2003: Why doesn't Buffett earn a performance fee?

AUDIENCE MEMBER: I’m Norman Rentrop from Bonn, Germany.

Mr. Buffett and Mr. Munger, I have a thank you and a question for you. Thank you for allowing us shareholders to invest with you on equal terms, with almost no management fee and no performance fee. (Applause)

I came to fully appreciate it when I compared my 10 years of holding Berkshire Hathaway to a private equity fund, which over the same 10 years earned 19.8 percent before fees, and 11.2 percent after fees. — (Buffett laughs)

Now my question. Back in the 1950s and 1960s when you had a partnership, Mr. Buffett, you asked for and got a performance fee of 25 percent of what was earned above 6 percent a year.

WARREN BUFFETT: Correct.

AUDIENCE MEMBER: What caused you to switch from that performance fee to that no fees we are enjoying today? Was it the wisdom that to give is better than to receive? (Laughter)

WARREN BUFFETT: Try again. (Laughter)

AUDIENCE MEMBER: And do you feel that this switch from performance fee to no performance fee, that that is fully appreciated? And what did it mean to you personally?

WARREN BUFFETT: Well, I appreciate what you had to say, and I will — I would pay to have this job I have. I would pay a lot of money. And I hope I don’t get tested on that, but you know, it’s —

Why in the world — if I can work with people I like, and get the same result they have, and end up with all kinds of money, you know, why do I need to make some further override on them?

I was changing my position in life significantly when I started that partnership in 1956. A couple of the people that — well I guess, yeah, [Buffett’s sister] Doris may be the only original partner here. But Doris, would you stand up? She joined on May 5th, 1956, wherever she is.

And the — you know, those people gave me their money but I wasn’t — I needed some money then, too. And I did get an override, which I thought was fair.

I got no management fee at all, though. I never charged — today, most of the people who run hedge funds charge 1 percent a year, and then some percentage of the profits. I did not do that.

And I did have all my money in after 1962, so that the downside would be equal to the upside.

But I’ve always felt about the people as partners. And when we got into Berkshire — originally we got into Berkshire, Berkshire was owned by the partnership. So if I had taken a salary then I would’ve been double-dipping, in effect, by getting money out of Berkshire before, in turn, the partnership participated.

And frankly, by the time I got — where I was running Berkshire I had all the money I needed. And you know, I’d rather get the same result as my partners than have me get a different result. And it can’t make any difference.

I mean, it’ll make a difference in the size of my foundation someday, perhaps. You know, but so what? I like living the way I live.

Charlie?

CHARLIE MUNGER: Well, you raise a very interesting question, and it has parallels, if you go back.

[Andrew] Carnegie was always very proud that the bulk of his fortune had been earned where he took no salary at all from Carnegie Steel. John D. Rockefeller the First took practically nothing in salary.

Over the years — the original Vanderbilt prided himself on living on his dividends and taking no salary.

It was a common culture in a different era. And you realize that all those people had the psychology of being the founder, and maybe that’s what influenced Warren.

WARREN BUFFETT: What influenced you, Charlie?

Charlie doesn’t take anything either, so —

CHARLIE MUNGER: I was delighted to get rid of the psychological pressure brought by — brought on me by getting fees based on performance. I think Warren was, too.

If you’re highly conscientious in your relations with other people, and you hate to disappoint, you’re going to suffer more if you are liberally rewarded with performance fees.

So I think there was an enormous advantage to us, so I guess we should be thanking you.

WARREN BUFFETT: I should — (Applause)

Bill Gates has never taken an option at Microsoft, and takes a very small salary. And you’ll find it interesting. The only reason he takes the small salary is if there — he feels that, if there’s a bad year at some time in the future, he wants to be able to take a cut in salary at the same time he’s asking other people to cut back.

And that is the reason. I mean, he takes peanuts as it is, but he just figures that — Bill is a very conservative guy, and he figures that some year there’ll be a bad year. And he wants — if he’s asking other people to take a 5 percent cut, he wants to be able to take a 90 percent cut, or something, himself.

But he’s never taken an option, and I don’t believe [Microsoft CEO] Steve Ballmer has either. They have gotten rich with their shareholders and not off their shareholders, and that’s an attitude we admire.