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Fed review of bank pay will go well beyond top execs

October 22, 2009 |  4:49 pm

The Federal Reserve’s new push to regulate pay levels of bankers probably won’t include a review of your friendly neighborhood branch manager’s salary.

But the Fed made clear Thursday that it will be looking at compensation arrangements beyond the executive suites of the 6,000-some banks it regulates.

In a question-and-answer post on its website, the Fed said its review would cover "personnel who have the ability to expose a banking organization to material amounts of risk." That would include, according to the Fed:

--- "Senior executives and others who are responsible for oversight of the organization’s firm-wide activities or material business lines;

Fedfacade --- "Individual employees, including non-executive employees, whose activities may expose the firm to material amounts of risk (for example, traders with large position limits relative to the firm’s overall risk tolerance); and

--- "Groups of employees who are subject to the same or similar incentive compensation arrangements and who, in the aggregate, may expose the firm to material amounts of risk, even if no individual employee is likely to expose the firm to material risk (for example, loan officers who, as a group, originate loans that account for a material amount of the organization’s credit risk)."

The Fed says its overriding goal is to ensure that bank pay plans -- specifically, bonus plans -- don’t reward employees for taking excessive risk that might boost profit in the short-term but also could threaten the safety of the institution.

And how, exactly, to determine that? There’s the challenge.

Importantly, the Fed says it isn’t looking for a one-size-fits-all pay formula. Instead, it issued some very general guidance Thursday on how pay arrangements should be structured, and asked for public comment on the proposals for the next 30 days. (Go here for the guidance.)

Once the Fed settles on the final language for the guidance, its examiners "will review whether the arrangements and processes of banking organizations are consistent with the guidance and safety and soundness."

But the Fed said banks shouldn’t wait for final guidance on compensation. Rather, it expects them to "immediately" launch reviews of their specific pay arrangements and alter the plans if management finds that the structure could threaten bank safety.

Bottom line: The obsession with financial companies’ pay levels, far from reaching a peak, is just ramping up.

-- Tom Petruno

Photo: The Fed's headquarters in Washington. Credit: Brendan Smialowski / Bloomberg News