Fed Presses Banks On Pay Scales For Employees

The Federal Reserve is proceeding with plans to oversee the compensation policies of the banks it regulates. The Fed says it hopes to block policies that encourage too much risk taking.

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MELISSA BLOCK, host:

This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block.

On Wall Street, there's the question, is it too big to fail. And increasingly these days, another question: how much is too much.

The Federal Reserve is looking at how banks compensate their employees. It's concerned that many still use bonuses and other incentives in ways that create too much risk. The Fed is working on guidelines that would, for the first time, put it in the position of ruling on pay packages at the thousands of banks it regulates.

And NPR's John Ydstie joins us to talk about the Fed initiative. John, first of all, does the Fed really have this authority to tell private companies here's what you can pay your employees?

JOHN YDSTIE: Well, the Fed says its authority to do this comes from its responsibility to ensure the safety and soundness of the financial firms it regulates. And there's pretty broad agreement that faulty compensation practices encouraged too much risk-taking and contributed to the financial crisis, and to the collapse of lots of financial companies. So the Fed believes it has the responsibility to be involved in compensation policies.

BLOCK: And how would the Fed try to make sure that employees aren't encouraged to take too much risk to inflate their compensation?

YDSTIE: Well, the Fed hasn't yet issued its guidelines and it isn't talking publicly about exactly what it will propose. But a source familiar with the Fed's thinking told NPR that the Fed is not going to set pay caps or develop a pay schedule.

What it will do is issue a set of principles that it expects the financial companies it regulates to follow, that will happen within a few weeks. There will be a comment period, and the Fed hopes the policy will be in place by the end of the year.

BLOCK: Okay. Well, translate that a bit. Principles for the banks to follow, what would that be?

YDSTIE: Well, one possibility is to make sure bonuses are adjusted for the amount of risk-taking. You want to make sure employees don't get a bigger and bigger bonus for taking more and more risk.

Another principle might be to defer bonuses so you'd a longer evaluation period. So instead of rewarding a loan officer for the number of mortgages written each month, you base the bonus on how well the mortgages perform over several years.

BLOCK: And we're not talking here about just high-level executives, John. This could apply all the way down to employees deep into a bank loan department.

YDSTIE: That's absolutely right. Any employee who's in a position to put the institution at a significant risk would be subject to these principles.

BLOCK: And how many people would we be talking to? How would the Fed go about enforcing this?

YDSTIE: Well, tens of thousands of people. It'll be a big job. What I'm told is that the Fed will issue the guidelines and then banks will develop their own compensation plans based on these principles. The Fed will then focus on the plans of the two dozen biggest financial institutions; the ones that could pose the greatest danger to the financial system.

If the Fed sees something it doesn't like, the bank will have to make changes. The pay plans at the thousands of other smaller banks the Fed regulates would be reviewed during their periodic examination by regulators.

BLOCK: And I'm sure banks are thrilled to think about more regulations coming from the Fed.

(Soundbite of laughter)

YDSTIE: They're never excited about more regulation. But when I talked to Scott Talbot of the Financial Services Roundtable, an industry group, today, he acknowledged that the Fed has the authority to do this. But then he added this.

Mr. SCOTT TALBOT (Senior Vice President, Government Affairs, Financial Services Roundtable): Obviously we're worried that the rules could be too draconian and have a blanket or a stifling affect on the company and reduce its ability to generate revenue, which would ultimately weaken the institution and make it less safe and sound.

YDSTIE: Now, the Fed is, of course, not the only institution addressing this issue. The U.S. government has already set limits on compensation at firms that got aid during the crisis. A House committee has passed a bill also aimed at risky pay package. And the Europeans want to take action on the subject at the G-20 Summit in Pittsburgh next week. So it remains a hot topic.

BLOCK: Okay. NPR's John Ydstie, thanks a lot.

YDSTIE: You're very welcome.

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