Why Are Wall St. Salaries and Bonuses Still So High?

Not everyone is suffering in this economy. According to a new study by the Global Economy Project at the Institute for Policy Studies, the CEOs of financial firms made an average of $13.8 million last year. The same report also found that the top five executives at 20 financial institutions—all of which received federal bailout money—took home combined pay packages of $3.2 billion over the last three years. Worse yet, the pay ratio between CEOs and employees of the companies that make up the Standard & Poor's 500 is now 319 to 1.

Attempts to rein in CEO salaries have so far been futile, says Sarah Anderson, director of the Global Economy Project and author of the group's report, America's Bailout Barons. NEWSWEEK's Nancy Cook spoke to Anderson about the growing wage gap, the problem of CEO pay, the Obama administration’s new pay czar, and whether the government should regulate executive salaries. Excerpts:

In your study, America's Bailout Barons, what were the most egregious examples of executive compensation this year?
I think the most shocking thing was looking at how executives could use the financial crisis as a springboard to an even bigger windfall this year. Rather than hand out bonuses, many companies gave out new stock options. For example, the stock options of American Express's CEO increased by $18 million, but the stock price of the company was about half since the economic crash. I think this shows that executives come out on top no matter what.

President Obama recently appointed a pay czar to rein in executive pay. In your experience, will big paychecks be something the czar can control?
It's too early to tell, but there's an impression that the pay czar has more power than he actually does. Right now he's only looking at the pay packages for seven companies that received bailout money, and he's not looking at pay packages of less than $500,000. That's a far cry from President Obama's speech earlier this year when he proposed a cap of $500,000 on executive compensation. Now that cap has turned into the floor.

There's also a lot of talk about how the pay czar doesn't have the power to break contracts. But I just hope he knows how to play hardball. There are lots of things the government could do to get these companies to negotiate. They could say, "Unless you renegotiate this contract, you can forget about getting tax breaks or other forms of corporate welfare."

Forget about the CEOs. What about the midlevel executives or the traders? How does their pay compare?
The average Wall Street employee got an end-of-the-year bonus of about $112,000, and this is the worst financial year that we've ever seen in about 80 years. That bonus is about twice the starting salary of the people here in Washington, who are responsible for regulating Wall Street. This undermines the regulatory system and can breed conflict of interest. It's like asking the regulators if they really want to crack down on a company they may want to work for someday.

Your report talked a lot about CEOs who earned stock options rather than bonuses or larger salaries. Can you talk about the breakdown of these pay packages?
For the top executives, stock options are the biggest form of pay and can make up to 80 to 90 percent of pay packages. For traders, a big share of their pay comes from bonuses. Stock options were originally promoted as a way to ensure that executives' interests would be aligned with that of their companies, but they are manipulating the system. Even though the stock prices are lower today than they were before the crisis, CEOs are still being rewarded.

What would you like to see happen in terms of the government regulating executive compensation?
During the Clinton administration, the government passed a $1 million cap on the tax deductibility of salaries. But there was still a big loophole because the law didn't cover performance-based pay and stock options weren't affected. The government closed this loophole in the TARP legislation for companies that the government bailed out. We're hoping the government extends this to all companies.

The loopholes are not there by accident. They're there because of fierce lobbying by the financial industry, which still has a lot of power on Capitol Hill. We need to push policymakers to say, "These are the guys who got us into this crisis. They cannot have the same kind of clout."

In the next year or so, which CEOs or executives will get big paydays?
In the past few years, Goldman Sachs has paid people very well, and this year they are on track to have the biggest payouts. They've already set aside $11 billion for bonuses, so they are one to watch. It's a little bit amusing. The CEO of Goldman Sachs gave this big speech in April, saying that he'd seen the light on executive pay. Now that the company has recovered financially, he's very quickly forgotten.

Anything else you'd like to add?
In the past few weeks, the governments in the United Kingdom, Germany, and France have passed executive-compensation laws. They're pushing the Obama administration to talk about something similar when everyone meets at the G20 summit in Pittsburgh on Sept. 20. The big argument from U.S. financial companies was that you can't pass serious restrictions on pay because then we'll lose all of our top talent to higher-paying European firms. But this makes that argument really fall apart.

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