Senators Hit CEOs Where it Hurts ... Try to Cap Bailout Pay

Posted by Staff, Institute for Policy Studies at 1:30 PM on February 3, 2009.

Executive compensation experts with the Institute for Policy Studies (IPS) are applauding a new Senate bill that would crack down on bailout profiteering.

The just-introduced legislation from Sen. Claire McCaskill (D-Missouri) would cap executive pay in bailed-out firms at no more than $400,000 -- the salary of the President of the United States. McCaskill introduced the bill on January 30, after revelations that Wall Street firms handed out more than $18 billion in bonuses last year.

"This bonus bonanza should put an end to the naïve notion that we can rely on Wall Street to voluntarily do the right thing," notes IPS analyst Sarah Anderson. "If Congress doesn't start legislating strict and measurable pay limits, taxpayers will continue to watch their money flood into executive pockets — and encourage still another round of reckless Wall Street behavior." 

"Here today, in the midst of our worst economic crisis in 80 years, we have far too many executives worried about how many zeros sit on their paychecks," agrees IPS Senior Fellow Chuck Collins. "It's our government's job to give these execs a reality check and protect ordinary taxpayers from this runaway greed."

President Barack Obama has condemned Wall Street's latest bonuses as "shameful," but officials in his administration have so far declined to support a cap on total compensation for all bailout executives.

According to news reports, Treasury Secretary Timothy Geithner is planning to issue new pay guidelines this week that only cover a small handful of bailout recipients and do no more than tighten rules on severance and bonus pay.

Another Obama administration official, unnamed in news reports, has objected to the McCaskill pay cap, arguing that troubled banks wouldn't enter into the bailout if her proposal became law, "and that means our economy would continue to stumble."

But that fear could be easily addressed, notes IPS Associate Fellow Sam Pizzigati, by adding to the McCaskill legislation a provision that defines the bailout pay cap as either the fixed $400,000 or a ratio between an enterprise's top-paid and lowest-paid staff.

The President's current $400,000 salary, adds Pizzigati, equals about 25 times the pay of the lowest-paid federal worker.

"If this 25-to-1 ratio were adopted as the pay standard for bailed-out enterprises," he observes, "then bailed-out executives could make more than $400,000 — but only if they first shared their company's success throughout their enterprises."

Researchers who have examined the practices of effective enterprises have, over the years, stressed the importance of maintaining a narrow gap between the top and the bottom of the corporate pay ladder. Any pay gap wider than 25-to-1, the preeminent business thinker of the 20th century, Peter Drucker, noted repeatedly before his death four years ago, undermines the teamwork that most businesses need to succeed.

CEOs, according to the IPS annual Executive Excess report released last year, averaged 344 times more pay than average American workers in 2007, the latest year with full data available.

For a more detailed analysis of the McCaskill bill and the executive pay provisions in the TARP reform bill recently approved by the House, see: http://www.ips-dc.org/getfile.php?id=327

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