Report: Fed May Police Banker Compensation

The Federal Reserve may soon be playing a role in compensation policies governing U.S. banking employees, according to a published report Friday.

The proposed plan would allow the Fed to reject those policies it feels allows banking workers to take on too much risk, according to The Wall Street Journal. The government would not have a hand in setting the workers' compensation, but could review and possibly amend salary and bonus policies. The plan would apply to institutions regulated by the Fed, but would not cover savings and loans or state banks that are under the Federal Deposit Insurance Corp.'s watch.

A spokesman for the Federal Reserve could not be immediately reached for comment.

A final proposal, which does not need congressional approval but must pass the central bank's board, is not expected for a few weeks, the paper said.

The Fed's move is seen as a way for the government to keep an eye on the nation's financial institutions without dictating compensation. The Obama administration has been hesitant for the government to meddle too much in corporate pay decisions, but many have felt that some type of oversight is necessary for banks - which have been blamed for taking too much risk and its executives being paid too handsomely during the economic downturn.

While compensation decisions have traditionally been made by banks' boards and management, the Fed will now have a say in policies that affect a number of workers - from CEOs to traders.

The banking industry has been closely watched by the government during the recession, with several financial institutions receiving federal bailout money under the Troubled Asset Relief Program created by Congress. Many have worked to repay the funds to free themselves from restrictions on executive compensation that they said was making it hard to keep top-performing executives.

Some executives appear to be in agreement about reining in compensation, including Citigroup Inc. CEO Vikram Pandit. Speaking at a New York event Thursday night, Pandit said banks that have received government bailout money should not be paying exorbitant amounts to their employees, according to the Journal.

Pandit also said that he felt a $100 million compensation package is too big right now - which is the amount that Citigroup commodities trader Andrew Hall's package may hit. Hall's compensation is linked to profits at his Phibro energy trading unit, but the size of his 2009 pay package has been controversial. Pandit acknowledged that Citigroup is working on restructuring Phibro, which may free Hall from pay restrictions.

The Wall Street Journal notes that in a Wednesday speech, Former Fed Chairman Paul A. Volcker said that one of the causes of the financial crisis "was the ultimately explosive combination of compensation practices that provided enormous incentives to take risks" just as new financial innovations "seemed to offer assurance -- falsely, as it has turned out -- that those risks had been diffused."