Executive Pay and the Obscene Culture of Wall Street

By Sarah Anderson and Chuck Collins, AlterNet. Posted April 2, 2009.

What’s happening with the AIG bonus scandal?

Congressional action to recoup the $165 million in bonuses already handed out to AIG employees has been derailed.  On March 19, the House responded to public outrage by voting 328-93 to approve a bill that would impose a 90% tax on any bonuses given to employees at AIG and other firms that received more than $5 billion in bailout money.  However, when the White House expressed concerns about the bonus tax, the Senate punted the issue until after the April recess. Sensing the loss of momentum behind bonus taxes, the House voted on April 1 to approve a substantially weaker approach.  The new bill, which passed by a 247-171 margin, would place some limits on future bonuses, but would otherwise allow Treasury Secretary Timothy Geithner to determine whether employee compensation at the bailed out firms was "unreasonable" or "excessive." 

Who is to blame for the bailout bonus scandal?

There is plenty of blame to go around.  Executives of AIG and other Wall Street firms have acted like modernday Marie Antoinettes, so disconnected in their own little bubbles that they can’t respond to the crisis with human decency.  But we can’t let Congress off the hook.  They had ample opportunity to prevent this from happening by putting strict, measurable limits on compensation in the original bailout plans.  Instead they backed down to pressure from Treasury officials, first in the Bush administration and then in the Obama administration.  Congress’s inaction on excessive compensation over the past two decades has led to an increase in the gap between CEO and average worker pay from 41-to-1 in 1980 to 344-to-1 in 2007.

Should Congress tax back the bailout bonuses? 

The House proposal to tax bonuses at 90 percent was a better late than never option in response to their failure to protect taxpayers from such bailout profiteering.  Congress should also begin a debate about how to restore greater progressivity to the federal tax system, with steeper rates on higher incomes across the board and rolling back some of the Bush and Reagan era tax cuts at the top. At some point, there needs to be a clear plan on how to pay for the substantial investments our nation is making to address the recession and improve health care, education and energy systems.  We had high income taxes between the late 1930s and the early 1960s that accompanied a period of middle class prosperity and stability. Progressive taxes are one of the ways we can discourage speculation.

Is the public acting like crazed pitchfork populists? 

The public is waking up to the unaccountable and reckless practices and culture of Wall Street.  And they are furious at the ways in which politicians from both major parties have accepted this Wall Street mindset (along with millions in campaign contributions).  The American people don’t resent fair compensation for hard work or innovative achievements.  But for decades, we’ve watched a powerful elite rig the rules of the game in their own favor.   We should channel this anger into long-lasting reforms to ensure such abuses never happen again – and that the economy works for everyone, not just the superrich.

Isn’t the problem of executive compensation just symbolic? 

Runaway excessive pay is both a contributing cause of the economic crisis and a symptom of what is deeply off kilter with Wall Street culture.  Our executive pay system contributes to what President Obama has called the “quarter by quarter mentality” that has infected corporate American for several decades.  When top managers are rewarded for short-term gains –- and not long-term stewardship –- they are more likely to pursue fast gains through stock price manipulation, outsourcing, speculative investments, and other actions that have jeopardized the stability of our economy.

What are immediate reforms Congress should implement?

There are several immediate actions Congress could take today to remove the perverse incentives in the executive compensation system.

First, Congress should eliminate incentives in the tax code that encourage excessive pay.  They should pass the Income Equity Act, which would cap the amount of pay a company can deduct off their income taxes at either 25 times the pay of the lowest paid worker at a firm or $500,000.

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Sarah Anderson and Chuck Collins of the Institute for Policy Studies (IPS) are also members of the New Economy Working Group, an initiative to stimulate bold thinking about a New Economy that serves the long-term needs of all our children, families, communities, and natural systems. IPS is also helping to form Common Security Clubs to help people come together to study the changing economy and help one another take action.  For more information on actions you can take, see IPS’s web site on extreme inequality.

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