AIG bonuses stir hornet's nest

Perhaps the worst news for the Obama administration has been the story about AIG's annual bonuses for its bailed-out executives. The Washington Post broke the story that AIG, which has received $170 billion in government funding since last fall, plans to honor a commitment to pay multi-million-dollar bonuses to the very executives that drove the company into the ground. It seems that before the federal bailouts began last September AIG promised $400 million in bonuses to its employees. Under pressure from embarrassed administration officials, AIG has talked the insurance company's 43 top executives into taking only half of their bonuses — $9.6 million — right away. The other half of these bonuses will be delayed until things quiet down a bit. Administration officials and more than a few taxpayers are outraged, and for good reason. AIG says the bonuses are a legal obligation. A contract is a contract, they say. Others might retort, a bankruptcy is a bankruptcy.

The AIG bonuses are not isolated phenomena. They reflect the whole topsy-turvy nature of compensation in this country. While millions of responsible, hard-working people are out of work in this economy, the people who precipitated the mess are being inconvenienced by the delay in their multi-million-dollar bonuses. Executive compensation has been out of kilter for decades. While wages stagnated or declined in inflation-adjusted terms, executive compensation soared.

And it's not just Wall Street bigwigs. Pay in the entertainment industry and in professional sports (maybe I'm being redundant) is outrageous. A single actor or actress commands millions of dollars for making one movie? An NFL quarterback can demand $10 million a year or more, and get it? Meanwhile, the people who do essential work that benefits society and makes life better for everyone — teachers, clergy, health-care workers, journalists, care-givers — can barely scrape by, or are laid off.

The AIG bonus scandal won't change this imbalance, but it might raise consumers' doubts about how compensation is calculated.

Executive pay proposal rings a bell

President Obama proposed Wednesday that executives' pay at any banks receiving federal assistance be limited to $500,000 per year. That's a healthy cut — more than 90 percent — for many bank executives, who receive millions of dollars in salary and other benefits.

Obama's proposal reminded me of a suggestion I'd made in a college bull session discussing taxes and fairness about 40 years ago. I had suggested at the time that annual pay be capped at the salary for the president of the United States — $200,000 at the time. Any pay above that level would be taxed at 100 percent. My reasoning was that the president has the toughest, most important job in the United States, so it should be the highest-paying job in the country. At the time, I couldn't think of any reason why this wouldn't work. Either companies would limit excessive pay for top executives, thereby providing additional pay for R&D, worker wages and profits for shareholders, or the federal government would benefit from a surge in tax revenues from those multi-million-dollar paychecks taxed at 100 percent.

Obama's $500,000 cap is 25 percent more than the current salary for the president, $400,000,  but the rationale is the same. Why should a bank president get more pay than the president of the United States? Does he have greater responsibility? Does he work harder? Do his decisions have greater impact? Are his decisions more important nationally or globally?

With another four decades of experience and maturity, I find some flaws in my long-ago collegiate reasoning. The president's compensation amounts to more than his salary. He gets a pretty nice house to live in, transportation, health care, retirement benefits, etc.  And confiscatory tax rates probably do discourage innovation and economic risk-taking, as Republican tax-cutters have long argued. Confiscatory rates applied only to salaries and not other forms of compensation would shift compensation to untaxed or lower-taxed compensation.

Still, 40 years after I made the argument for capping salaries at the same level as the president's, it's interesting to see the new president make a quite similar proposal.