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The Monitor's View

How government must influence executive pay

Treasury Secretary Geithner is on the right track – mostly.

By the Monitor's Editorial Board / June 12, 2009

News item: Last year, compensation for the highest-ranking executives at America's 50 largest financial firms went skidding downhill right along with the economy. In 2007, the executives averaged $13 million a year; in 2008 they earned $9.8 million – a drop of 25 percent.

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The decline, reported this week by Bloomberg, is unlikely to change views on Main Street that many of those on Wall Street are greedy – and not very good managers, either.

For three decades, CEO pay across America's major corporations has been racing ahead of what Joe and Jane Worker make. In 1980, chief executives made "only" 40 times the earnings of average workers. By 2007, it was 344 times.

Public outrage over executive compensation bubbled up during the Enron and Tyco scandals several years ago. But it reached full volcanic force earlier this year when bonuses at bailout-recipient AIG came to light.

Main Streeters, pitchforks in hand, rushed Wall Street – and Washington. Do something, the public demanded, and now, Washington is.

This week, Treasury Secretary Timothy Geithner announced a plan to limit compensation at companies receiving government help under the Troubled Asset Relief Program (TARP), as the administration was required to do by Congress. He also presented an outline for legislation that would increase transparency and lessen conflict of interest in setting corporate executive compensation.

With the exception of the TARP companies (more on that in a minute), Mr. Geithner is moving in the right direction. Admitting that pay "practices" were a factor in the financial crisis, he correctly identified the problem: "Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excessive leverage."

Note that he did not zero in on the amounts that executives are paid. As morally offensive as the totals may be, the far more important issue for the sake of the economy is pay "practices" – how pay is determined and doled out.

Is it done in a way that insulates America's businesses against excessive risk – or rather, that makes them more sensitive to it? Plain-old risk is not the concern here; it's the reckless kind that ignored mortgage borrowers' ability to pay that caused so much trouble.