Warren Buffett says rules requiring CEO-to-employee pay comparison backfired

• Warren Buffett criticized rules requiring companies to compare CEO pay to that of average workers.
• "The good intentions didn't work; instead they backfired," he said in a letter published Monday.
• Rather than "embarrass" CEOs, Buffett says the new rules resulted in more envy and greed.

Warren Buffett is generally a pretty grateful guy, but there's one thing in particular that he's not thankful for: CEO pay ratio rules.

The legendary investor took some time in his third annual Thanksgiving letter to Berkshire Hathaway shareholders on Monday to criticize rules that require public companies to compare their CEOs' compensation packages to that of the median worker.

"The good intentions didn't work; instead they backfired," he said in his letter.

Buffett said in the letter that the reformers behind the rules "sought to embarrass CEOs" in the wake of the Great Financial Crisis of 2008 by requiring companies to show how many years the average employee would have to work to earn what the boss makes in one year.

If the goal was to limit the explosive growth of CEO pay, Buffet said it didn't work — at all.

"Based on the majority of my observations — the CEO of company 'A' looked at his competitor at company 'B' and subtly conveyed to his board that he should be worth more," he said. "The new rules produced envy, not moderation."

"What often bothers very wealthy CEOs — they are human, after all — is that other CEOs are getting even richer. Envy and greed walk hand in hand," Buffett added.

The Securities and Exchange Commission has specific rules about how public companies must identify a "median" employee, calculate their annual pay, and compare it to the CEO's salary, benefits, stock, and other perks.

In math terms, "median" refers to the middle-most value in an ordered list, so that means about half of a company's workers earn more and half earn less than its "median employee."

Buffett said in his letter that the disclosure rules contributed to corporate filings that are now five times longer than they once were.

The Oracle of Omaha is not alone in disliking the CEO pay rules.

In the annual proxy filings that include the pay ratio details, companies frequently take issue with the metric, arguing that it should not be used as a basis of comparison against peers or any other firm.

"The pay ratio reported by other companies may not be comparable because companies have different employee populations and compensation practices and may utilize different methodologies, exclusions, estimates, and assumptions in calculating their own ratios," Starbucks said in its most recent filing, for example.

Its CEO, Brian Niccol, made $97.8 million last year — 6,666 times the median employee.

Other companies, like Costco and Amazon, have chosen to disclose more information than the rules require by identifying a supplemental median employee from their US-based, full-time, full-year workforce.

That adjustment results in a higher-paid median worker and narrows Costco's CEO pay ratio from 262:1 to 192:1, and Amazon's from 43:1 to 33:1.

"What consultant ever recommended a serious cut in CEO compensation or board payments?" Buffett asked in his letter.

Berkshire Hathaway's proxy statement from earlier this year includes its own critiques of the SEC rules, noting that Buffett's salary has been $100,000 for more than 40 years, plus $305,111 in home and personal security expenses. With the median employee earning $82,106, Buffett's pay ratio was 4.94:1.