WASHINGTON - September 29 - The draft bailout bill released yesterday contains several historic provisions that represent positive steps toward ending taxpayer subsidies for executive pay. But the bailout bill ultimately falls short on CEO pay - by failing to set a specific limit on the compensation of top executives at bailed-out companies.

The bill applies two different sets of executive compensation criteria, depending on whether the government negotiates directly with the institution to purchase troubled assets or whether it purchases them through auction. 

SUMMARY OF EXECUTIVE PAY PROVISIONS:

DETAILED ANALYSIS: 
Major shortcoming:  No set limits on compensation The key bailout bill provision on executive pay merely directs Treasury Secretary Henry Paulson to prevent "incentives" that encourage executives "to take unnecessary and excessive risks that threaten the value of the financial institution."

In other words, a bailed-out bank board of directors would be perfectly free to funnel $10 million into its CEO's pockets - unless Paulson decides that reward poses an excessive risk to the institution. The draft legislation, the "Emergency Economic Stabilization Act of 2008," does not define what might constitute an "unnecessary and excessive risk."

"Congress missed a golden opportunity to use the leverage of the bailout to put tough controls on an out-of-control executive pay system," says IPS Global Economy Project Director Sarah Anderson. "Without clear limits on pay, the public is being asked to put their trust in Secretary Paulson, a man who made hundreds of millions of dollars as a Wall Street CEO, to decide what's ‘excessive.'"

Several members of Congress had proposed fixed limits on pay. Sen. John McCain (D-Az.) and Sen. Diane Feinstein (D-Calif.) had called for capping compensation for bailed-out executives at the current compensation level of the U.S. President: $400,000. Rep. Henry Waxman (D-Calif.) had proposed a $2 million cap, while Rep. Brad Sherman (D-Calif.) had advocated a $1 million cap on "plain vanilla" salary compensation.

The Institute for Policy Studies favors a lid on CEO pay set at 25 times the pay of a bailed-out company's lowest-paid worker.  The current top federal paycheck - the President's $400,000 annual compensation - represents about 25 times the pay of the federal government's lowest-paid employee.

"The most respected business thinker of the 20^th century, Peter Drucker, considered the 25-to-1 ratio be the appropriate standard for the private sector as well," notes IPS Associate Fellow Sam Pizzigati. "Pay gaps too wide, management experts like Drucker believe, undermine enterprise effectiveness and efficiency."

The Institute will be urging the Congress and President who take office in January to better define the bailout bill's limits on executive pay.

THE BAILOUT'S POSITIVES ON CEO PAY

Ban on "golden parachutes": Senior executive officers will not receive any severance payment if they leave the company that's getting bailout dollars. Congress is right to ensure that executives who drove the country into this mess should not be allowed to walk away with massive payoffs.

Cap on tax deductibility: Firms that participate in the bailout will not be allowed to deduct executive pay that exceeds $500,000 per year from their corporate income taxes. The current tax code places a $1 million cap on tax deductibility for executive compensation, but this provision has been meaningless in practice because it allows exceptions for "performance-based" pay. Most companies simply limit top executive salaries to around $1 million and then add on to that total various assortments of "performance-based" bonuses, stock awards, and other long-term compensation. The draft bailout bill attempts to close this loophole by eliminating that exception for executives of bailed-out firms.

Clawback: Executives of bailed-out firms who receive bonuses or other awards that later turn out to be based on "materially inaccurate" financial reports will need to give that money back. This hardly seems like something that would need to be legislated, but when it comes to today's corporate America, Congress is right to not rely on executives to voluntarily give up unearned gains.

BROADER CRITIQUE OF THE BAILOUT BILL

For additional IPS analysis on the broader aspects of the bailout bill, see:  www.ips-dc.org.  These materials include an IPS Plan to Pay for Recovery.

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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.

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.