03/18/2010 05:12 am ET | Updated May 25, 2011

Taming Corporate Pay, Finally

Complaining about executive pay and perks has the feel of King Canute shouting at the tides. But is the reported, imminent slapdown by "pay czar' Ken Feinberg of the pay packages at seven bailed out firms the breakthrough critics have been waiting for? Until this year's populist fury over bonuses burst the damn, Wall Street has for decades largely brushed off attacks on corporate compensation like Jay Z flicking lint off his lapel. Despite Dennis Kozlowski's $16,000 umbrella stand. Despite ExxonMobil's Lee Raymond earning more per hour in 2005 than his line workers earned per year. Despite the top tenth earning 30 percent of all income from the 1940s to the 1970s but 45 percent today. Defenders of the executive status quo have had five self-serving arguments that they could rely on:

  • "A CEO had to keep up with his competitors or a firm could lose him." How free market advocates could argue that competition was desirable everywhere except their own pay was an inconsistency that bothered few who profited from the analysis. They understood that compensation consultants would tell each of their clients that they had to keep up with the Joneses. So all happily rode this escalator together.
  • "It's up to the shareholders." But since corporate ownership and control were separated generations ago - shareholders technically own but don't run their firms - this was a convenient way to sound responsible but escape accountability.
  • "The Board determines pay packages." But who determines the Board? Imagine if batters could call balls and strikes. The Management-Board system still allows executives to effectively write their own tickets since the CEO chooses both compensation consultants and board members loathe to offend their employer.
  • "Pay inequality is the price we pay for economic growth." This blend of Ayn Rand and John Locke doesn't fly in a global economy where Japanese CEO counterparts earn a quarter as much and seem pretty motivated and efficient. The enormous shift in real income from the bottom 90 percent to the top one percent is not the result of the "unseen hand" but intentional policies of Reagan and the Bushes slashing taxes to the rich, weakening labor law enforcement, deregulating consumer and financial rules, eroding the minimum wage. Our current version of the Gilded Age is hardly inevitable since real wages doubled and the income of the top one percent actually fell during the 1929-1947 "Great Compression," in Paul Krugman's analysis.
  • "Movie stars and star athletes also earn outsized incomes." Yes but a) they at least have objective measures like batting averages and attendance and Neilsons to determine success and b) they don't play the role of both labor and management in salary talks. When Babe Ruth famously said that he deserved more money than President Coolidge in 1927 "because I had a better year," he could cite stats.
Executives at bailed out companies are now encountering a new reality: the old arguments are untenable if not laughable at firms that wouldn't exist without the massive injection of taxpayer funds. The public is rightly disgusted when billions in bailouts became billions in bonuses to such wards of the state as AIG. (On average, CEOs at 29 of the largest public financial companies saw their perks and benefits grow four percent, or over $380,000 each, as the Great Recession took hold in 2008.) Now comes Feinberg who under the Economic Stimulus law has the unprecedented power to reject some pay packages as excessive and better align shareholder and executive interests by replacing over-the-top pay and perks with stock that can't be sold for years. Even the desirable "Say on Pay" legislation, if enacted, probably wouldn't be able to do this. He alone can't force such changes on thousands of other companies. But if he limits and/or jawbones down pay and links it to long-term gains, then if President Obama follows up by using his bully pulpit to urge others to follow suit -- as Credit Suisse has announced it will do and as The Group of 20 Nations has proposed in a best-practices proposal -- this could be the pebble in the rockslide. Obama and Feinberg could finally slow or stop capitalism-without-risk, when executive salaries rose during good times (since they created the wealth) and rose during bad times (since they had to be bribed to stay).

Earlier eras saw public backlashes after Republican abuses led to jumps to new paradigms. Like antitrust laws. Like labor laws. Like consumer and environmental laws. Like corporate pay?