QuestionerCharlie, you clearly understand the power of incentives. How do you apply this at Berkshire when designing compensation formula?
CharlieWhen it comes to the system, our incentive systems are different, and what they try and adapt to is the reality of each situation. And the basic rule on incentives is you get what you reward for. So if you have a dumb incentive system, you get dumb outcomes. And one of our really interesting incentive systems is that guys, And I'll let Warren explain it to you because we don't have a normal profits type incentive for the people at Geico. Warren tell them because it's really interesting.
WarrenYeah, well, at Geico, we have two variables. And they apply to well over 20,000 people. I think you have to be there a year. But beyond that point, anybody's been there a year or more, and I could be wrong on the exact period, is subject and knows. and knows, understands that these two variables will determine bonus compensation. And as you go up the latter, it has a multiplier effect. It's still the same two variables, but it gets to be larger and larger in terms of bonus compensation as a percentage of your base. But it's always significant. It's always significant. And those two variables are very simple. I care about growing the business. and I care about growing it with profitable business. So we have a grid which consists of growth in policies in force on one axis, not gross in dollars, because that's reflected by average premiums which are outside their control, but growth in policies and force. And then on the other grid, we have the profitability of seasoned business. It costs a lot of money to put business on the books. I mean, we spent a lot of money on advertising and all of that. So the first year, any business we put on the books is going to reduce profit significantly. And I don't want people to be worried about the profit if it's going, that comes, that might be impaired by growing the business fast. So profit of season business, growth of policies enforced. Very simple. We've used it since 1995, we put a tiny little tweak or two in for new businesses or something. But it's overwhelmingly the simple system. Everybody understands it. In February or so, it's a big day when it's the two variables are announced and people figure out how they come out on it. And it's totally aligns the goals of the organization in terms of compensation with the goals of the owner.
[2:58]
CharlieAnd that's a simple one. The interesting thing about version. It's simple, but other people. might reward something like just profits. And so the people don't take on new business that should take it on because it hurts profits. So you've got to think these things through. And of course, Warren's good at that. And so is Tony nicely. Yeah. And just thinking about, you know, I mean, very, somebody comes and said, well, you reward profits. I don't want to reward profits. I mean, alone, it'd be the dumbest thing you could do them. You just quit advertising and, you know, start shrinking the business a little. And like I said, that people there know that the very top person is getting paid based on those same two variables. So that they don't think that the, you know, the guys at the top have got a cushy deal compared to them and all of that. It's just a very logical system.