The Wall Street Journal reports (subscription required) that RiskMetrics Group is advising investors to withhold votes from corporate directors who approve tax "gross-ups" to cover taxes on forms of executive compensation like perks and golden parachutes offered in the case of a merger or buyout.

I've always thought that the whole tax gross-up thing was ridiculous . Do people earning 8-digit pay packages really need help paying their taxes? Worse, the tax gross-ups could also make it harder to figure out the total compensation given the absurd legalese that is found in proxy statements. But was it really that big of a deal? Or was it just a complication that really didn't result in any additional shareholder cash being wasted? A company that pays $6.5 million plus $3.5 million in tax gross-ups is no worse than one that pays $10 million in cash.

But according to RiskMetrics, tax gross-ups are indicative of an "anything goes" corporate culture: S&P 500 firms offering tax-gross ups to their executives had golden parachutes 61% bigger than those that didn't -- without including the value of the gross-up!

The one nice thing that has come out of the market mayhem is a renewed interest in corporate governance. Tales of executive looting are making the front-page of newspapers, and Congress has taken interest. Whether anything will come of it depends on the willingness of the large institutional investors that control the voting rights to most of the stock in this country to put their foot down.

A survey of 800 registered voters conducted by Public Strategies found that 63% of Americans are "much more concerned" with the debate on executive compensation than they were a year ago and 33% are "somewhat more concerned."

Some 80% have an unfavorable opinion of the chief executives of big banks. What's amazing to me is that 20% don't! 89% want to see some sort of clawback provision to allow companies to recoup funds paid to executives whose firms later collapsed.

This would seem to provide Congress with all the mandate it needs to implement very stringent pay controls on the companies participating in the bailout. If the taxpayers are being asked to provide more than $700 billion to the banks and they want executive pay controls to be part of that, then what's the question? Any bank that doesn't need the money that badly is free to reject it. It's a win-win!

Any rational argument against imposing restrictions on executive pay went out the window when the bailout bill was passed.

This post is part of a feature on companies and products that our bloggers think are in need of a makeover. See all 26.

You may have noticed, as I did, that Treasury Secretary Henry Paulson seemed colossally uncomfortable during his testimony before Congress in September. Obviously, no one would enjoy jumping into Paulson's shoes and defending the merits of the government's $700-billion bailout bill to skeptical senators. However, the good Secretary's level of discomfort went up to 11 when the legislators began grilling him about the obscenely fat pay packages received by Wall Street CEOs -- even those who, you know, bankrupted their companies and stuff?

I can't blame Hank for breaking a sweat. Before he assumed the role of Treasury Secretary, Paulson was better known as the handsomely compensated CEO of Goldman Sachs (NYSE: GS). To his credit, Goldman is one of the few titans of Wall Street still standing in the wake of the mortgage-backed securities mess. Although he managed not to drive his company into the ground, I'd argue that Paulson is not quite impartial enough to lead the charge for CEO pay reform.

On the other hand, I have never received a salary that could be described as "scandalous." Plus, I have a healthy amount of indignant rage regarding the pay packages scored by such Wall Street ne'er-do-wells as Richard Fuld of Lehman Brothers and Martin Sullivan of AIG (NYSE: AIG). With this arbitrary sense of entitlement, I feel more than qualified to suggest some new guidelines for executive pay.

Executive pay is like the weather. Everyone complains about it but no one does anything to change it. That is until New York Attorney General Andrew Cuomo tangled with AIG (NYSE: AIG).

Cuomo, the son of a former New York governor who reportedly wants the job himself one day, convinced the embattled insurer to suspend payments from a $600 million bonus fund as well as a $19 million payoff to its former chief executive Martin J. Sullivan, according to The New York Times.

This is good news for taxpayers for a number of reasons. First, the thought of executives at a firm that was bailed out by taxpayers the tune of tens of billions of dollars getting bonuses was galling. Sullivan and his colleagues were supposed to be rewarded to creating value for shareholders, which they obviously failed to do. Cuomo also set a precedent that might apply to executives at other failed companies such as Lehman Brothers, Bear Stearns and Merrill Lynch & Co. (NYSE: MER).

When an executive gets a bonus, he should be able to keep it, no matter what happens to his company later. It was given to him by his board of directors. It is their right. Most senior management people have employment contracts. It is all legal. Bonuses drive performance and help retain people who might take jobs elsewhere.

Andrew Cuomo, son of a former governor of New York State, and a man who would like that job, is the Attorney General of the Empire State. He looks at management bonuses a bit differently. He is going after AIG (NYSE: AIG) management compensation to make his point.

According to The New York Times, "The board awarded its chief executive officer a cash bonus of over $5 million and a golden parachute worth $15 million," Mr. Cuomo wrote in a letter to AIG's board. He proposes to take action against the insurance company if it does not relent, but it is not clear what that action would be.

No matter how much popular support there is for cutting huge executive compensation packages, Cuomo wants to undermine the rights of public company boards to use their own judgments on how to handle pay packages for their own senior managers. Cuomo wants to restrict corporate boards from exercising rights which they have had for decades. Will he want to decide how boards compensate management at steel companies or fast-food firms? Where does it end?

Cuomo is out of bounds.

Douglas A. McIntyre is an editor at 247wallst.com.

Let it be written that on the sixth day of October in the year 2008, the irrational exuberance that defined the 1990s came screeching to a halt.

The Dow Jones Industrial Average fell below 10,000 this morning for the first time since 2004. Gosh, it seems like only yesterday that investors were as giddy as school girls when the leading stock market indicator crossed that once-unthinkable benchmark. Remember the Dow 10,000 hats? I bet the people who bought them along with other keepsakes of better times plan to unload them on eBay so they can fill up their tanks with gas. In fact, some people have already started selling bull market memorabilia. A Lehman Brothers coffee mug is available on eBay for $14.99, while the book Dow 36,000 is attracting no bidders for the bargain-basement price of $1.93.

These are lousy times. The real estate market continues to suck wind. Holiday retail sales are expected to be their worst in years. Hundreds of billions of dollars worth of federal bailouts have failed to unfreeze the credit market or provide any relief for homeowners hurt by the subprime crisis. A good part of the market's downturn can be blamed on lax corporate governance, including outrageous CEO pay.

It would seem to make sense that as the financial industry contracts and the federal government keeps a closer eye on compensation at firms that it helps bail out that the age of massive bonuses is over.

According to The New York Times, "For most of the financiers who remain, with the exception of a few superstars, the days of easy money and supersized bonuses are behind them. The credit boom that drove Wall Street's explosive growth has dried up."

It is way to early to say that the era of the big comp package is gone.

The competition for Wall Street talent will remain keen. With the rise of investment banking compensation, most money center banks like JPMorgan (NYSE: JPM) began to pay their top traders and M&A staff increasingly larger sums. They had no other way to retain the talent that would allow them to remain competitive.

The dynamics of personnel supply and demand have not changed. They have just shifted to another part of the industry -- the hundreds of hedge funds and private equity firms that have made thousands of executives, traders, and bankers rich beyond the imaginations of most people.

Compensation at big investment banks will stay high. It may dip during the current crisis. It would be bad PR to pay huge bonuses this year and next, but ultimately the banking industry cannot afford to see all of its best people walk out the door.

Douglas A. McIntyre is an editor at 247wallst.com.

I have been astonished by the speed of the collapse of our financial system. There is no precedent in my lifetime for such a rapid collapse. And I doubt that the lessons of the Great Depression pertain to the current situation. This is the Greatest Depression -- about which I posted in March -- and the lessons of this one are likely to expose five fundamental flaws in our financial architecture.

These flaws are the reason for the rapid meltdown and they include:

1. Securitization -- the popularity of shifting risk from an originator to a group of investors in a package wrapped in a AAA credit rating based on flawed analysis.
2. Lack of transparency -- the inability to estimate the future cash flows of such a complex security -- thereby creating massive uncertainty in a period of decline.
3. Leverage -- borrowing way too much money with too tiny a sliver of capital to protect against risk -- making it possible to wipe out all the capital with a 6% decline in the value of these securities.
4. Heads-I-win, tails-you-lose pay -- Paying deal makers for the size of their deals and sticking taxpayers and shareholders with the losses.
5. Global interconnectedness -- thanks to information technology and ease of investment rules, a sneeze in the US causes hurricanes around the world.

How could we cure these problems? As I posted, we could end securitization, demand complete transparency, raise capital requirements, link pay to profits rather than sales, and create firewalls to prevent problems in one market from infecting the rest. But with the global financial architecture crumbling worldwide, there's no time for this now.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

It looks like the CEOs pushed out at Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) will do very well. According to MarketWatch, "Daniel Mudd, the outgoing CEO of Fannie Mae, could receive more than $9 million in combined severance pay, retirement benefits and deferred compensation." The head of Freddie, Richard Syron, could do even better. The amounts may come down a little if performance clauses in the contracts cut bonus pay.

The complaining is misplaced. The departing CEOs at places like Merrill Lynch (NYSE:MER) and Citigroup (NYSE:C) did much better. Paying financial firm chief executives large sums is part of doing business. That issue is not confined to banks and brokerages. It extends to almost every other large industry.

The US business culture has become one of paying CEO hundreds of times more than entry level workers at the same companies. The entire systems would have to be altered for that to change. Activist investors have been working on the problem for years, and nothing has happened.

The excitement over the Fannie and Freddie CEO comp deals only serves to show that the company's boards believed that the executives would do a good job when they came into the firms and that, at the time, there was no reason to think that their stocks would trade for under $1.

No one puts together a pay package on the assumption that a corporation's stock will fall 99%. It is hard to find senior management who will take $1 as an exit package, even if things do go wrong..

Douglas A. McIntyre is an editor at 247wallst.com.

Gas prices are increasing your cost of living and your retirement portfolio has probably been a poor performer of late, with the stock market down year to date following an unremarkable 2007.

But you'll be happy to know that top executives are making more money than ever. An ExecuNet survey of 1,098 business leaders found that executive compensation increased 5.7% over the past year, and is expected to grow an additional 6.2% during the next twelve months.

Doesn't that pretty much expose the whole "pay-for-performance" paradigm as a total fraud? I mean, how can the value of companies, on average, decline more than 5% while the average pay increases more than 5%? All that's happening is that a larger chunk of shareholder wealth is being siphoned off each year and, if the ExecuNet survey is even close to being accurate, it has absolutely nothing to do with performance.

The only solution is improved corporate governance that comes with more active shareholders voting their proxies with the "corporate raiders," who work to unseat the directors who have allowed the shareholder democracy to become a complete joke.

Check out Carl Icahn's latest blog post for more information on corporate governance and how it can be improved.

Both Republican and Democratic members of Congress agree that Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) may need a taxpayer-funded bailout. Amounts of the bailout have ranged as high as $25 billion.

While this is a whopping big bucket of money, it pales in comparison to the $217 billion worth of non-agency securities that have fallen in value and the $1.5 trillion in debt downgrades in 2Q alone. In order to mitigate objections from taxpayers opposed to using public monies to bail out a quasi-private industry, those bulwarks of fiscal responsibility in Congress are beginning to draw up plans to curb executive compensation for those who will help Fannie and Freddie crawl out of the hole.

In 2007, Fannie Mae President Daniel Mudd earned a $2.2 million bonus on top of his $10 million salary. Members of Congress want to know why the executives who ran the ship aground were rewarded handsomely for doing so. Some members of Congress have suggested that previous executive bonuses should be given back to the companies. I bet some taxpayers might want to apply this same reasoning to Congressional salaries and perks.

Executive compensation gone wild is nothing new, but it's worth looking at in the context of Freddie Mac, whose stock has tanked on a weak housing market and questions about the company's solvency. Rumors are swirling that the publicly traded quasi-semi-governmental agency will seek some kind of government bailout.

Fortune's Colin Barr examined the company's latest proxy statement and found some disturbing trends in management compensation: for 2007, CEO Richard Syron took home a $1.2 million salary, a $3.45 million cash bonus, and stock awards and misc. other of $10.6 million. That was up 24% from a year ago.

If Freddie decides to seek public funds, it will look laughably hypocritical. When it comes to CEO pay, this is a company that wants to operate like a private business but, when the going gets rough, it pulls the federal trump card. That's crap.

Think about it: any bailout will be indirectly supporting that eight-figure compensation. I think taxpayers deserve better than that and, before we contribute a penny or guarantee anything, Mr. Syron should take a large pay cut and invest his own money in any preferred/secondary offering the company pursues. Think that'll happen? One can dream ...

The Bush administration has taken the approach that business can do no harm. So we have had eight years of the fox guarding the hen house. Adding a few more thoughts to yesterday's Sunday Funnies: Business should have NBA type salary cap. The subject of executive pay at public corporations sometimes raises eyebrows, sometimes raises voices, and often loud protests.

When companies perform poorly financially and it is reflected in the share price the protests are even louder and more justified.

Like they say about pornography... When executive pay becomes so high that it becomes obscene, you may not be able to define it exactly, but you know it when you see it!

Unfortunately these protests are not coming from the board room, or large institutional investors or pension funds, although they should! They come from the "hard working stiffs" that go unheard and disrespected -- and the common shareholder.

Most people in the United States and for sure shareholders of losing companies have been railing against executive pay for many years. It is generally agreed the salaries, bonuses, stock options, deferred compensation, and retirement packages have become ridiculous and do not reflect anything other then the "good ol' boy network" operating at its worst.

Compensation committees substantiate their decisions in a fashion that outlines plausible deniability not merit, value or truth. They do not reflect shareholders, employees, or customers best interest. They reflect a tight knit group that has to pay and pay big so that they can get theirs in the next round.

This brings me to the National Basketball Association and its use of the salary cap. We just witnessed an NBA finals where the better team won (Boston Celtics in six games) and that is the nature of the game. It's five on five, the best player does not take every shot and the best player cannot defend the other team by himself.

Lehman Brothers Holdings Inc. (NYSE: LEH) is trying real hard to convince its Gucci-clad workforce not to abandon ship.

According to CNBC, employees will receive 20% of last year's bonus in stock that vests over three years. "Lehman's decision to issue additional stock to employees is being interpreted by some in the market as a sign that the Lehman is not planning to sell itself for a below-market price," writes CNBC ON-Air Editor Charlie Gasparino.

Hmm. Didn't the same conventional wisdom believe that Bear Stearns was too big to fail and that the end of the write-downs at Wall Street banks was near? So, pardon me if I am a little skeptical.

As Fortune magazine notes, Lehman, like other Wall Street banks, got itself into trouble by making scores of bad real estate investments.

"Because it prided itself on real estate expertise - it helped popularize real estate-backed securities in the early 1970s - and investment prowess, Lehman risked far bigger proportions of its own capital doing deals than its major competitors did," the magazine notes. Little wonder that the stock is down more than 65% this year.

Sorting out through this mess will take years. Any Lehman employees who were smart enough to get hired probably know a bad deal when they see it. This well-timed leak to CNBC is part of Lehman's efforts to avoid becoming the next Bear Stearns.

For now, the ploy is working. Shares of the New York-based investment bank are trading up on the news -- Lehman shares closed up 6.68%. Over the long run, though, investors and Lehman employees will see through the smokescreen.