WASHINGTON - September 26 - This week, Treasury Secretary Henry Paulson gave up his opposition to including executive pay restrictions in the proposed $700 billion financial sector bailout. But serious weaknesses, note executive compensation experts with the Institute for Policy Studies, remain in the proposals that Democratic leaders in Congress are advancing.

Democratic Leadership Proposals Draft proposals from Rep. Barney Frank (D-Mass.), chair of the House Financial Services Committee, and Sen. Chris Dodd (D-Conn.), chair of the Senate Banking Committee, would allow Treasury Secretary Henry Paulson to determine what qualifies as "inappropriate or excessive" executive compensation.

(See Section 9 of the Frank proposal and Section 17 of the Dodd proposal.)

"Secretary Paulson amassed a personal stock stash worth over three-quarters of a billion dollars as the CEO at Goldman Sachs," says IPS analyst Sarah Anderson. "He hardly strikes us as the appropriate arbiter of what's excessive and what's not."

The nation, Anderson adds, needs clear and strict limits on CEO pay "so that taxpayers won't have to worry about their money flooding into the pockets of top executives and encouraging another round of reckless behavior."

The Democratic leadership executive pay proposals do contain laudable provisions to ban over-the-top severance deals ("golden parachutes") as well as clawback mechanisms to recoup compensation based on inaccurate earnings reports. But these proposals don't speak to what ought to be job one of executive compensation reform: ending windfall pay incentives.

"The most fundamental problem isn't what boards of directors pay CEOs who fail," notes IPS Associate Fellow Sam Pizzigati, "The problem is what boards pay CEOs to get them to succeed. Outrageously high rewards give executives an incentive to behave outrageously."

"If the bailout lets corporate boards continue to float mega-million rewards as incentives, Pizzigati explains, executives will continue to do whatever it takes to grab those rewards."

Other Congressional Proposals to Cap Executive Pay Levels Several members of Congress have proposed tougher executive pay restrictions than those that appear in the Dodd and Frank proposals.

On the Presidential campaign trail, Sen. John McCain (D-Az.) has called for capping compensation for bailed-out executives at the current compensation of the federal government's highest-paid employee. That employee, the President, currently makes $400,000.

Rep. Henry Waxman (D-Calif.) has proposed a$2 million cap, while Rep. Brad Sherman (D-Calif.) has advocated a $1 million cap on "plain vanilla" salary compensation.

Sen. Max Baucus (D-Mont.), chair of the Senate Finance Committee, has promoted a measure in the financial bailout legislation that would place a cap on the corporate tax deductibility of executive pay at all companies participating in the bailout.

Under the Baucus proposal, companies would not be allowed to deduct over $400,000 from their corporate income taxes for each of their top five executives.

The Baucus proposal would be a good first step toward ending taxpayer subsidies for excessive CEO pay. His initiative reflects the pending Income Equity Act (HR 3876), legislation introduced by Rep. Barbara Lee (D-Calif.) that would deny tax deductions to all companies, across the board, for any executive pay over 25 times what a company's lowest-paid worker makes.

The $400,000 deductibility cap in the Baucus proposal amounts to 25 times the pay of a worker making $16,000.

The downside to the Baucus proposal: If not combined with other restrictions, this deductibility cap would allow companies to continue paying their executives whatever they please. That's not what an American public outraged by CEO pay excess expects to see.

Institute for Policy Studies Proposal Ideally, the IPS CEO pay analysts believe, Congress should approve a bailout package that includes both the Baucus proposal to cap the tax deductibility of executive pay as well as a ceiling on total compensation.

For both measures, IPS executive pay experts favor a ratio approach over a fixed dollar amount. They are calling on lawmakers to set the bar for excessive executive pay as any compensation over 25 times the pay of a firm's lowest-paid worker.

Peter Drucker, the founder of modern management science, believed that companies that pay their executives over 25 times what their workers make risk endangering enterprise morale and productivity, as this recent appreciationof Drucker's work in Business Week makes plain.

In the end, the IPS executive pay experts emphasize, the bailout package lawmakers adopt will only discourage future reckless executive behavior if the package includes clear and concrete restrictions on executive pay, be these restrictions set as a ratio or at a fixed dollar figure.

Any bailout that leaves the definition of executive excess up to Treasury officials, IPS notes, will leave CEO pay practices nearly as dysfunctional and dangerous to our economic well-being as they have been.

Footing the Bailout Bill IPS analysts have also been focusing on a related bailout question: Who will pay the bailout bill?

"The U.S. public wants Wall Street speculators and wealthy CEOs to pay for the mess they have created," points out IPS senior scholar Chuck Collins. "We should institute a securities transaction tax, a surcharge on incomes over $5 million, and press for full financial disgorgement of responsible parties. We've identified $900 billion worth of revenue-generating proposals."

The Institute's ten-point plan to pay for the bailout appears online at www.ips-dc.org/article/740#. Includes: $40 billion for financial discouragement: $100 billion from Securities Transaction Cost; and $20 billion by eliminating taxpayers subsidies for excessive CEO pay.

Contacts: Sarah Anderson is the Director of the Global Economy Project at the Institute for Policy Studies and a co-author of 15 IPS annual reports on executive compensation. Contact: saraha@igc.org, tel: 202 234 9382 x 227. Cell: 202 299 4531.

Chuck Collins is a senior scholar at the Institute for Policy Studies where he directs the Program on Inequality and the Common Good. He was a co-founder of United for a Fair Economy, and his latest book, the co-authored The Moral Measure of the Economy, appeared earlier this year. Contact: chuckcollins7@mac.com, 617 308 4433.

Sam Pizzigati is an Associate Fellow of the Institute for Policy Studies and the author of Greed and Good: Understanding and Overcoming the Inequality That Limits Our Lives (Apex Press, 2004). He edits Too Much, on online weekly on excess and inequality. Contact: editor@toomuchonline.org, 301 933 2710.