Would you believe that two of the four richest people in the U.S. were paid nothing and almost nothing, respectively, last year for running two of the most important companies in the world? Well, you should believe it, because it’s true.
It’s also true, as you’ll see, that the annual disclosures that U.S. companies make about the ratio between what their chief executive officer gets paid and the median pay of the companies’ other employees can sometimes be misleading.
Which happens to be the case with both of the CEOs we’re talking about: Elon Musk of Tesla and Warren Buffett of Berkshire Hathaway. (You can look up their ratios—along with thousands of other CEOs—in Fast Company‘s CEO pay database.)
You have to be especially careful with the numbers when you deal with Musk, whose net worth was $225 billion of September 27, according to the Bloomberg Billionaires Index. He ranked first on the list. By contrast, it’s a lot simpler—albeit misleading—to deal with the numbers disclosures that Berkshire makes about Buffett, who Bloomberg says was worth $120 billion as of September 27.
(A brief aside for the voyeurs among us: Bernard Arnault of France was second on the Bloomberg list, at $161 billion; Jeff Bezos was third at $150 billion; and Bill Gates was fourth at $123 billion.)
Musk’s salary at Tesla last year was listed as zero. That’s right, nothing. Tesla says in its Securities and Exchange Commission filings that Musk—who Tesla describes as its “technoking,” whatever that means—used to earn a base salary “that reflected the applicable minimum wage requirements under California law” but he refused to accept it.
So, in May of 2019, Tesla says, “we eliminated altogether the earning and accrual of this base salary.” The company has since moved to Texas, where there seems to be no law requiring a company to pay minimum wage to its chief executive.
Now, to Buffett. For as far back as I can remember—which is pretty far back, given the decades that I’ve written about him—Buffett’s salary was $100,000 a year. His total 2022 pay was reported as $401,589, which Berkshire says includes $301,589 for security services that the company provides him.
Given that Musk’s income from Tesla last year was given as zero and the median Tesla employee earned $34,084, the ratio of Musk’s pay to median employee pay was a big fat zero.
Buffett’s ratio was 6.4 times Berkshire employees’ median income of $62,691. If you included only Buffett’s $100,000 of salary, the ratio would have been 1.6 to 1. Of course, Buffett’s wealth comes from his ownership of Berkshire stock, not from what Berkshire pays him to run the company.
Now, let me show why I think that the compensation numbers involving Tesla and Musk can be both accurate and misleading at the same time.
If you look only at what Tesla paid Musk last year, he seems to be a saint who works for nothing. However, the numbers change wildly if you step back a year and look at Tesla’s disclosures for 2021.
That year, Musk exercised an enormous batch of Tesla stock options that were due to expire in 2022, and realized a gain of more than $23 billion on them. The precise number of the value Musk realized by exercising the options was $23,452,910,177, according to Tesla’s proxy statement.
Musk’s “total realized compensation” in 2021 was given as $734,762,107. So, while the ratio of Musk’s compensation to the median compensation of all Tesla employees last year was zero, for 2021 it was 18,043-to-1.
That isn’t very saintly.
By contrast, Buffett doesn’t get stock options from Berkshire, so $100,000—or if you insist, $401,589—represents everything that Buffett gets from Berkshire.
However, despite being the top executive at Berkshire, Buffett isn’t anywhere close to being the highest paid. His two top subordinates—Gregory Abel, the vice chairman of Berkshire’s non-insurance operations; and Ajit Jain, vice chairman of insurance operations—each got salary and bonus totaling $19 million last year and showed total income from Berkshire of $19,015,250.
If you did the median-employee ratio with Abel or Jain, it would be 303.3 to 1. That would be a more realistic ratio than the 6.4 or 1.6 ratio between Buffett’s pay and the median employees’ pay. But the rule requires that a company use the CEO’s pay for the ratio, not the highest-paid employee’s pay. (In San Francisco, where the city has implemented a tax on companies with large pay ratios, the law eliminates this loophole by using the highest-paid employee as its benchmark.)
There’s a lot to be learned from looking at the CEO-to-median-employee’s pay ratio—and in many cases, there’s a lot to be outraged about, given the huge disparities between what the top dogs often get compared with what the workers get.
But as you can see from the Musk and Buffett examples, you sometimes need to put numbers into context, not just accept them blindly. That’s a lot more work than just doing boss-to-worker ratios—but it gives you a far more accurate picture of what’s really going on.
Disclosure: My wife and I have owned Berkshire stock since 2016. It currently accounts for about 2% of our portfolio.
Loading the player...
Nadine Mezher reveals secrets to developing a healthy investment outlook