WASHINGTON — The
Federal Reserve announced Thursday that it would crack down on pay
packages that encouraged bankers to take excessive risks, but officials
acknowledged that the plan might not reduce the biggest paychecks on Wall
While unlikely by itself
to end the practice of lavish compensation, the Fed’s plan is one of the
most far-reaching responses yet to last year’s
financial crisis. It will subject executives, traders, deal makers and
other employees of the biggest banks to regulatory scrutiny of their
compensation and represent another increase in government intervention in
The announcement was
choreographed to coincide with the decision by the Obama administration
this week to cut the pay of many high earners at the seven companies that
received the most taxpayer help. Both decisions were announced amid
growing public outrage over large pay packages at many of those companies.
“Compensation practices at
some banking organizations have led to misaligned incentives and excessive
risk-taking, contributing to bank losses and financial instability,” said
Ben S. Bernanke, the Fed chairman. “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
In one sense, the
announcements by the Fed and the
Treasury are a sharp departure from the hands-off approach to
regulation that had dominated this city for decades. The abiding principle
of both announcements was the same — companies that make a lot of money
over a sustained period will be allowed to reward their executives
handsomely, while those who put the economy, the financial system,
shareholders and the taxpayer at risk may not.
But the effectiveness of
the new policies — and whether they will curtail irresponsible business
decisions designed to inflate bonuses — will ultimately be dictated by how
the new rules are enforced. Even in Washington, there was skepticism about
whether the government would be able to keep ahead of practices that have
allowed top executives and others to reap huge financial rewards while
their banking companies turned in poor or unsustainable performances.
The principles proposed by
the Fed for the nation’s 28 largest banking companies are less strict than
those from some European leaders and some members of Congress. They do not
impose caps on pay or prohibit multimillion-dollar packages. One senior
official predicted that they would do nothing to curtail the lucrative pay
at firms like
Goldman Sachs and
Morgan Stanley, both regulated by the Fed since becoming bank holding
companies last year during the financial crisis.
Instead of pay limits, the
Fed rules are intended to discourage pay packages that may encourage risky
practices. The government wants to encourage pay packages that reward
executives for long-term performance.
that it could be months before they would be able to tell whether the
Fed’s changes would have the intended effect. Bank examiners will have to
be trained on the ties between compensation and risk management. Moreover,
compensation consultants have been adept at finding ways to get around pay
The officials emphasized
that the plan was not intended to make pay packages more socially
equitable but was part of a broader effort by the Fed to shore up the
stability of the banking system. That effort has included tighter
supervision of lending and trading practices and higher requirements for
capital held as a cushion against losses.
Even as the Fed was
unveiling its plan,
Kenneth R. Feinberg, the Treasury official in charge of overseeing pay
practices at the companies that received the biggest government bailouts,
was providing details about his decision to curb the compensation of the
25 top employees of each of those firms.
At those companies — which
Bank of America, the
American International Group,
General Motors and
Chrysler — future bonus payments will be awarded only after senior
executives set corporate performance goals in consultation with Treasury.
The bonuses will have to be in the form of restricted stock that cannot be
sold until the company repays the government. Executive perks of more than
$25,000 for country clubs or corporate cars will need approval from
But, bowing to concerns
that too heavy a hand could lead to a mass exodus of executives, both the
Treasury and Fed policies will permit top earners to reap millions of
Mr. Feinberg said that all
the companies had made unacceptable requests. In most cases, he restricted
the cash salary to $500,000 and imposed new restraints on stock grants and
bonuses tied to company performance over several years.
“I found that the numbers
that were submitted by the companies were almost without exception to have
been not in the public interest,” Mr. Feinberg said. “They were both too
high and the wrong mix of stock and cash.”
Mr. Feinberg said he had
made one significant exception to his policy of slashing compensation —
for three senior executives at A.I.G. who had signed contracts long before
his appointment for multimillion-dollar bonuses. And if Citigroup and Bank
of America manage to heal, 22 of the top 34 earners could each wind up
making more than $5 million over the next year.
The Fed’s plan, which will
take effect some time after a 30-day comment period, will create a
two-tier system of supervising pay, using different approaches for the
nation’s 28 biggest institutions and the thousands of smaller banks, which
would be subjected to a review with their regular bank examinations.
The money center bank
holding companies, like
JPMorgan Chase, Goldman Sachs and Morgan Stanley, would have to
present their compensation plans to bank regulators, who would then
evaluate whether pay incentives properly balance goals of short-term
growth and long-term stability. Bank regulators could demand changes, and
would monitor pay practices as part of their regular examinations.
The plan would apply to
senior executives and others, like loan officers and traders, whose
individual or collective decisions could expose the firm to significant
But the review, including
discussions between regulators and the companies, would remain
confidential, making it difficult for outsiders to glean any changes
prompted by regulators
At Citigroup’s investment
banking offices, traders shrugged off the pay rules imposed by Mr.
Feinberg as affecting only a handful of the company’s 275,000 employees.
Eugene A. Ludwig, a former
Comptroller of the Currency who runs a consulting firm that
specializes in regulatory issues, said banking regulators had been
reluctant to look at pay practices, thinking it is the province of
management. Now, it is rising to the top of their agenda.
“That will change
behavior,” he said.