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IPS on the CEO Pay Caps

February 4, 2009 ·

We applaud efforts to cap bailout pay, but are concerned about reports of weak Treasury rules.

WASHINGTON - February 4 - Compensation experts with the Institute for Policy Studies (IPS) today called President Barack Obama's $500,000 cap on executive pay at some bailed-out companies a "small, but very welcome first step toward ending excessive executive compensation."

"After 30 years of escalating CEO pay, we finally have a president who has taken a concrete step toward limiting the dollars that are cascading into executive suites," notes Sarah Anderson, lead author of Executive Excess, the Institute's yearly report that tracks the gap between CEO and worker pay. "But given the level of public outrage over the Wall Street bonus bonanza, the administration should have gone much further to stop bailout profiteering."

The key shortcoming of the administration plan is that the $500,000 pay cap will apply to only a handful of firms getting "exceptional assistance." In recent news reports, administration sources have argued that troubled banks would choose not to accept government assistance if broader pay restrictions were imposed, for fear of losing key personnel.

But as IPS Senior Scholar Chuck Collins points out, "The argument that super-sized paychecks are necessary to retain top talent doesn't hold water. It's that mentality that got us into this mess, as outrageous rewards encouraged outrageous behavior. Part of the solution to the crisis needs to be a new approach to compensation that rewards responsible business leadership." "By arguing that companies wouldn't accept government assistance if they had to rein in executive pay, the administration is suggesting that the vast majority of companies getting bailouts don't really need the money," adds Collins. "That's not a winning argument with taxpayers." President Obama, in his remarks today, pledged to end the executive pay "culture of narrow self-interest and short-term gain at the expense of everybody else." But the pay curbs the President announced today, says IPS associate fellow Sam Pizzigati, only begin the cultural change that's necessary to fix the failing U.S. economy.

"So long as we tolerate these outrageous rewards, that outrageous behavior - the endless mergers that create workplace chaos, the downsizings and outsourcings, the hammering of consumers with hidden fees - will continue unabated." The Institute's pay experts favor a uniform cap for executive pay that would apply to all firms receiving bailout funds and all forms of compensation. Sen. Claire McCaskill (D-Missouri) and several other senators are behind a proposal to cap executive pay in bailed-out firms at no more than $400,000 - the salary of the President of the United States. McCaskill has introduced the bill as an amendment to the stimulus legislation.

Click here for a more detailed analysis of the McCaskill bill and the executive pay provisions in the TARP reform bill recently approved by the House. Encouragingly, Obama announced that these guidelines "are only the beginning of a long-term effort" and that they are "going to be taking a look at broader reforms."

In addition to stronger restrictions on bailout recipient pay, IPS is urging the Obama administration to support two specific steps that could end taxpayer subsidies for excessive executive compensation.

"The administration should ask Congress to deny all corporations tax deductions on any executive pay that runs over 25 times the pay of a company's lowest-paid worker," says Anderson.

A generation ago, she notes, pay for most CEOs fell within a 25-to-1 range. In 2007, top CEOs averaged 344 times average worker pay.The Obama administration, the Institute's experts propose, should make this same 25-to-1 pay standard the benchmark for any company that seeks a government procurement contract or tax break.

The Institute for Policy Studies is a multi-issue progressive think tank founded in 1963. It has published 15 widely publicized yearly reports on executive pay. The latest, Executive Excess 2008, found that five tax loopholes that benefit top executives cost taxpayers more than $20 billion per year.

For more information, contact IPS Media Director Emily Schwartz Greco at emily [at] ips-dc [dot] org.