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October 6, 2008
Too Much: The Historical Link Between Bailouts and Pay Caps
Joseph J. Thorndike

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Complaints about outsized executive pay have prompted Congress to include compensation limits in the recently passed Wall Street bailout measure. Are the limits a good idea? Maybe. Will it work? If history is any guide, probably not.

In dollar terms, executive compensation is trivial. Even the huge paychecks common on Wall Street shrink to insignificance when compared to the size of the proposed bailout (or the liabilities of financial firms now in peril). To be sure, some compensation schemes reward short-term profit at the expense of long-term prudence. But the most salient arguments for executive pay caps -- at least in the political arena -- are moral, not practical.

Complaints about outsized paychecks have been a recurring feature of American politics. Sometimes, populist indignation has led to legislative action. But rarely have pay limits had the desired effect. Why else would we keep having the same arguments over and over again?

Still, it can be instructive to revisit past arguments, if only to appreciate current possibilities. In particular, we might look to the early 1930s (isn't everyone these days?). In those early years of the Depression, lawmakers tried to cap pay at companies seeking handouts from the Reconstruction Finance Corporation (RFC), a federal agency created to stabilize markets and rescue ailing banks. Sound familiar?


In his fine study of New Deal taxation, The Limits of Symbolic Reform, historian Mark Leff recounts the popular and political "obsession" with corporate pay during the 1930s. Then, as now, popular opinion ran strongly against executives. In one early poll, a 5-to-2 majority complained that salaries at large corporations were too high. Predictably, lawmakers were eager to do something -- anything -- that might limit salaries on Wall Street and elsewhere.

As a start, Congress demanded in 1933 that every corporate income tax return include a list of salaries for top executives. When those lists were made public the following year, there was an outcry in Congress. "For the captains of industry to be drawing down large salaries is unconscionable and unpatriotic," declared Sen. Burton Wheeler, D-Mont. "The practice must be curbed by legislation, through taxation and publicity." To Wheeler's mind, the stakes were high: "It is this kind of thing that does more to make for socialism and communism than all the propaganda from soap- boxes and Soviet Russia."

The numbers were certainly large, although nothing by 2008 standards. E.G. Grace, president of Bethlehem Steel, earned a salary of $12,000 annually in 1928, 1929, and 1930. But he also received bonuses totaling $3,470,789 (something like $43 million in current dollars). G.W. Hill of the American Tobacco Co. earned a salary of $787,500 between 1928 and 1933, but also received bonuses totaling $3,181,120. Many other executives had similar, if somewhat less princely, pay packages.

The salary report, issued by the Federal Trade Commission, pointed out that compensation dropped dramatically after 1932, along with the economy. Bonuses disappeared at many companies. But sympathy was in short supply on Capitol Hill.


Sen. Edward Costigan, D-Colo., an early sponsor of salary publicity legislation, suggested that high pay be taxed at high rates. He also proposed that corporations not receive a tax deduction for any individual compensation package totaling more than $75,000 annually (roughly a million in current dollars). Sen. Thomas Gore, D- Okla., grandfather of author Gore Vidal, offered legislation to that effect:

There shall be levied, collected, and paid for each taxable year upon the amount by which the compensation (including salaries, commissions, emoluments and rewards and any other reward or bonus by any name known) of any individual for personal services exceeds compensation at the rate of $75,000 per year, a tax of 80 per centum of such amount.

Gore was confident of the passage, not to mention the justice, of his legislation. "I regard my amendment as not only necessary to protect helpless stockholders, but as a sane move to equalize taxation and increase revenue to the government," he told reporters.

Sadly for Gore, not everyone saw the issue in such clear terms, and the amendment failed. (Almost identical legislation failed two years earlier, but supporters had hoped the new salary data would carry the day.)

Some supporters thought the effort more or less hopeless. In 1933 Attorney General Homer Cummings considered the possibility of a personal income tax penalty on high salaries, according to Leff. But he quickly discarded the idea as impractical, pointing out that such provisions would be hard to confine to salaries. Cummings also observed that limits on the deductibility of excess compensation represented only a 13.75 percent tax penalty given the corporate rates in effect at that time.


Frustrated by their failure to curb compensation using the tax system, angry lawmakers looked for alternate, if more limited, means. They narrowed their focus to companies seeking federal help, arguing that any company looking for an RFC handout should be required to limit salaries for top executives.

In 1933 Congress demanded that insurance companies borrowing money from the RFC (or selling stock to the agency) be prohibited from paying anyone more than $17,500 annually. As Leff notes, this limitation was more symbolic than substantive: Few insurance companies were seeking federal help by this point in the Depression, with many having received assistance (without salary restrictions) in 1932 and early 1933.

But salary cappers were not discouraged. Indeed, supporters of the salary limit on insurance companies tried to extend it to all companies seeking RFC help. But officials in the Roosevelt administration were skeptical, and ultimately lawmakers gave the agency discretion to impose salary limits as it saw fit. Almost immediately, RFC Chief Jesse Jones imposed a high-profile salary reduction on the Southern Pacific Railroad -- "a well-timed grandstand play" designed to appease Congress, according to Leff. But in later years, Jones used his regulatory discretion with great discretion; by most accounts, RFC regulation had only a modest effect on corporate salaries during the Depression.

The limited achievements of the salary-limitation drive in 1933 and 1934 were not quite the end of the story. They may have been only the beginning, paving the way for later efforts to tax high incomes of all sorts, whether from salaries, bonuses, investments, or any other source. In 1935 Congress would go on to pass the Wealth Tax Act, targeting rich Americans with a range of steep new levies. If taxes were too blunt an instrument to slash salaries, they served admirably to limit incomes and estates more generally.