Politicians held their collective nose to vote in favor of a massive boondoggle that solves nothing, but at least they were able to limit executive pay. Along with handing out three quarters of a trillion dollars, the bailout bill imposed limits on CEOs whose companies end up benefiting from the Treasury's largesse.

Unfortunately, like many of the rewards the economy will supposedly reap, the limitations on executive pay are largely illusory. Oh, there are plenty of reasons that pay should be capped -- 700 billion of them, in fact. It's just there aren't any teeth in the package.

All bark, no bite
Maybe that's why Hank Paulson finally gave in to demands that the bill include language to limit pay. It's either so vaguely written that it'll have little practical effect, or so specific that the situations where it can be used won't really matter. For example, allowing the government to claw back pay from CEOs first requires a finding of fraud. Yet that's probably only going to be a very small portion of any recovery, and besides, corporations can already get back compensation if such activities are uncovered.

Daniel Mudd of Fannie Mae (NYSE: FNM) and Richard Syron at Freddie Mac (NYSE: FRE) had such clauses in their pay agreements, but they still may walk away with somewhere north of $25 million, because what they engaged in wasn't criminal.

Bans on so-called golden parachutes are only prohibited if employment agreements are written during the rescue period, and if the company sells more than $300 million in assets to the government. Although some analysts think the Treasury will still be able to impose restrictions if the government takes ownership of a lower amount, if the severance language already exists or a golden parachute is already in place then the new law will not help.

Just before JPMorgan Chase (NYSE: JPM) got to scoop up the remains of a failed out Washington Mutual , for example, WaMu's CEO parachuted into a $44 million deal. That wouldn't change under the new bill, nor would the incentives used to justify these pay packages.

Pay-for-breathing
According to at least one analyst, the top executives at Goldman Sachs (NYSE: GS), Merrill Lynch , Morgan Stanley , Lehman Brothers, and Bear Stearns made $613 million combined last year. And the worst offenders -- Lehman and American International Group (NYSE: AIG), along with Fannie and Freddie -- have paid out more than $1.4 billion in total compensation since 2004. Lehman Brothers was handing out $23 million to three executives (two of whom were terminated) just days before it collapsed, even while it was fishing for a government handout.

We've been paying CEOs for failure for so long that it's second nature now. Regions Financial (NYSE: RF) shareholders saw their stock decline 34% last year, but its CEO got a 46% raise. Ken Chenault at American Express (NYSE: AXP) saw his pay go up 124% although shares declined 13%. Continued...