CEO pay pressure builds due to Wall Street bailout

By Martha Graybow

NEW YORK (Reuters) - Investor activists see the U.S. government's proposed $700 billion bailout of Wall Street as a big opportunity to curb CEO pay they consider too lavish, adding new intensity to an already hot debate.

Criticism of executive pay has gained momentum this election year with the presidential candidates from both major parties lashing out over rich payouts for CEOs of companies that have suffered big losses in the U.S. housing market bust and ensuing credit crisis.

It is expected to become an even bigger issue as lawmakers debate the proposed government purchase of toxic mortgage-related securities held by banks and other financial institutions, whose executives have been among the most highly compensated in all of Corporate America.

Last year, CEOs of companies in the Standard & Poor's 500 index on average took in $10.5 million in pay, 344 times that of the average U.S. worker, according to the Institute for Policy Studies and United for a Fair Economy, two groups that focus on social justice issues.

A powerful Democrat, House of Representatives Financial Services Committee Chairman Barney Frank, has already said he wants limits on executive pay at banks and other institutions that would be helped by the bailout.

Business groups counter that it should be left to boards of directors -- not Congress -- to decide how to best compensate company leaders, and that limiting executive pay will be counterproductive.

Wall Street has become the focus of rising populist anger as the subprime and credit market problems have boiled over into an extraordinary taxpayer-funded rescue plan.

Many executives whose firms have been hard-hit by the mortgage crisis have earned sizable pay. Richard Fuld, the chairman and chief executive of Lehman Brothers Holdings Inc, which filed for bankruptcy protection last week, was awarded $22 million in fiscal 2007, for instance.

"Why should executives who were well paid, driven by the subprime investment bubble, be able to keep that money at taxpayers' expense?" said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees, a critic of executive pay plans.

"There should be substantial control of their pay packages by the government," he said.

It's not clear how CEO pay could be reined in as part of the bailout proposal and whether there is enough support in Congress to make it a requirement. And while public company executives by any measure earn sizable pay, it can pale in comparison to the awards given to managers of hedge funds and private equity firms that are not publicly held.

Ferlauto said one proposal is to limit future payouts for top executives whose companies would be financially supported by the government. There could also be "clawbacks" of past bonus pay linked to profits earned from subprime mortgage and abusive lending business that has led to financial restatements and asset write-downs.

Ferlauto said he expects the bailout will jump-start a Senate bill introduced by Democratic presidential candidate Barack Obama that would give public company shareholders an advisory "say on pay" vote on top executives' compensation.

A version of the bill passed the House in April 2007 but has stalled in the Senate. Business groups have opposed the proposal.

The debate on pay comes as union activists, shareholder rights groups and others argue that business leaders are enduring little pain from the financial crisis themselves, while average Americans are struggling to hang on to their homes and jobs.

In the wake of the bailout plan, "we see this as a huge opportunity to start confronting the extreme inequality and the excessive compensation that has been going to executives," said Sarah Anderson, global economy project director at the Institute for Policy Studies.

The group wants Congress to require companies seeking assistance under the rescue plan to cap executive pay at 25 times that of the lowest-paid employee. If a firm's lowest-paid worker earns $30,000, the ceiling for the top-paid executive would be $750,000 -- still far more than the $400,000 annual salary of the U.S. president, the group said.

Another idea floated by the group is to apply a special tax of 20 percent on all income of employees and consultants of bailed out institutions who earned at least $500,000 per year over the past four years.

Charles Tharp, executive vice president for policy at the industry-funded Center on Executive Compensation, said demands for Congress to step in on pay issues "makes me very nervous."

He said it's hard to argue with calls for executives to refund performance pay that was tied to company results that are later revised downward because of bad loans or write-downs. But he said many companies have their own clawback provisions, including 28 of the 30 components of the Dow Jones industrial average. Congress doesn't need to get involved, he said.

Also, said Tharp, limiting how much CEOs earn through bonuses or other compensation would likely have unintended consequences, such as discouraging healthy risk-taking by companies -- something that is needed to reinvigorate Wall Street.

"The board has the responsibility for setting the right incentives," he said. "It's not a legislative responsibility."

(Reporting by Martha Graybow; editing by John Wallace)