“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 announcing the moves. “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 system.”

A separate explanation provided by the Fed goes even further to justify the proposal, saying, in effect, that Wall Street executives can’t be trusted to limit risk-taking on their own.

Recent events have highlighted that inappropriate compensation practices can contribute to safety and soundness problems at banking organizations and to financial instability. Traditionally, banking organizations and supervisors relied on strong risk management, internal controls and corporate governance to help constrain risk-taking. However, the financial crisis has illustrated that the incentives created by poorly designed and implemented incentive compensation arrangements can be powerful enough to overcome risk controls.

The Fed’s plan is to monitor the pay structures of the nation’s banks in order to discourage excessive risk-taking by executives as well as lower-ranking employees, such as traders. The reviews will apply differently to the nation’s 28 largest institutions versus the smaller community banks, with the larger banks subject to more intensive scrutiny.

Federal Reserve Governor Daniel K. Tarullo said the proposal “is but one part of a broad program … to strengthen supervision of banks and bank holding companies in the wake of the financial crisis.”

It was the second wave of bad news to hit Wall Street in 24 hours. On Wednesday, the Obama administration announced plans to slash pay for the top 25 executives at the seven companies that received “exceptional” funding under the Wall Street bailout bill. The average compensation for those 175 executives will be halved, according to U.S. pay czar, Kenneth Feinberg.

Still, neither the administration’s nor the Fed’s limits would cap compensation at these firms, as proposed by some members of Congress earlier in the year. That means that executives at even those institutions propped up with billions of taxpayer dollars could still be in line for multi-million dollar pay packages. The Fed explains why it didn’t include caps:

[O]ne size does not fit all firms or employees. Best practices for balancing risk and rewards in incentive compensation programs continue to develop and are likely to evolve significantly in the coming years….

Further experience may reveal specific compensation practices that may appropriately be required or prohibited.

The difference between salaries like mine and those of average Americans creates a lot of tension, and I’d like to offer a suggestion. President Obama should celebrate our success, rather than trying to shame us or cap our pay. But he should also take half of our huge earnings in taxes, instead of the current one-third.

Then, the next time a chief executive earns an eye-popping amount of money, we can cheer that half of it is going to pay for our soldiers, schools and security. Higher taxes on huge pay days can finance opportunity for the next generation of Americans.

Hastings makes the point that other attempts to cap CEO compensation haven’t worked out. His idea isn’t as crazy as it sounds. But I wouldn’t expect other CEOs to line up in support anytime soon. No matter how bad the economy may get, top executives — like most people — aren’t going to enthusiastically embrace paying more taxes. Just ask Treasury Secretary Timothy Geithner, or maybe former Health and Human Services Secretary-nominee Tom Daschle.