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ECONOMIC SCENE: US begins crackdown on CEO pay. Will it work?

In 1965, CEOs of major US firms made 24 times an average worker’s pay. By 2004, that ratio was 431 times.

By David R. FrancisStaff Writer / September 10, 2009

Chairman of the House Financial Services Committee, Rep. Barney Frank (D) of Massachusetts speaks during the markup of legislation regulating executive compensation in Washington in July. Mr. Frank compared executive bonuses to bribes in a recent hearing.

Ryan Kelly/Congressional Quarterly/Newscom

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The letter writer got to the point: “I never have encountered anything as outrageous and questionable as your policy of giving million-dollar-a-year bonuses to employees who are skilled financial traders.... Cannot something be done to correct this really shameful situation?”

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The letter was addressed to James Dimon, chief executive of JPMorgan Chase. But a similar one could easily have been sent to other major bankers who played a role in last year’s financial debacle. It sums up many Americans’ bewilderment – and their anger, often – over the extraordinary bonuses paid to top executives while their companies got federal bailouts.

Now, key players in Congress are taking on corporations over the issue.

“If in good times you were told you weren’t going to get a bonus, what part of your job would you not do?” Rep. Barney Frank, chairman of the House Financial Services Committee, asked financial executives at a recent hearing. “Would you, like, leave early on Wednesday?... Why do you need to be bribed to have your interests aligned with the people who are paying your salary?”

The word “bribe” caught the attention of some conservative bloggers. One defended the huge sums as “a carrot.”

That’s the usual argument from Wall Street: Top pay and bonuses are necessary to keep the talent. But it’s largely mythology, says Sarah Anderson, an analyst at the progressive Institute for Policy Studies and veteran critic of extreme executive pay. In 1965, the CEOs of major US companies made 24 times an average worker’s pay. By 2004, that ratio had grown to 431 times.

Are today’s executives really hundreds of times more capable than those of four decades ago? Ms. Anderson – and others – are doubtful.

The recession has readjusted the balance a little. Average total compensation of CEOs of companies in the Standard & Poor’s 500 index fell to $10.4 million in 2008, down 6 percent from 2007.

A bill passed by Mr. Frank’s committee and then the entire House on July 31 aims to shrink executive pay further by giving corporate shareholders a say on pay. It would require all public companies to hold nonbinding annual votes on compensation if the CEO’s pay exceeds $500,000.

The Senate is expected to take up the House bill this fall. Sens. Carl Levin (D) of Michigan and John McCain (R) of Arizona have introduced a measure to eliminate federal corporate tax breaks on stock options for executives. The idea behind both bills is to discourage incentives that would cause bosses to take major short-term risks for the sake of fat bonuses.

There’s some skepticism about whether these bills will work. The shareholder referendums are nonbinding. But a Treasury study notes that a say on pay, as imposed on British companies since 2002, has made CEO pay “more sensitive to poor performance.” CEOs in Britain get about 44 times the average worker’s pay, and the nation’s financial regulator this month tightened restraints on bonuses. Japan’s top executives get about 11 times the salary of an average worker.

A say on pay might discourage the most egregious executive pay excesses, says Lucian Bebchuk, a Harvard Law School expert. More effective, he says, would be the House plan to give federal regulators the power to structure compensation in financial firms so that it doesn’t encourage perilous risk-taking.

Seven bailed-out corporations – from Citigroup to General Motors – also face the scrutiny of the new Washington pay czar. But his actions probably won’t be enough to satisfy the letter writer.