Rein in the pay of America's CEOs

Congress is rightly concerned about excessive pay for business executives.

Nor is Congress alone. Boards of directors, stockholders, labor unions, and the public show growing uneasiness over multimillion-dollar compensation packages for those who run America's great companies. This is having some effect: Average compensation of CEOs at major companies is down this year from $13.1 million to $11 million, a level that still strikes many people as too high.

The highest are paid a good deal more – $105.5 million for Richard Fairbank of Capital One Financial Corp. (credit cards), $65.8 million for Dwight Schar of NVR Inc. (real estate). The Greeks (see Plato and Aristotle) thought that a spread of five times was about right between the highest and lowest paid workers. By the end of the 19th century, J.P. Morgan had boosted this to 20 times. Now in the 21st century, it's many times more. At Hershey Foods, to take a specific case, it is 589 times: CEO Richard Leemy's 2001 pay of $22,425,470 divided by the average worker's pay of $37,440 equals 588.97.

That is socially unhealthy. It would be bad public policy to eliminate these distortions altogether, but it is also bad policy to tolerate their continuance, let alone their increase.

There is a way to avoid this. The precedent was set in 1942. As part of an effort to control wartime inflation, President Franklin Roosevelt issued an executive order limiting an individual's salary and other compensation to $25,000 a year after taxes. The Treasury Department estimated that with wartime tax rates this would mean a gross of $67,200 and that between 20,000 and 24,000 individuals would be affected.

The Treasury further estimated that about 750 persons were receiving salaries of more than $100,000 a year; about 30 people, more than $150,000; and three or four, more than $500,000.

Earlier in 1942, FDR had asked Congress to use the tax laws to limit individual incomes to $25,000, but Congress refused. Congress did not like the executive order any better and repealed it through an amendment attached to a bill raising the ceiling on the national debt from $125 billion to $210 billion. (Note: Members of Congress in 1942 were paid $10,000. And the whole national debt then was less than the budget of the Defense Department today.)

Roosevelt felt that he could not afford to veto the debt increase, so he allowed the bill, along with its repeal of the salary limit, to become law without his signature, but not without a blast at what he saw as its inequity:

"Congress has authorized the drafting of men into the Army for $600 a year [the basic pay of a draftee was $50 a month] regardless of whether they were earning $1,000 or $100,000 a year, but has refused to authorize the reduction in the salary of any man not drafted into the Army, no matter how high his income may be."

We have come a long way since 1942 in terms of higher salaries, lower taxes, and bigger debt; but we have made no progress toward eliminating the basic disparities between the best and worst off among us.

Congress could now take a modest step toward that goal by changing the tax code to provide that no part of the compensation paid to any employee exceeding, say, $1 million a year, can be treated as a business expense and thereby qualify as tax deductible. This would not prevent a company from paying an executive more than $1 million; but if it did so, the excess over a million would come from profits and not operating expenses. The $1 million figure is debatable. It was chosen because anybody can live comfortably on it and provide for retirement without giving the appearance of scandalous wealth.

This change would have corollary benefits: It would remove the argument "everybody's doing it" to justify huge salaries. And it would bring salaries in pro sports, especially baseball, basketball, and football, to more reasonable levels.

The suggested tax change would apply only to salaried employees. This might be a loophole, but let's take small steps first. The limit would not affect tennis and golf, where players compete for prize money. It would not affect the income athletes earn from commercials and endorsements. Nor would it affect the income of such professionals as doctors, lawyers, accountants, actors, freelance writers, and others who are compensated on a fee-for-service basis.

Sixty years ago, this was a presidential idea that was rejected by Congress. Today, Congress has a chance to correct the mistake it made then.

• Pat M. Holt is former chief of staff of the Senate Foreign Relations Committee.