Fed gets pay offensive in gear

The Federal Reserve Board summoned the CEO of 28 top banks and gave them Feb. 1 deadline for submitting proposals about how they intend to better their pay practices, which have been excoriated as of late. William Dudley, president of the New York Fed, called the industry big-wigs to an extraordinary meeting. But essentially the same meeting was held at other regional Fed banks. The goal was to underscore that the Federal Reserve is serious when it comes to the guidelines on compensation it has previously proposed. The unusual meetings, according to the Washington Post, also included members of board compensation committees. 

It's no secret what the Fed wants. It aims to use pay to limit some of the outsized risks that banks were all to willing to take on. They want better alignment of pay and long-term performance by using more stock in compensation plans. These concepts have been promoted for years. But it took a crisis for real progress to be made. Banks subject to the guidelines will also be required to report regularly on compensation practices, and regulators will monitor how pay equates with incentives for executives, traders, and others who can boost a bank's risk profile. 

The meetings apparently were not contentious, and represents a good first step if the Fed is serious about pay reform. It has taken an approach based on principles and not rules, which we must all applaud. A rigid formula will not be able to capture the nuances and can't account for all circumstances. 

Federal Reserve Governor Daniel Tarullo gave an example, as noted by Reuters. Pay arrangements for senior executives were best balanced if they involved deferred pay, at least for several years, in some form of equity. Also, this pay had to be tied to performance. This same arrangement would be less effective for mid- and lower- level employees. 

Rules of course can always be circumvented. A principles approach makes it less likely that the intent of the reform movement will be turned. It would help if a good working relationship were established between banks and the Fed. 

It will be interesting to see if these reviews are to be made public. We'll see how creative banks are getting--or not. Will we see some banks tie pay to unusual measures of performance? We noted the case of a CIO at an Australian bank whose compensation was tied to the performance of the website and other customer satisfaction measures. - Jim