Executive Pay Experts Critique Financial Bailout Bill

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.

***

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.