Warren Buffett quotes on options. Why Warren Buffett disapproves of options and his thoughts on options backdating.
Options as Executive Compensation
Warren Buffett often states that he does not approve of options. This is because options carry with them a perverse risk-reward system that he does not like. Options gave its holders the potential for significant rewards without any risk – thus, those who hold options have nothing to lose when they are taking business risks and everything to gain. They might thus be more likely to engage in risky behavior that would not be in the interest of shareholders.
In contrast, if management were given shares instead of options, the interests of management and shareholders would be better aligned, as management would then share in both the risks and the rewards of their business decisions.
Limited Executive Compensation
Buffett likes to limit executive compensation in the form of salaries in general, as over the top executive compensation hurts shareholders directly. Thus, the perk of working as a manager might not be the compensation, but this is often outweighed by the significant autonomy that Buffett gives his managers. He is very trusting of his managers and also a good motivator who can get his managers to put in their very best.
Warren Buffett: Options Backdating
The other options-related issue that Warren Buffett has spoken out strongly about is the issue of options backdating. In the past, some companies
have retroactively adjusted the grant dates of options in order to increase their value. Apple, for example, discovered issues with options backdating during the Dot Com Bubble, leading to the resignation of Apple CFO Fred Anderson. Buffett argues that regardless of whether this is legal, it is unethical and would not be tolerated in any of the Berkshire subsidiaries.