Federal Reserve: Big Banks Should Tie More Employee Pay To Risk

10/05/2011 01:18 pm ET | Updated Dec 05, 2011

WASHINGTON (Dave Clarke) - Large banks need to tie more employees' compensation to the risk their decisions pose to the banks through such things as deferred pay, the Federal Reserve said in a report released on Wednesday.

The Fed said, however, that banks continue to make progress toward better aligning compensation and risk-taking.

Bank pay practices have been blamed by regulators and other critics for spurring on some of the excessive risk-taking that contributed to the 2007-2009 financial crisis.

Regulators have been pushing banks to take steps, such as deferring bonuses over a number of years, to make sure that decisions made by executives are done for the long-term benefit of the bank and not in search of short-term gains that boost bonuses.

In late 2009 the Fed began an effort to review bank pay practices.

The Fed said that while progress has been made banks need to do more.

One issue highlighted in the report is deferring employees' pay so that bonuses and other forms of compensation can be reduced if decisions turn out worse for the bank over time.

"Most firms still have work to do to implement such arrangements for a larger set of employees and to more closely link such reductions to individual employees' actions, particularly for employees below the senior executive level," the Fed said in its report.

The report focuses on 25 large banks including Goldman Sachs, JPMorgan Chase and Morgan Stanley.

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