04/24/2009 05:12 am ET | Updated May 25, 2011

Sign Of The Times: Bernanke Endorses Executive Compensation Reform

While the federal government works to pull the economy out of recession, there is a parallel effort, which receives less scrutiny but will arguably have a more profound impact, to reshape the structure of the new economy that emerges.

A glimmer of that effort flashed at a hearing of the House Financial Services Committee hearing on Tuesday, when Federal Reserve Chairman Ben Bernanke endorsed the push by Democrats to restructure financial industry compensation. In a sign of how dramatically the political ground has shifted, Bernanke, a Bush appointee, went even further, effectively calling for limits to executive compensation even at banks that haven't taken federal dollars.

"It is very important that compensation links performance and reward appropriately, and in particular that it do so in a way that doesn't incentivize excessive risk taking," Bernanke said in response to questions from Chairman Barney Frank (D-Mass.).

He also called for an incentive structure "that makes sure that we don't get short term compensation for long term outcomes."

Turning to limits on compensation, Bernanke said that "proportionality" -- the idea that executive compensation should be proportional to earnings and to average worker salaries -- is important to any compensation structure.

He called for a pay scale "that in general is more consistent with both appropriate proportionality but also with maintaining the appropriate incentives for safe and sound behavior that was missing in AIG."

Frank wanted to make sure Bernanke was referring to all institutions. "And you think that should be done across the board with large financial institutions whether or not they're receiving federal money?" he asked.

"Yes, sir. I do. We've already undertaken that through the advisory process," he said.

"So you think that lessens to possibility people will get in trouble?" Frank asked.

"It's an important issue for avoiding future crises," Bernanke said, making the same argument Democrats have in the past. Current incentive structure encourages risk-taking because executives are highly rewarded for big returns but not harmed if those risky moves turn out badly.

Frank noted that he and other Democrats pushed for a restructuring of the compensation structure in 2006, when the GOP held Congress, and again in 2007, after they'd taken over.

"It became a very partisan issue...we ran into a great deal of opposition," said Frank. "I was pleased to hear you say what you said."

Frank promised that the restructuring effort would begin again. "I solicited that comment because that's one of the things we'll be returning to," he said.

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