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How long will politicians look the other way on CEO pay?

Inequity between top executives and average workers remains at jaw-dropping levels.

By David R. Francis / August 25, 2008

Some 77 percent of Americans polled last year felt that corporate executives "earn too much." Most corporate boards apparently disagree. Last year, although the nation's economy was already in trouble, they gave the chief executive officers of the Standard & Poor's 500 largest companies on average a 2.6 percent pay hike to $10,544,470.

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Relative to past raises, this is not a big income jump. Nonetheless, that sum is still 344 times the pay of typical American workers, says Sarah Anderson, an analyst at the Institute for Policy Studies (IPS), a liberal think tank in Washington.

On the presidential campaign trail, both Sens. Barack Obama and John McCain attack the high levels of pay for corporate bosses, but are mostly fuzzy on remedies. Several bills before Congress would attempt to tame runaway executive pay. But none have passed both houses.

How come?

Politicians are "looking out" to protect the campaign contributions they receive from corporate executives, says Ms. Anderson. And it's an election year.

For 15 years, Anderson has worked with colleagues at the IPS and others from another liberal research group, Boston-based United for a Fair Economy, to turn out an annual study of executive excess. Their work has likely fueled a rising unhappiness with today's CEO pay packages that 30 years ago averaged only 30 to 40 times the average American worker paycheck.

Anderson hopes that a new research finding in this year's report, along with a new president in the White House and a possible swing toward more Democrats in Congress, will bring about some legislative action on executive pay.

What the 2008 report finds is that five tax and accounting loopholes encourage excessive pay by allowing CEOs to avoid "their fair shares of taxes." In effect, ordinary US taxpayers are subsidizing the earnings of executives by at least $20 billion.

"Outrageous … it's a real cost to society," says Anderson. That's a big enough amount to subsidize 130,000 affordable housing units, she figures.

For that matter, it would pay for the Iraq war for about a month and a half.

One tax loophole gives preferential treatment to "carried interest" at a cost of $2.66 billion to Uncle Sam, according to the Joint Committee on Taxation.

To explain, in a publicly traded corporation, a CEO pay package typically includes salary, bonus, perks, and stock awards of various sorts. At private investment funds and hedge funds, managers get paid by taking an annual management fee, usually 2 percent of the capital they oversee, and by taking a larger chunk, usually 20 percent, of profits realized when they sell fund assets. The latter is termed "carried interest."