The Bailout and CEO Pay: What's 'Excessive'?

Everyone knew this bailout was going to be big. Now the bailout has become even bigger.

Treasury Secretary Henry Paulson is not just talking about bailing out mortgage lenders and traders any more. The federal government, Paulson now envisions, will be buying up all sorts of troubled investments. Even foreign banks will be able to get in on the bailout action.

Meanwhile, a host of power-suited vultures are hovering overhead, anxiously awaiting federal contracts to manage -- for a handsome fee, of course -- all the bad debts the Treasury starts buying.

In other words, the bailout figures to drive a huge swatch of the U.S. economy for years to come. Indeed, the bailout could soon become the economy's driving force.

On the one hand, that's fairly scary. On the other, this could create an opportunity to restore some common sense to the crazy CEO pay dynamics that have so fouled up our American economy.

For three decades now, the incentive structure has rewarded top executives at outrageously high levels. To win these outrageous rewards, executives have behaved outrageously. They've downsized and outsourced. They slashed benefits and ended pension plans. They've extorted subsidies from taxpayers. They've squeezed consumers. And they've turned the mortgage market into a casino game rigged against average families.

All this wheeling and dealing has left us with an economy where the richest 1 percent of Americans now hold over $2.5 trillion more wealth than the bottom 90 percent combined. We have more inequality in the United States than we've had since 1928, the year right before the Great Depression began.

To prevent another depression, we definitely do need a bailout. But we need a bailout that takes away the incentives that created our current mess.

And that's doable. Our lawmakers merely need to say to every company that wants to put a finger in the bailout pie: No tax dollars to make top executives super rich.

In theory, outside of Treasury Secretary Henry Paulson and Republican leaders in the White House and Congress, just about everybody who's anybody on the national political scene already agrees with the notion that the bailout must include constraints on executive compensation.

Both of our major Presidential candidates, Barack Obama and John McCain, are insisting that the bailout must not enrich the already rich.

In Congress, top Democrats are singing the same song.

But the lyrics have been rather indistinct. The Democratic leadership plan so far, as advanced by Rep. Barney Frank, would give the Treasury Secretary the vague power to set "appropriate standards" over the pay that goes to executives at bailed-out companies.

Let's keep in mind that our current Treasury Secretary, Henry Paulson, spent his previous life on Wall Street, most recently as the CEO of investment banking giant Goldman Sachs. Paulson accumulated, as a reward for his executive labors, a personal stock stash that's still worth, even after the Wall Street meltdown, $523.5 million.

Is this the person we want defining what level of executive pay qualifies as "appropriate"?

We need a more impartial arbiter. Peter Drucker, the founder of modern management science, would have been perfect. Drucker passed away three years ago, but he did leave behind a body of wisdom that we ought now be tapping.

Business enterprises, Drucker preached, operate most efficiently and effectively when they keep the gap between worker and executive pay within a reasonable range. Wide gaps between executives and workers, as a Business Week appreciation of his work noted last week, undermine "the kind of teamwork that most businesses require to succeed."

What sort of gap did Drucker consider reasonable? No executives, he believed, should make over 25 times more than their workers. Top American executives last year, says a recent Institute for Policy Studies report, took home an average 344 times more than worker pay.

Imagine if we had a bailout that would only move tax dollars to companies where executives make no more than 25 times what their workers receive. The executives at these companies would actually have a vested personal interest in sharing rewards with their workers. The more their workers make, the more they could make.

Today, the incentives in our economy all run the other way. Executives make their money by exploiting workers, not sharing with them.

That's the incentive structure that put us in our current economic predicament. That's the incentive structure the emerging bailout could -- and should -- start ending.