Fed to issue bank pay rules Thursday: source

The guidelines are expected to apply to any employee able to take risks that could imperil an institution, not just the executives whose large bonuses have been the target of public outrage.

The proposed rules will be aimed at all firms the Fed regulates and be enforceable under its existing powers.

The source, who was not authorized to speak on the record, said it was unclear exactly what practices the rules will clamp down on.

The Fed's rules will come as U.S. pay czar Kenneth Feinberg is poised to dramatically cut compensation for the 25 highest-paid employees at seven firms that received exceptional taxpayer bailouts.

Feinberg is expected to cut the overall compensation for those employees by half, and to slash their cash payouts by an average of 90 percent.

The companies affected by Feinberg's rulings are: AIG, Bank of America, Citigroup, General Motors, Chrysler, GMAC and Chrysler Financial.

The Fed's proposed rules are designed to reform compensation at firms outside of Feinberg's jurisdiction. They will aim to curb the type of excessive risk taking that led to the recent financial crisis.

Regulators have said Wall Street pay was dangerously tied to short-term returns and risky financial bets, not long-term shareholder value.

The Obama administration has faced public outrage, as Wall Street firms that were recently propped up by federal assistance have brought their bonuses back to pre-crisis levels even as the general population faces the highest unemployment level in 26 years.

A Fed source said last month that the proposal would take a two-pronged approach. A top tier of the largest banks would get particularly close scrutiny, while all other lenders under the Fed's supervision would receive less-intensive treatment.

Larger firms would also be subject to a review that would compare their practices against rivals, and would be required to submit their pay policies to the Fed for its approval.

This would put the burden on the big firms to modify existing compensation practices, while leaving them with flexibility to customize compensation to best fit their needs.

(Reporting by Karey Wutkowski; Editing by Lisa Von Ahn, Phil Berlowitz)