas, and confidentiality agreements from the Financial Crisis Inquiry Commission.

The group was set up in the aftermath of the crisis by Congress to look into the causes of the event, and the documents are a gold mine of information.

We're reading through it and will update as we see more interesting nuggets, but to start out, here is a great excerpt from an interview with billionaire investor Warren Buffett in 2010.

It pretty much sums up the problem with executive compensation across America, and particularly on Wall Street:

Well, it's perfectly understandable. I mean, you've got a CEO that cares enormously about his compensation. You've got a compensation committee that meets for a few hours maybe, you know, every meeting. You've got a human relations vice president who is working for the CEO that probably suggests a compensation consultant — a compensation consultant who is draconian is not going to get hired generally around, or even too innovative on the downside.

...

I was at Solomon. And it — the nature of Wall Street is that, overall, it makes a lot of money relative to the number of people involved, relative to the IQ of the people involved, and relative to the energy expended. They work hard, they're bright, but they aren't — they don't work that much harder or that much brighter than somebody that, you know, is building a dam some place, or a whole lot of other jobs.

Market systems produce strange results and Wall Street — in general, the capital markets are so big, there is so which money, that taking a small percentage results in a huge amount of money per capita in terms of the people that work in it. And they're not inclined to give it up.

Comp — most of the comp — you're talking about individual traders on, you know. And they have the big — you know, they call it the "traders' option." But they've got the upside. If they have a good year, if they have a bad year, you know, they might have a good year again next year. They might go to another firm. But they really — their interests are not totally aligned with shareholders.

He goes on to say that the problem is especially difficult on Wall Street, as a top performer can in theory move next door and set up a hedge fund.

"It is a tough managerial problem," he said.

He went on to suggest a fairly dramatic arrangement to stop banks from going bust while still giving executives large payouts.

Basically, he says, ensure that bosses lose everything if a bank has to be bailed out:

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.

Perhaps, then, it's not surprising that he also supports dramatic clawbacks, which are arrangements where CEOs have to pay back earnings from previous years:

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.

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