March 1, 2024

DealBook Column: New Buffett Manager Gets Higher Taxes and Less Pay, by Choice

Ted Weschler shows that the rich do not necessarily make all decisions based on the financial bottom line for themselves.Matt Eich/LUCEO, for The Wall Street JournalTed Weschler shows that the rich do not necessarily make all decisions based on the financial bottom line for themselves.

How would you feel about taking a pay cut and paying more in taxes?

Meet Ted Weschler. He just did both. And he’s happy about it.

You might have heard about Mr. Weschler. He was hired by Warren E. Buffett last week to help invest Berkshire Hathaway’s piles of cash.

Mr. Weschler, a successful but little-known 50-year-old hedge fund manager, plied his trade from a small office in Charlottesville, Va., above an independent bookstore, reaping huge returns for his investors, some 1,236 percent over a decade. In the process, his $2 billion fund put him comfortably in the millionaires’ club, and at the rate he was going, he was on his way to the more exclusive cadre of billionaires.

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Here is a quick measure of his wealth: he paid $2,626,311 in a charity auction to have lunch with Mr. Buffett in 2010. That’s how they met. A year later, Mr. Weschler paid $2,626,411 to dine with him again.

In his new job at Berkshire, he is expected to be paid significantly less than he was making. (We’ll get to the formula for his compensation in a moment.) And he is going to be giving up a huge tax break. Instead of paying the 15 percent capital gains rate on most of his income like most hedge fund managers and private equity executives, he is going to be taxed at the 35 percent ordinary income level as an employee.

His decision — and his compensation structure — are worth considering as the country weighs President Obama’s proposal to increase taxes for the ultra wealthy in what has been called the “Buffett Rule.”

The plan is aimed at ensuring that millionaires pay the same effective rate as middle-income families. In part, it takes aim at the controversial “carried interest” income, or the profits that hedge fund managers and other big investors take home as part of their pay. That compensation is now taxed at the capital gains rate of 15 percent, far below the 35 percent top rate on ordinary income. Mr. Obama hopes to close that loophole.

Many Republicans have derided the Buffett Rule, saying it would hurt the economy. “If you tax job creators more, you get less job creation,” Representative Paul D. Ryan, Republican of Wisconsin, argued on “Fox News Sunday. “If you tax investment more, you get less investment.”

Perhaps Mr. Ryan should dine with Mr. Weschler. The view that “millionaires and billionaires” will stop, or slow down, working or investing may be a myth.

“When you have enough money to live the lifestyle you want,” Mr. Weschler told me in a brief conversation, money and taxes are less of a consideration than “who you want to work with.”

Mr. Weschler — and his colleague Todd Combs, another successful hedge fund manager who joined Mr. Buffett last year — demonstrate that people of great wealth don’t necessarily make all decisions based on their own financial bottom line.

“Neither would have voluntarily paid more than 15 percent when working at their hedge fund simply because of the feeling that they were a favored class,” Mr. Buffett said. “But neither will feel the least bit abused because the earnings from their daily labors will now be taxed at a higher rate.”

Like Mr. Buffett, Mr. Weschler says he doesn’t believe the tax loopholes for hedge fund managers make sense. “When my accountant first told me about it,” he said he responded “You can’t be serious.” But he added quickly, “I’m not complaining.”

That’s not to say he will be paid like a pauper at Berkshire. Mr. Weschler and Mr. Combs will earn seven figures, and potentially more. But they won’t make John Paulson money. He reportedly made $5 billion last year.

Unlike hedge fund managers, at Berkshire Mr. Weschler and Mr. Combs don’t take home the standard “2 and 20,” collecting a 2 percent management fee and 20 percent of all the profits. Instead, Mr. Buffett has tightly linked their pay to the performance of the Standard Poor’s 500-stock index, a system that some big institutional investors should be pressing hedge funds to adopt.

“Both Todd and Ted will have performance pay based on 10 percent of the excess return over the S.P., averaged over multiple years,” Mr. Buffett told me. “If the S.P. averages 5 percent annually in the future, this means that the average hedge fund manager has received a 1 percent performance fee — 20 percent of 5 percent — before Todd and Ted receive anything.”

“Nevertheless, I expect them to make a lot of money,” he added. “The difference is that they have to earn it by true investment performance.”

In addition, both men receive modest salaries that Mr. Buffett said “will work out to about a tenth of 1 percent” of the assets they manage. “This compares to the 2 percent nonperformance fee which most hedge fund managers charge, even if they are losing money.”

Mr. Buffett’s critics complain that while he supports higher taxes on the wealthy, Berkshire is structured to pay little in taxes and he has sidestepped Uncle Sam by giving away his wealth.

Some have even suggested that he mail the Treasury a check if he wants higher taxes. The Senate minority leader, Mitch McConnell, Republican of Kentucky half-jokingly said on NBC News program “Meet the Press,” “if Warren Buffett would like to give up some of his benefits, we’d be happy to talk about it.”

But Mr. Buffett shrugs off the naysayers. “When I ran my partnership in the 1950s-1960s, I was generally taxed at 25 percent, considerably below the rate on similar amounts of ordinary income,” he said. “I knew I was getting favored treatment compared to the local doctor, lawyer or C.E.O., but I made no voluntary payments to the Treasury, nor does any hedge fund manager of whom I’m aware.”

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