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Quite the World, Isn't It?

A CEO excessive-pay solution that will go nowhere

New York Times columnist Joe Nocera has a column today looking at "executive pay czar" Kenneth R. Feinberg's decision to curtail executive compensation at firms that received massive government bailouts. He could do that because of the public investment in the businesses, but the problem extends far beyond a few troubled banks and GM. It is endemic in the private sector, with executives receiving millions of dollars for, in effect, screwing up.

Nocera suggests that the ultimate power needs to be held by the shareholders in the companies, and there's some merit to that. They are, after all, the ones immediately shouldering the weight for those obscene pay packages. But getting corporations to change their governance structure to let that happen isn't going to be easy. As good revolutionaries know, those who hold power aren't likely to let it go without a fight.

It would be easier, and more effective, to do it through the tax code. Congress could set up an agency, or use Treasury, to develop formulas for acceptable executive pay ratios. It could tie the pay package to the size of the company and to the average wage of the workers, making it some reasonable multiple of what the lowest rung gets paid. And for every dollar over that level the executive is paid, the company is taxed dollar for dollar. So if the level under the formula is $10 million, and the executive receives $15 million, the company pays another $5 million in taxes.

In the short term, the taxpayers get some benefit. In the long term, the brakes are put on this obscene practice.
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