Fed Hones In on Bank Pay Practices

P/>NEW YORK (TheStreet) -- The Federal Reserve weighed in on the hot-button issue of executive compensation on Wall Street Thursday, outlining a proposal that would impact the entire banking industry by seeking to ferret out and rectify situations where risk assumption can be influenced by pay potential.

The Fed issued a statement that describes two, separate supervisory initiatives. The first would set up a special review process for "28 large, complex banking organizations," which presumably include companies such as Bank of America(BAC), Citigroup(C), Goldman Sachs(GS), JPMorgan Chase(JPM), Morgan Stanley(MS), Wells Fargo(WFC), and many others. These institutions would be subject to a 'special "horizontal" review," which the firm said would entail "a coordinated examination of practices" at the 28 firms that will pay look at each firm's "consistency with the principles for risk-appropriate incentive compensation."

The second initiative calls for a review of compensation practices at regional, community and other banking organizations that aren't deemed "large and complex" as part of the regular oversight process.

"Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability," Federal Reserve Chairman Ben Bernanke said in a statement. "The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system."

The Fed, which didn't provide a list of the 28 firms it's designated as "large and complex," said it plans to accept comments on its proposal for the next 30 days, but it still expects banks to immediately start reviewing their own compensation policies. The Fed is also moving forward with the initiatives outlined in the proposal in the interim in order to "spur action."

The proposal, in its current form, would allow the Fed to take enforcement actions against banking organizations, such as factoring in deficiencies found in the review to the organization's supervisory ratings, "which can affect the organization's ability to make acquisitions or take other actions." The proposal would also extend beyond a company's top executives to include individuals such as traders, and groups of employees who together set a broad company policy, such as loan officers.

The news follows reports late Wednesday of details about pay czar Kenneth Feinberg's plans to limit pay at the troubled firms whose compensation he oversees: financial firms American International Group(AIG), BofA, Citigroup; and automakers Chrysler and General Motors as well their respective financing arms.

Written by Michael Baron in New York.

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