Aug. 17 (Bloomberg) -- Start with two principles.

1) U.S. taxpayers have every right to determine how executives of bailed-out banks and auto companies should be paid. If 60 percent ownership of General Motors Co. doesn’t give them clout, what does?

2) The government has no business setting pay standards for the rest of the corporate world. That’s an infringement of the rights of companies and their shareholders -- and doesn’t work in any event.

U.S. paymaster Kenneth Feinberg is on the job of setting compensation standards for GM and six other basket cases from the credit crisis: Citigroup Inc. (where taxpayers have a 34 percent stake), American International Group Inc. (almost 80 percent government-owned), Bank of America Corp., Chrysler LLC, Chrysler Financial Corp. and GMAC Inc.

Feinberg, a 63-year-old Washington lawyer, will do a good job. I’m sure of that because he’s not getting any pay for his work.

Assuming Feinberg’s seven get out of the government’s clutches eventually and are still in business, our second principle would apply.

Still, once restrictions are removed, banking companies undoubtedly will revert to the policy of taking high risks hoping for high rewards that led to the current recession. Goldman Sachs Group Inc. proved the point in the first half when it set aside 33 percent more for compensation than it did in that period last year.

Beefing Up

Regulators can bring common sense to executive pay without meddling in individual contracts by raising banks’ capital requirements. This would give them less money to lend.

On the premise that it was surplus money that led to devastating subprime mortgage investments, money that could be lent would be lent sensibly. If it weren’t, the banks would have more capital to handle the losses.

For this to work, the banks would have to be held strictly accountable. The capital they state has to be real. No more letting bank executives value their assets as they see fit.

Another possibility: Limit the banks’ short-term borrowings. Credit crunches come when investment banks can’t roll over their loans. Longer-term borrowings should make for more stability.

While I’m not qualified to put numbers on what these standards should be, the regulators certainly should be.

Bonus Babies

Less risk would also help end the bonus culture on Wall Street, where year-end payouts typically account for 60 percent of total compensation. You know matters are out of control when companies pay “guaranteed” bonuses.

All the top dogs should get more in salary and stock and less -- if anything -- in bonus.

Traders and merger advisers will insist they should get big bonuses if they pull off profitable deals. But isn’t scoring big what they’re supposed to do? They would still be paid well enough in years they didn’t swing big deals.

The government tried to restrict executive pay in the past by limiting the tax-deductibility of salaries. Chief executive officers, and the compensation experts they hired, then helped themselves to stock grants and options that sent total pay off the charts.

There are now plans afloat that would force companies to put pay packages up to a non-binding shareholder vote and to make it easier for big shareholders to influence corporate policy. Good luck.

Escalating executive pay has been as inevitable as the rise in college tuition and the federal deficit. But it needn’t be. It is possible to bring common sense to Wall Street pay. Doing that just might lead to curbing CEO appetites everywhere.

(David Pauly is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: David Pauly in Normandy Beach, New Jersey dpauly@bloomberg.net

Last Updated: August 16, 2009 21:00 EDT