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Fed Finding Status Quo in Bank Pay

Federal regulators reviewing the compensation policies of major banks are finding that the industry has not adequately adjusted its pay practices to reduce risk-taking.

The Federal Reserve, six months into a compensation review of the country’s 28 largest financial companies, has found that many of the bonus and incentive programs that economists say contributed to the worst financial crisis since the Great Depression remain in place, according to people briefed on the examinations.

Officials have found, for example, that risk managers at several of the biggest banks still report to executives who have influence over their year-end bonuses and whose own pay might be constricted by curbing risk. In many cases, risk managers do not have full access to the compensation committee of the banks’ boards.

The review also revealed that banks tend to set similar bonus formulas for broad sets of employees and often do not adjust payouts to account for risks taken by traders or mortgage lending officers. Bank executives and directors, meanwhile, are often in the dark on the pay arrangements of employees whose bets could have a potentially devastating impact on the company.

Kenneth R. Feinberg, the Treasury Department's special appointee for executive compensation.
AP
Kenneth R. Feinberg, the Treasury Department's special appointee for executive compensation.

The Federal Reserve’s examination is focusing on the structure of compensation arrangements, not their amounts, and the results have not been made public. However, some preliminary findings emerged from interviews with government officials and bank executives who have been briefed on the review.

Last month, the Fed sent letters to the chief executives of each of the 28 banks detailing officials’ concerns about their institution’s pay practices. The letters ordered them to promptly make changes.

Bank officials are now in negotiations with federal officials over the steps they must take. The Fed is not expected to release its official report until next year, though it may provide new details when it releases a final set of pay guidelines that it has been working on at the same time. Those are expected in coming weeks.

The Fed’s review is the latest in a flurry of federal efforts to rein in banker pay and is occurring as Congress works to reconcile bills passed by the House and the Senate that will further tighten the government’s grip on the financial industry. Other agencies are also forging ahead with mixed success on compensation initiatives announced earlier this year, when it seemed that everyone in Washington was hoping to turn the politics of pay to their advantage.

Kenneth R. Feinberg, President Obama’s pay czar for banks bailed out by the government, is combing through the compensation awarded from October 2008 to February 2009 to the 25 highest earners at each company that received bailout money. He plans to publicize the results within the next three weeks.

Only about 180 of the 420 companies that accepted bailout money were subject to his review, and Mr. Feinberg has no authority, other than the threat of public embarrassment, to renegotiate compensation arrangements that he finds objectionable.

Other government efforts have run into delays. The Treasury secretary, Timothy F. Geithner, proposed a global bank tax, partly based on executive compensation, at several recent meetings with finance ministers from the Group of 20 large economies. But that initiative has failed to attract broad support and faces resistance from Australia and Canada, whose banks generally withstood the crisis.

Separately, the Federal Deposit Insurance Corporation has pushed back a board vote on a controversial plan that would tie a bank’s pay practices to the fees it pays to the agency’s insurance fund. Under the proposal, lenders that use long-term stock to reward employees and those that adopt provisions to claw back compensation would pay less money into the fund, while riskier pay practices could lead to higher assessments.

The banking industry opposes the plan, arguing it could increase compliance costs and conflict with other regulatory efforts on compensation. The F.D.I.C. vote, which was expected to take place at the agency’s June meeting, has been put off until at least late summer, according to people with knowledge of the agency’s plans.

The Federal Reserve’s review started in early November, when senior officials informed the chiefs of the major banks and their compensation committees that they might need to change their pay practices ahead of new rules. The banks were required to respond to a four-page questionnaire, inquiring about policies like the golden parachute payouts for senior executives and the pay scales of lower-level mortgage bankers.

The Fed, just as it did with the bank stress tests in the spring of 2009, analyzed thousands of pages of answers it received to compare the results and identify patterns.

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