The U.S. Federal Reserve plans new rules on bank pay to curb excessive risk-taking, which is blamed for sparking the global financial crisis and has triggered international demands for action.
Public outrage at the stratospheric compensation of some bankers has boiled up to the level of the Group of 20 nations, whose leaders meet next week in Pittsburgh.
The United States, under pressure to act at the G20 from France and Germany, has already said it aims to curb the culture of excessive risk-taking at the root of the crisis.
A Fed source said Friday that the guidelines would be proposed in the next few weeks and would apply to any employee able to take risks that could imperil the institution.
The rules will be aimed at all firms regulated by the Fed and will be enforceable under its existing supervisory powers, said the source, who spoke on the condition of anonymity.
Massive losses inflicted by risky bets on U.S. subprime mortgages destroyed some of the oldest names in U.S. finance last year and intensified a stubborn recession that has cost millions of jobs.
The Financial Stability Board, which answers to the G20 and will issue guidelines at the summit on September 24-25, said on Tuesday that poorly capitalized banks should not be able to pay large bonuses.
The Obama administration has already appointed a pay czar to oversee executive compensation at firms getting taxpayer aid, and has indicated it will take further steps.
The crisis has newly highlighted the potential for compensation practices at financial institutions to encourage excessive risk-taking and unsafe and unsound behavior, Fed Governor Daniel Tarullo told Congress last month.
Tarullo, a law professor named to the Fed by President Barack Obama earlier this year, is leading the central bank's push for tighter pay rules.
But industry officials say many financial firms had already changed pay practices in anticipation of the Fed's proposals, and that a heavy-handed approach could be harmful.
What we're worried about is if they place undue restrictions on the sales people because that could weaken the company itself, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, the industry's lobbying group.
Some financiers complained that Washington was bowing to popularist pressure for payback after taxpayer money was used to bail out their industry last year.
I think that talking about curbing Wall Street pay is emotional and not rational, said Tom Sowanick, co-president and chief investment officer of Omnivest Group LLC.
The Fed's proposal would aim to curb excessive short-term risk-taking by any employee, not just bank executives, and would take a two-pronged approach.
Larger firms would be subject to a horizontal review process to compare their practices against rivals, while the compensation review for smaller banks would be part of their regular bank exams, the Fed source said.
Goldman Sachs, which set aside $11.3 billion in the first half of the year toward bonuses for its employees but has also spoken out against excessive pay at firms that lost money, said excessive risk-taking should not be rewarded.
We think it entirely appropriate that people are rewarded for performance, but compensation should correlate directly with the performance of the firm, said Goldman Sachs spokesman Lucas van Praag.
The Fed's proposal has not yet been voted on by its Board of Governors, but the timeline for the guidelines to advance was weeks, not months, the Fed source said.
The proposed rules would face a period of public comment before they could be made final.
But the Fed would launch the horizontal review process for large firms as soon as the proposal goes out, rather than waiting for all the comments to come back, the source noted.
The guidelines would not apply a one-size-fits-all prescription to cap pay at any specific level, the source added. Rather, the guiding principle would be to aim for a longer view of profits from banking practices that squeezes out short-term risk-taking.
In addition, officials are discussing the possibility of clawing back compensation in instances where it later becomes apparent excessive risks were taken. But no decision on whether to include such a provision has been made, the source said.
(Additional reporting by Karey Wutkowski in Washington and Jennifer Ablan and Steve Eder in New York; Editing by Andrea Ricci and Dan Grebler)