Congress Targets Executive Pay As Rescue Package Hangs In Balance

If there’s one thing that politicians are good at, it’s seizing on the sensational aspects of any given issue and squeezing them for political gain. The amount of money finance firms pay top executives, while exorbitant, ultimately counts for relatively little when it comes to the bottom line. But now, with Wall Street’s rescue package hanging in the balance, congressmen are trying to append all sorts of pay restrictions to the bill in order to placate outraged constituents. NYT:

Angry sentiments on the issue in Congress were palpable on Tuesday, when Treasury Secretary Henry M. Paulson Jr. and Ben S. Bernanke, the Federal Reserve chairman, testified before the Senate banking committee.

Senator Christopher J. Dodd, chairman of the committee, said the “authors of this calamity” should not walk away enriched.

The presidential candidates, Senators Barack Obama and John McCain, have also called for pay limits.

The proposals in Washington are still tentative, and often vague. A Senate draft document calls for a ban on incentive payments that the Treasury deems “inappropriate or excessive” and a “claw-back” provision, requiring executives to give up pay or severance benefits if the firm’s financial results are later shown to be overstated.

Other proposals call for a ban on severance payments and allowing large shareholders, with a stake of 3 per cent or more, to propose alternative slates of directors. This would be an effort to tackle excessive pay practices by opening up and strengthening corporate governance.

Executive pay is a tough issue, but it’s separate from the current crisis. Congress should focus on passing an effective bill, which addresses the fundamentals of the crisis, as soon as possible. There will be plenty of time later for populist grandstanding.

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