- Associated Press - Monday, June 21, 2010

Federal regulators on Monday adopted a plan to ensure that salaries for bank executives don’t encourage employees to take reckless gambles like those that contributed to the recent financial crisis.

The plan, originally proposed by the Federal Reserve last year, was also endorsed by other key banking regulators — the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision. The plan would apply whether the banks accepted taxpayer bailout money or not.

Many banks’ practices have been found wanting for failing to curb risk taking based on an in-depth analysis by regulators, the Fed said. It has directed individual banks — which weren’t identified — to take steps to fix their policies.

“Many large banking organizations have already implemented some changes in their incentive compensation policies, but more work clearly needs to be done,” said Fed Governor Daniel Tarullo, the central bank’s point person on the matter.

The regulators won’t actually set compensation. Instead, they would review — and could veto — pay policies that could spark too much risk taking by executives, traders or loan officers.

As part of that process, the regulators will be conducting additional reviews of bank-compensation practices and making sure that they address shortcomings.

Many banks need better ways to identify which employees can expose the entire institution to risk, the Fed said. Many banks’ policies aren’t fully capturing the risks involved and not applying risk-curbing measures to enough employees. Many banks also don’t have sufficient ways to evaluate whether their compensation practices are successful in curbing risks.

All told, nearly 8,000 banks would be covered by the plan.

In the heady days leading up to the 2007-2009 financial crisis, banks too often rewarded employees for increasing the firm’s short-term revenue or profit, without adequate recognition of the risks posed for the company.

The regulators, among other things, suggest that banks carefully review “golden parachutes,” which typically provide senior executives with large payments without regard to how the company fared under their leadership, to ensure they don’t encourage undue risk taking. Regulators also suggest doling out compensation payments over longer time frames and deferring payments for a “sufficiently long” time for certain employees.

The plan neither dictates nor bans specific forms of compensation. Instead it provides a broad framework to banks — both large and small — to rethink their compensation to key employees.

Although regulators didn’t provide any blanket exemptions, they said that “tellers, bookkeepers, couriers and data-processing personnel” would not likely expose the company to the type of risk taking the plan seeks to curb.

Under the plan, the nation’s 25 biggest banks — including Citigroup, Bank of America and Wells Fargo & Co. — are developing their own plans to make sure compensation doesn’t spur undue risk taking. If the regulators approve, those plans would be adopted and bank supervisors would monitor compliance.

At smaller banks — where compensation packages are typically smaller — banking supervisors will conduct reviews. Those banks don’t have to submit plans to regulators.

The plan comes as President Obama and leaders of 19 other countries gather later this week at the G-20 summit to explore ways to beef up global financial oversight to prevent another financial crisis from occurring.

One of the issues that has touched a popular nerve is that bank executives continued to be paid handsomely even as their firms’ lax lending standards and hardy appetite for risk contributed to financial and economic chaos.

In response, the Obama administration installed a “pay czar” to limit compensation at companies that received billions of dollars in taxpayer bailouts.