Image: Edward Liddy
Chip Somodevilla  /  Getty Images
Edward Liddy, chairman and CEO of the American International Group, prepares to testify before a House panel this week as protesters make their point in the background.
By Allison Linn Senior writer
updated 3/20/2009 1:11:14 PM ET 2009-03-20T17:11:14

The uproar over bonuses paid to AIG executives is giving critics of corporate pay practices hope that either Congress or the private sector will move to rein in compensation even at companies that are not getting government aid.

For years, some have argued that a system of rewarding executives with millions of dollars in annual compensation is too opulent and too far out of sync with what average employees take home.

But corporate boards have continued to richly compensate their top brass with packages that commonly include millions of dollars in base pay, bonuses and stock-based compensation, arguing that such pay is necessary to keep key, talented executives from jumping ship.

Now the outrage over AIG executives receiving $165 million in bonuses even as the company accepted billions of dollars in bailout money could put a harsh enough spotlight on such practices to force companies to change their ways. Some advocates see it as an opportunity to press the federal government to enact stricter tax requirements on executive pay packages.

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“I think we may be at one of these really unique tipping points in executive compensation,” said David Lewin, a professor at UCLA’s Anderson School of Management.

This week the House passed a bill that would to impose a 90 percent tax on the bonuses paid to some AIG executives, and the Senate is considering a slightly different tax that also aims to "claw back" some of the bonus money. The latest action came after a week of intense criticism of AIG, which also has continued to rack up billions of dollars in losses.

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While some Americans, including activist shareholders, have long criticized the rich rewards paid out to the nation's most powerful executives, politicians have never done much to curb pay at private companies. As a result CEO pay at the nation's biggest companies soared to 344 times the pay of a typical American worker in 2007, compared with 42 times typical in 1980, according to the Institute for Policy Studies.

But Lewin and others say that politicians have a golden opportunity to rein in extravagant pay at the financial services companies such as AIG that have received billions of dollars in government aid to stay afloat.

“It’s not such a big leap for the companies in which we have taxpayer money invested. Now the taxpayers are the shareholders,” Lewin said.

Lewin also expects to see a ripple effect on other public companies, as both shareholders and boards of directors grow less patient with the argument that executives need to be compensated well because otherwise they will go work somewhere else. If pay falls at financial services firms, that will lower the bar at companies that measure their pay against Wall Street firms.

While Lewin thinks it would be a mistake for the government to try to regulate executive pay at companies not receiving bailout money, others are hoping to use the hubbub over AIG payouts to prod legal action.

Sarah Anderson, an analyst with the Institute for Policy Studies and an advocate for more stringent controls on executive pay, said she hopes the AIG situation will prompt Congress to pass heavier taxes on executive pay even at companies that are not receiving government funds.

Still, even Anderson concedes that reining in executive pay is a tricky business. If Congress tries to limit one form of compensation, companies may simply respond by increasing another form of pay or perk to make up the difference.

Politicians learned this lesson in the 1990s, when a change in tax laws that effectively capped base salaries at $1 million led companies to start paying out larger bonuses and stock-based compensation to make up the difference. The median pay package for CEOs at S&P 500 companies in 2007 was worth nearly $8.4 million including bonuses, stock and other perks, according to an Associated Press analysis.

That’s one reason Anderson is hoping for a more comprehensive approach on pay.

“They need to put restrictions on all forms of compensation at these companies,” Anderson said.

Even those who favor leaving pay practices in the hands of the private sector concede that this may be a year of relative restraint.

Steven Hall, managing partner of the executive compensation consulting firm Steven Hall & Partners, said there are several reasons pay packages will be lower this year.

For one thing, companies that may receive government aid in the future are going to be nervous that they will either be forced to rescind the money or be lambasted for the payouts, he said.

For another, those that aren’t receiving government aid will worry about public outcry — and shareholder resentment — over rewarding executives handsomely in a year when most companies’ share prices have fallen sharply, many have reported disappointing earnings and layoffs are commonplace.

“We know that the world is reacting negatively to those things,” Hall said.

A tough business climate also likely made it harder for executives to meet their goals for the year, which could crimp pay that was based on meeting certain performance targets.

Still, Hall doesn’t expect the cutbacks to last once the economy starts to recover and business starts to rebound.

“For general industry, I think pay will come back,” he said.

On Wall Street, however, Hall expects that compensation will not return to the levels it hit before the financial crisis altered the industry, perhaps for good.

“Wall Street bonuses are going to be lower than they were because the business is different,” Hall said. “The world has changed for them.”

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