Fed next to challenge Wall Street pay policies

The Federal Reserve announced a proposal Thursday to set guidelines on the pay policies of U.S. banks.

The central bank said it will examine 28 major banks and smaller, regional banks to make sure their compensation polices “do not undermine their safety and soundness.”

“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 S. Bernanke said.

The announcement was made the same day the Treasury Department ordered seven companies that have yet to repay their government bailouts to cut in half the compensation of their top executives. Their salaries could be cut as much as 90 percent.

The cuts will apply to the 25 highest-paid executives at the seven companies, which received the most money in the federal government’s $700 billion financial bailout last year. The seven companies are Bank of America Corp., American International Group Inc., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial.

Federal Reserve Governor Daniel K. Tarullo said the central bank’s proposal is an important step in its ongoing effort to improve financial regulation.

The policy of high pay for top executives on Wall Street and of the Big Three automakers is considered one of many factors that contributed to the recent financial crisis.

The Federal Reserve joins critics who say inflated bonuses and other compensation resulted in everybody from senior executives to traders taking risks that could have hurt their companies.

The central bank will not make a final decision until after it officially makes the proposal, which is expected soon, then gives the public at least 30 days to comment.