The Wall Street bailout legislation, despite claims to the contrary, does precious little to limit the outrageously extravagant pay rewards that give top executives the incentive to behave outrageously.

By Sam Pizzigati

The $700-billion Wall Street bailout bill has now become law, after lawmakers backing the bill packed the legislation with billions in sweeteners to rally their skeptical colleagues. But the bailout still does include, we’re all assured, one bitter pill — for Wall Street CEOs.

Top Wall Street executives, the bill’s champions are trumpeting, will not be getting rich off bailout dollars. The bailout legislation’s executive pay provisions, says Rep. Barney Frank, amount to the first “restrictions on excessive CEO compensation” in U.S. history.

The bailout bill’s official one-page summary delivers the same celebratory message. The title on the summary section on CEO pay: “No Windfalls for Executives.”

The bailout’s provisions on executive pay do, to be sure, give some cause for celebration. The legislation carries a ban on “golden parachutes,” for instance, and language that lets the feds “claw back” executive earnings based on phony accounting.

And the legislation also includes a provision that places a $500,000 cap on the individual executive pay that bailed-out companies can deduct from their taxes. Any executive pay over that cap — including pay in the form of stock options and other so-called “performance-based incentives” — will now get a tax ax.

This represents a precedent-setting advance over existing law. The tax code’s current $1 million deductibility cap on executive pay only applies to straight salary. Companies can deduct everything else, no matter how many millions that everything else ends up totaling.

All these executive pay restrictions in the bailout bill, listed neatly, certainly do sound impressive. So what’s the problem? Just this: Nearly every executive pay restriction in the bailout legislation comes with a loophole built-in.

Take, for instance, that $500,000 cap on how much executive pay bailed-out companies can deduct off their taxes. This cap only applies when the Treasury Department buys up over $300 million of a company’s “troubled assets” through an auction process. If Treasury Secretary Henry Paulson’s people buy up a company’s troubled assets directly, the $500,000 deductibility cap doesn’t apply. Nor does the “clawback” provision.

Even the bailout bill’s celebrated ban on golden parachutes comes with a loophole. The golden parachute ban, in auction bailout situations, only applies to executives hired after the auction takes place. Those executives who led their companies into the bailout zone will be able to ride off, into the sunset, with saddlebags stuffed with windfalls.

“The golden parachutes,” as Rep. Peter DeFazio from Oregon noted last week, “have been exchanged for camouflage parachutes.”

But that’s not the worst of it. In situations that don’t involve auctions, the bailout legislation directs the Treasury to “require that the financial institution meet appropriate standards for executive compensation.” Who will define “appropriate”? The legislation leaves that up to Secretary Paulson.

Not a great idea. Secretary Paulson, as CEO of investment banking giant Goldman Sachs, amassed a personal stock stash worth over three-quarters of a billion dollars. His conception of what constitutes “appropriate” pay for bailed-out executives just might not gibe with the definition American taxpayers have in mind.

The bailout bill’s biggest executive pay loophole of all? The legislation does nothing to restrain, in any way whatsoever, executive pay at the Wall Street companies the Treasury Department will now hire to manage the “troubled assets” the federal government will shortly start buying.

Should any of this really bother us? Shouldn’t we be concentrating on cleaning up Wall Street’s mess, not punishing Wall Street’s executives?

Cleaning up the mess surely has to be a top priority. But avoiding more mess also needs to rate right up there on the federal priority list, and that’s why we need serious restraints on the pay of bailed-out executives — not to “punish” executives, but to prevent the reckless executive behaviors that have brought us face-to-face with so much economic peril.

The bottom line: The longer we as a society let top executives chase after dazzling rewards, the more recklessness we encourage.

The bailout legislation, as now passed, does establish the principle that we need “limits on compensation” that discourage executives from taking “unnecessary and excessive risks that threaten the value of the financial institution during the period that the Secretary holds an equity or debt position in the financial institution.”

Congress now needs to spell out specifically what these limits should be. Lawmakers didn’t get executive pay right on their first go-around with the bailout. In January, fortunately, they’ll have another chance.

Sam Pizzigati, an associate fellow at the Washington, D.C.-based Institute for Policy Studies, edits Too Much, the online weekly on excess and inequality.