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U.S. Considers Financial Pay Rules

Date: Thursday, May 14, 2009
Author: Louise Story and Eric Dash, The New York Times

Obama administration officials are contemplating a major overhaul of the compensation practices in the financial services industry, moving beyond banks to include more loosely regulated hedge funds and private equity firms.

Federal policymakers have been discussing ways to ensure that pay is more closely linked to performance.

Among the ideas under consideration are incorporating compensation as a “safety and soundness” concern on official bank examinations as well as expanding the existing regulatory powers of the Securities and Exchange Commission and Federal Reserve to obtain more information regarding compensation. The policymakers are also expected to publish formal guidelines regarding Wall Street pay.

Any overhaul is likely to be tied to the Obama administration’s broader efforts to curb systemic risks to the economy. That means the new rules could apply to financial firms like hedge funds or private equity firms that never accepted money from the Troubled Asset Relief Program, or TARP. It would also mean greater oversight on compensation for banks that are seeking to return the TARP money in an effort to avoid the new strings attached to pay.

Administration officials have been contemplating broad-based pay reforms since early this year. In February, the Treasury Department was instructed to write detailed guidelines to the new executive pay rules for banks accepting TARP money, rules that were inserted at the 11th hour into the economic stimulus bill.

But the effort was apparently put off after the furor over bonuses at the insurance giant American International Group in March.

Financial policymakers had hoped for things to cool down, and have also been preoccupied with a number of other issues, including the highly-anticipated stress tests for the nation’s biggest banks. Just as the tests aimed to give the markets more clarity on the financial condition of the banks, the compensation guidelines may be designed to give the market more clarity over pay.

Wall Street pay has long been a hot-button issue in Washington, but the public outrage over excessive compensation has erupted in recent weeks.

Bank executives have been pressing for more clarity on the pay issue, fearful that talented managers and traders might flee their companies for overseas institutions and boutique firms. But President Obama and lawmakers on both parties have been looking for ways to rein in excessive pay packages and make sure that compensation does not encourage them to take more risk.

Treasury officials have said new executive compensation rules could be released shortly, with some bankers and lawmakers expecting them to be formally released before the Memorial Day recess.