Executive Pay Experts Critique Latest Details of Financial Bailout

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.