Fed to keep an eye on pay policies

WASHINGTON (AP) — The Federal Reserve would police banks’ pay policies to ensure they don’t encourage employees to take reckless gambles like those that contributed to the financial crisis, according to a proposal unveiled Thursday.

Unlike a Treasury plan to slash pay at certain companies that were bailed out with large sums of taxpayer money, the Fed proposal would cover thousands of banks, including many that never received a bailout.

The Fed would not actually set compensation. Instead, the central bank would review — and could veto — pay policies that could cause too much risk-taking by executives, traders or loan officers.

It’s the Fed’s latest response to criticism that it failed to crack down on lax lending, irresponsible risk-taking and other practices that many blame for contributing to the worst financial crisis since the 1930s.

The Fed’s goal is to make sure banks’ pay policies don’t encourage top managers or other employees to take gambles that could endanger the company, the broader financial system or the economy.

“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” said Federal Reserve Chairman Ben Bernanke. “The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system.”