The Washington Independent
The Washington Independent

The Fed Takes on Executive Pay

Last updated: 07/31/2020 08:00 | 10/22/2009 11:49
news
Daisy-Mae Schmitt

The Federal Reserve on Thursday proposed a new program of monitoring executive compensation at the nation’s largest financial institutions, a move designed to prevent banks from using pay incentives that encourage risky transactions like those that recently toppled the global economy.

“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.

Daisy-Mae Schmitt | Daisy-Mae is obsessed with inventing new ways to create awesome content that's absurdly useful and successful, with over ten years of editorial and inbound marketing experience. She also serves as a reporter, strategist, interviewer, mentor, and therapist for in-house contributors and clients.

Related

Rep. Paul Ryan to deliver SOTU response

Chairman of the House Budget Committee Rep. Paul Ryan (R-Wis.) will deliver the Republican response to the State of the Union Tuesday, according to Mike Allen

Rep. Parker Griffith (R-Ala.)

One of the most conservative Democrats in the House -- a freshman who said he couldn’t support Nancy Pelosi again -- is going to switch over to the GOP. Josh

Rep. Patrick McHenry: Please, Conservatives, Fill Out Your Census Forms!

The conservative congressman from North Carolina, a constant critic of the census -- one of the people who sounded the alarm about politicization when the

Rep. Perlmutter criticizes House measure that would eliminate 800K federal jobs

Congressman Ed Perlmutter today issued a scathing statement criticizing the House of Representatives for passing a spending bill that could put nearly a million federal employees out of work. The Colorado delegation voted strictly on party lines, with all four Republicans voting in favor of the bill and the three Democrats voting in opposition. Perlmutter’s statement: “My number one priority is to get people back to work because that’s the best thing we can do to pay our debt and move forward toward economic stability

Rep. Paulsen touts balanced budget constitutional amendment

In a post for the conservative blog True North , U.S. Rep

Rep. Pete Hoekstra Bashes Global Currency

I was just talking to Rep. Pete Hoekstra (R-Mich.), who’s leaving Congress to run for governor of Michigan, about his proposed Parental Rights Amendment—a

Rep. Perlmutter to hold constituent meet-up in grocery store

Colorado Congressman Ed Perlmutter will hold a Government in the Grocery constituent meet-up this evening from 5-7 at the Safeway at 38th and Wadsworth in Wheat Ridge. The address is 3900 Wadsworth. The meeting, where Perlmutter typically sits at a folding table and talks to whomever shows up, is free and open to the public

Rep. Paulsen, Karl Rove the latest to get ‘glittered’

Rep. Erik Paulsen and former Bush staffer Karl Rove were both showered with glitter at the Midwest Leadership Conference Friday

Rep. Pete Hoekstra Surging in Michigan Gubernatorial Bid

The ranking member of the House Intelligence Committee -- you couldn’t flip on a TV without seeing him in the aftermath of Umar Farouk Abdulmutallab’s botched

School of Hock

A growing number of college grads are defaulting on their student loans as the economy worsens.

© Copyright 2021 The Washington Independent All Rights Reserved

Terms & Privacy | twi.news@washingtonindependent.com