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Globe Editorial

Scraping by on half a mil

February 6, 2009
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THE DIRECTOR of an executive compensation firm was quoted in The New York Times this week condemning the Obama administration's proposed caps on corporate salaries for companies that take taxpayer bailouts to keep afloat. "Five hundred thousand dollars is not a lot of money," said the compensation expert, James F. Reda, "particularly if there is no bonus."

The US Department of Labor estimates that just 0.4 percent of Americans currently earn $500,000 or more. That suggests that for 99 and six-tenths of Americans, $500,000 is, in fact, a lot of money.

This kind of cluelessness is emblematic of the distortions in the US economy that helped bring on the current crisis. It also explains why President Obama's proposed compensation reforms are more than just a populist gimmick.

The first half of the $700 billion Troubled Asset Relief Plan, which was intended to thaw the credit freeze, was handed out last year with limited oversight. Little of it came back as consumer loans. To learn now that, for example, Bank of America, which received $25 billion in TARP funds, paid its CEO over $20 million in compensation in 2007 only salts the taxpayers' wounds.

Many corporate executives are measured not on real performance but on risky, short-term moves that look good on paper and pump up stock prices. They are rewarded by compensation committees made up of even more people who live in a world where $500,000 is not a lot of money. That needs to change, for reasons of sheer equity and to restore stability to the economy.

In his inauguration speech, Obama said that the cynics who question the need for change don't understand that "the ground has shifted beneath them." Wall Street just got a seismic reminder.

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