Fed issues U.S. bank pay guidelines to combat risk

By Reuters Staff
October 22, 2009

WASHINGTON, Oct 22 (Reuters) – The U.S. Federal Reserve issued bank pay guidelines on Thursday to curb the type of excessive risk-taking it said contributed to the crisis that nearly collapsed the financial system last year.

The guidelines apply to any employee able to take risks that could significantly and adversely affect the safety of a firm, the Fed said in a statement. The Fed will conduct a review of the practices of the 28 largest and most complex banking organizations.

The Fed’s directions come as U.S. pay czar Kenneth Feinberg is poised to dramatically cut compensation for the 25 highest-paid employees at seven firms that received “exceptional” taxpayer bailouts. [ID:nN21508337]

The move to cut executive pay follows public outrage over continued high salaries and bonuses in the financial sector, whose practices set the stage for a painful recession, and for companies that benefited from taxpayer-funded handouts even as unemployment hit a 26-year high.

“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” Fed Chairman Ben Bernanke said in a statement.

A senior Fed official told reporters that setting the guidelines on pay is part of the central bank’s duty to ensure the soundness of the financial system.

The Fed said it was not imposing pay caps or outlawing any specific practices. It asked for public comment on formulas that shape the way executives are paid, such as ones requiring that at least 60 percent of the pay of bankers at large firms be deferred, and that at least 50 percent of incentive compensation be paid in the form of stock, options, or other equity-linked instruments.

The proposed guidelines will be aimed at all firms the Fed regulates and be enforceable under its existing powers. The Fed asked banks to review pay and incentive practices immediately.

Feinberg, the pay czar, is expected to cut the overall compensation for key employees by half and to slash their cash payouts by an average of 90 percent.

The companies affected by Feinberg’s rulings are: AIG Inc, Bank of America Corp, Citigroup Inc, General Motors, Chrysler, GMAC and Chrysler Financial.

The Fed’s proposed guidelines are designed to reform compensation at firms outside of Feinberg’s jurisdiction.

Regulators have said Wall Street pay was dangerously tied to short-term returns and risky financial bets, not long-term shareholder value.

(Reporting by Karey Wutkowski and Mark Felsenthal; Editing by Lisa Von Ahn, Phil Berlowitz, Padraic Cassidy) ((mark.felsenthal@thomsonreuters.com; +1 202 898 8329; Reuters Messaging: mark.felsenthal.reuters.com@reuters.net))

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