The Bailout and CEO Pay: What’s ‘Excessive’?

Outside of Treasury Secretary Henry Paulson and Republican leaders in the White House and Congress, just about everybody who’s anybody on the national political scene agrees with the notion that the financial bailout must include constraints on executive compensation.

Both of our major presidential candidates, Barack Obama and John McCain, are insisting that the bailout must not enrich the already rich.

In Congress, top Democrats are singing the same song.

But the lyrics have been rather indistinct. The latest Democratic leadership proposal we’ve seen would give the Treasury Secretary the vague power to exclude incentives for executives of bailed-out companies that he deems to be “inappropriate or excessive.”

Let’s keep in mind that our current Treasury Secretary, Henry Paulson, spent his previous life on Wall Street, most recently as the CEO of investment banking giant Goldman Sachs. Paulson accumulated, as a reward for his executive labors, a personal stock stash that’s still worth, even after the Wall Street meltdown, $523.5 million.

Is this the person we want defining what level of executive pay qualifies as “inappropriate”?

We need a more impartial arbiter. Peter Drucker, the founder of modern management science, would have been perfect. Drucker passed away three years ago, but he did leave behind a body of wisdom that we ought now be tapping.

Business enterprises, Drucker preached, operate most efficiently and effectively when they keep the gap between worker and executive pay within a reasonable range. Wide gaps between executives and workers, as a Business Week appreciation of his work noted last week, undermine “the kind of teamwork that most businesses require to succeed.”

What sort of gap did Drucker consider reasonable? No executives, he believed, should make over 25 times more than their workers. Top American executives last year, says a recent Institute for Policy Studies report, took home on average 344 times more than worker pay.

Imagine if we had a bailout that would only move tax dollars to companies where executives make no more than 25 times what their workers receive. The executives at these companies would actually have a vested personal interest in sharing rewards with their workers. The more their workers make, the more they could make.

Today, the incentives in our economy all run the other way. Executives make their money by exploiting workers, not sharing with them.

That’s the incentive structure that put us in our current economic predicament. That’s the incentive structure the emerging bailout could — and should — start ending.