msnbc.com news services
updated 1/31/2007 5:05:50 PM ET 2007-01-31T22:05:50

In his “State of the Economy” speech today, delivered from the financial center of the world, President Bush aimed at bringing his economic message out of the shadows of the Iraq war. On his second day in a row he focused on the economy, the government reported faster-than-expected growth of 3.5 percent in the final quarter of last year.

In his address, Bush took aim Wednesday at lavish salaries and bonuses for corporate executives, standing on Wall Street to issue a sharp warning for corporate boards to “step up to their responsibilities” and tie compensation packages to performance.

The president acknowledged people’s continuing nervousness about their financial picture, despite a string of similar reports that provide some reason for optimism. He said some workers are being left behind in the booming economy and the disparity between the rich and the poor is growing.

“The fact is that income inequality is real. It has been rising for more than 25 years,” the president said. “The earnings gap is now twice as wide as it was in 1980,” Bush said, adding that more education and training can lift peoples’ salaries.

The president spoke to an audience of business leaders at the venerable Federal Hall — a symbol of both America’s democracy and its economic resilience. Later, he stopped along Broad Street to shake hands with New York police officers and then ducked inside the New York Stock Exchange. The surprise visit caused a frenzy on the already chaotic trading floor. It was so crowded that traders standing just five feet away of Bush had a better view of him on television screens.

Video: Bush visits Big Board In his address, Bush said he realized that stories about the enormous salaries and other perks for CEOs, for instance, create anger and uncertainty that affect the country’s investors.

The president does not endorse any government role in reducing those packages. Instead, Bush highlighted new federal rules that the administration thinks are a better path toward wise compensation decisions by companies.

“Government should not decide the compensation for America’s corporate executives,” he said. “But the salaries and bonuses of CEOs should be based on their success at improving their companies and bringing value to their shareholders.”

In effect starting last month, the rules give investors access to clearer and more detailed information from public companies on their top executives’ pay packages and perks. Their impact will become apparent as corporations begin issuing 2006 annual reports.

“America’s corporate boardrooms must step up to their responsibilities,” Bush said. “You need to pay attention to the executive compensation packages that you approve. You need to show the world that America’s businesses are a model of transparency and good corporate governance.”

Today, a report showed gross domestic product, the broadest measure of overall economic activity within U.S. borders, expanded at a 3.5 percent annual rate during the October-through-December quarter, according to the Commerce Department.

It was the best quarterly reading in the GDP report since the beginning of last year, when the slide in the U.S. housing market was not yet fully evident. It also was a healthier pace than the annual growth rate of 3.0 percent that economists were expecting. Consequently, it strengthened their sentiment that the Federal Reserve will not cut interest rates soon.

“Overall, we’re seeing some very good growth data, combined with some friendly inflation data, which overall supports the view of a steady Federal Reserve,” said Alex Beuzelin, senior market analyst at Ruesch International, in Washington, D.C.

On the inflation front, the closely watched personal consumption expenditures price index fell 0.8 percent in the quarter, mostly because of falling energy prices. It was the biggest decline since the third quarter of 1954 when it dropped 1.2 percent and surprised economists, who were expecting gain of 1.9 percent.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, has said he will push legislation to require shareholder approval of executive compensation plans. And a separate bill before the Senate to raise the minimum wage would fund accompanying tax breaks to ease the burden on small businesses by capping executives’ tax-deferred pay packages at $1 million a year.

Still, even Bush’s words on pay were met with complete silence from the business crowd he addressed.

Huge salaries and other perks for CEO have drawn investor ire and made splashy headlines. Anger over executive compensation unrelated to performance, even as companies stumble, lay off employees or renege on billions of dollars in pension obligations for workers’ retirement, has spread from shareholders to union activists and buttoned-down mutual fund trustees. The chasm between executives’ salaries and the pay of rank-and-file employees continues to widen.

Home Depot chief executive Bob Nardelli was earning an average of $25.7 million a year — excluding stock options — before he was forced out in a furor over his hefty pay. He left with a severance package worth about $210 million.

In 2001, General Electric Co. paid chief executive Jack Welch $16.25 million. Welch was replaced that year with Jeffrey Immelt, who earned $3.4 million in total annual compensation in 2005.

The New York Stock Exchange faced an uproar over former CEO Richard Grasso’s $187.5 million severance package. Former New York Attorney General Eliot Spitzer, now governor, sued members of the NYSE board over the package given to Grasso when he quit as chairman in 2003.

The annual salary of the president is $400,000.

“The state of our economy is strong,” he declared.

Democrats respond that Bush is giving a misleadingly rosy picture about the economy.

“President Bush can deliver all the economic pep talks he wants, but the fact remains that his failed leadership has led to the worst job recovery on record, stagnating household incomes, a rise in poverty and record deficits,” said Stacie Paxton, spokeswoman for the Democratic National Committee.

Since Bush took office in 2001, the country has seen one in five manufacturing jobs disappear, a total of 2.96 million lost jobs. The U.S. trade deficit is expected to climb to a fifth consecutive record when final 2006 figures are totaled next month.

The Associated Press and Reuters contributed to this report.

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