Fed to Limit Executive Pay of Bank Employees
The Federal Reserve is moving to restrict compensation practices at the nation's large banks, aiming to rein in pay practices that threaten to distort incentives for everyone from chief executives to loan officers.
The Fed, in its role as the lead regulator of the nation's biggest banks, is looking to monitor pay practices at those institutions as part of its responsibility for ensuring their safety and soundness, sources familiar with the plans said. It aims not to set caps on the amount of pay any given employee can receive, but to restrict banks from paying employees in ways that create long-term risks to the institution.
Private analysts -- and Fed officials -- argue that pay practices emphasizing short-term performance contributed to the excessive risks that large banks took during the run-up to the financial crisis.
For example, a trader who receives bonuses based solely on short-term performance may take irresponsible long-term risks, and a loan officer paid solely based on the volume of loans issued might not pay enough attention to the quality of those loans. Under the approach envisioned by the Fed, banks would have to explain these pay practices to their regulator, and adjust them if examiners believe they create excessive risk.
http://www.washingtonpost.com/wp-dyn/content/article/2009/09/18/AR2009091802045.html?hpid=topnews