WASHINGTON --- The Federal Reserve for the first time would police banks' pay policies to make sure they don't encourage excessive risk taking under a plan the Fed is drafting.
The proposal is the Fed's latest response to criticism it failed to crack down on lax lending, reckless gambles and other practices that led to the financial crisis.
The central bank's more activist stance carries a risk, though: It could intensify accusations from lawmakers and other critics that the Fed is overstepping its bounds and should be reined in.
The compensation issue is likely to surface when President Obama meets with his counterparts from other major industrialized countries in Pittsburgh next week. French President Nicolas Sarkozy is leading a European attempt to rein in banker bonuses at the Group of 20 summit.
G-20 leaders promised at their London meeting in April to pass "tough new principles on pay and compensation." But little progress has been made.
Under its proposal, the Fed would review pay policies that could cause too much risk taking by executives or other employers, according to two people familiar with the plan. The Fed would not actually set compensation, however, those people said. They spoke on condition of anonymity because the proposal has not been finalized.
The Fed would review salaries, bonuses and other compensation for CEOs and other senior management, the people with knowledge of the proposal said.
It also would cover certain employees, such as traders, who can take big risks on behalf of a firm, they said. And it would cover some workers whose compensation could affect their risk-taking, such as loan officers making mortgages, they added.
The Fed could examine how compensation is structured, such as when it is awarded, the sources said.
The proposal, in the works since early this year, could be unveiled within weeks, people familiar with the initiative said. The public, the industry and others would be able to comment on the proposal, which could be revised. A final plan, subject to approval by the Fed's Board of Governors, could be adopted by year's end.
THE PROPOSAL
BANK PAY RULES: The Federal Reserve for the first time would police banks' pay policies to ensure they don't encourage excessive risk-taking.
HOW it would work: The Fed would review -- and could reject -- pay policies that might cause too much risk-taking by employers, according to two people familiar with the plan. The Fed would not actually set compensation.
SAFETY FIRST: The goal is to make sure banks' pay policies don't encourage top managers or other employees to take gambles that could jeopardize the company, the broader financial system or the economy.
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