Mid-June saw Executive Compensation Week here in Washington. On June 11 the House Financial Services Committee convened a hearing on Compensation Structure and Systemic Risk, just one day after the administration announced that attorney Ken Feinberg (lately of the September 11th Victim Compensation Fund) would serve as the “Special Master” overseeing executive compensation at firms receiving TARP funds. His vaguely kinky title notwithstanding, early reports suggest Feinberg won’t be imposing much discipline on naughty execs. “Our people kind of thought it was a nonevent,” a bank executive told the Washington Post.

But all the attention on bonuses for executives at TARP firms obscures a much bigger issue, one touched on but never sufficiently investigated during the hearing: how to recalibrate the share of gains captured by shareholders, executives and workers in the post-crash economy.

So far, there hasn’t been much progress on that front. In fact, corporate governance expert Nell Minow says that, counterintuitively, massive future payouts for CEOs are being “spring-loaded” into the system. “They’re resetting all their benchmarks and options grants at what they know is a low point,” she says, “so that when the market comes back they are going to rise with the market, having done nothing themselves. That’s what we saw in the ’90s: up to 70 percent [of gains from stock options] are attributable to market gains as a whole, and yet executives argue it’s pay for performance.”

The focus on limiting outsize payouts isn’t simply about populist backlash or a basic sense of fairness (though those are perfectly good reasons for it). The pre-crash mushrooming of executive pay in the finance sector almost certainly helped bring about the crisis. “Incentives for short-term gains,” Treasury Secretary Tim Geithner said the day Feinberg’s appointment was announced, “overwhelmed the checks and balances meant to mitigate…the risk of excess leverage.”

Bloated CEO salaries aren’t exactly new, but why they persist is harder to explain than you might think. Every dollar paid to an executive above his or her actual worth comes from the pockets of the shareholders. And while workers may be too beaten down to fight back, investors aren’t exactly a powerless class in America. Why, then, do they allow clubby compensation committees and consultants to pick their pockets?

Part of the problem is the raw difficulty of figuring out how much value a particular CEO adds to a company. There’s also a legal structure that attenuates shareholder power. But there’s a deeper issue. CEO pay is to corporate governance what farm subsidies are to the federal government: the benefit accrues to a small group (CEOs or big agricultural concerns like Monsanto) while the cost–whether to shareholders or taxpayers–is shared widely.

It’s a “collective choice problem,” according to Minow. “The amount of time and energy that anybody spends to read through this impenetrable prose,” she says of the details of a compensation package, “is never going to be paid back by the fractional share” of the savings. Economists call it “rational apathy.”

Against this backdrop, what you end up with is a whole lot of corrupt, elite self-dealing, which is the emerging through line of our benighted age. “The boards tend to be dominated by CEOs and other high corporate executives of other firms, who have an interest in keeping executive compensation high,” wrote Judge Richard Posner on his blog last year. They are “abetted by compensation consultants who naturally recommend generous compensation packages to directors who are recipients of generous compensation and therefore believe that the CEOs of the companies on whose boards they sit should be paid top dollar.”

How to stop it? The administration has thus far endorsed two good but relatively minimal reforms: “say on pay” legislation, similar to what they have in Britain, which allows stockholders to hold a nonbinding vote; and measures to strengthen the independence of the compensation committees.

There’s a whole lot more that could be done. In all but a few cases, company directors need only receive a single shareholder vote to stay on the board. If this were converted into a majority threshold, it might impose some discipline. The SEC could require, as a regulatory matter, listed companies to institute clawback policies, which would allow the board to recoup compensation that arises from short-term gains followed by big long-term losses. Perhaps most intriguing, Minow points out that the Labor Department is charged with overseeing employee benefit funds, which, she notes, are the largest accumulation of capital in America. “If the Labor Department insisted that pension fund votes were based on what was best for plan beneficiaries,” she says, “instead of what was best for corporate managers,” director elections might actually start to matter.

As needed as many of these reforms are, whatever rules are put in place, CEOs will have massive incentives to skirt them. Which is why, finally, much of the solution must be found in the tax code. In 1980, before Ronald Reagan inaugurated the supply-side counterrevolution in taxation, the top rate for individuals was 70 percent. When taxation took 70 cents of every dollar made above a certain amount, there was far less incentive to game the system for giant payouts. By 1988, though, the rate was 28 percent. It has fluctuated between 30 percent and 35 percent under the past two presidents, while capital gains and other wealth taxes have steadily declined.

During the financial services hearing, as Republican after Republican railed against the specter of government bureaucrats micromanaging pay–down to “secretaries and janitors” in the fevered imagination of Illinois Representative Judy Biggert–part of me wondered if perhaps they had a point. Regulating executive compensation might have the same balloon-squeezing effect as bonus caps. And besides, it’s easier for executives to game the compensation committee and shareholders than the IRS. So maybe we should let executives make as much as they can wrangle. We just need to make sure we then tax the hell out of them.