The Bailout Plan & Wall Street CEOs’ Pays

In the late 1970s, the total compensation of chief executives in large American corporations was 35 times that of the average American worker. In 1993, Congress limited the tax deductibility of executive salaries to $1 million unless it could be demonstrated that the extra pay was linked to performance incentives. This contributed to the practice in later years of very generous grants of stock options, which helped drive executive pay to new heights. According to an estimate by the liberal research organization the Economic Policy Institute, in 2007, an executive’s salary was 275 times that of the average worker.

Wall Street executives, with their eight figure earnings, are at the top of the corporate pay range. Wall Street firms have a bonus system which rewards short-term trading profits. It acts as an incentive for executives to expand their highly profitable businesses in exotic securities and ignore the risks. The present financial crisis is a direct result of the compensation practices at these Wall Street firms, which encouraged executives to maximize profits and ignore risks. The salary levels at some Wall Street firms are appalling, given their performance. After news of the bailout plan spread on September 19, experts felt that it was only reasonable to impose limits on the salaries of executives of firms that would participate in the bailout. It was they who made those risky bets on behalf of their firms.

As Congress and the Bush administration (represented by Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke) deliberated the bailout plan before it was rejected by the House on Monday, lawmakers felt that executives should not be allowed to walk away enriched, especially since many have contributed to the present crisis by taking too many risks. There were calls to impose some limits or approval authority on salaries of executives whose firms seek help.

Presidential candidates Barrak Obama and John McCain have both called for limits on the salaries of such executives. There is a fear among many, including lawmakers, that Wall Street’s tarnished titans might walk away with tens of millions of dollars a year while taxpayers pick up the tab.

A Senate draft document calls for a ban on incentive payments that the Treasury deems “inappropriate or excessive” and a “claw-back” provision requiring an executive to give up pay or severance benefits if the firm’s financial results are later shown to be overstated. Other proposals call for a ban on severance payments and allowing large shareholders, with a stake of 3% or more, to propose alternative slates of board directors. This would be an effort to tackle excessive pay practices by opening up and strengthening corporate governance.

Opponents of the proposals say that pay restrictions will discourage hard work and innovation. It would have an overall impact on the financial sector and the economy. Some feel that it would be best to stretch out payments for several years, encouraging executives to pursue the long-term health and stability of the firms they head. However, the salaries are bound to fall. With consolidation, more people would be competing for fewer jobs, leading to lower salaries.

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