Banks face Feb. 1 deadline on compensation

updated 11:48 a.m. ET Nov. 3, 2009

WASHINGTON - The nation's biggest banks face a February deadline for submitting employee compensation plans to the Federal Reserve, according to people with knowledge of the process.

The Fed also will be encouraging — though not requiring — banks to revise this year's pay plans if they are significantly out of step with principles the Fed has proposed to discourage excessive risk taking, those people said. They spoke on condition of anonymity because they aren't allowed to talk about discussions between Fed supervisors and banks, which are usually confidential.

The Fed can use its power to urge banks to make changes this year, but it can't penalize them for failing to do so because the Fed's new rule isn't likely to take effect until next year, the people said.

Under the Fed proposal, the 28 biggest banks — including Goldman Sachs, JPMorgan Chase, Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. — would develop their own plans to make sure compensation for executives, traders, loan officers and others doesn't spur undue risk taking. Bank executives met with Fed officials around the country on Monday to discuss the process.

If the Fed approves, the plan would be adopted, and bank supervisors would monitor compliance. If the Fed rejects the plans, the banks would have to fix them to comply with the new rules.

Those top 28 banks have until Feb. 1 to submit their plans. That will start a back-and-forth process between the Fed and bank officials, with the Fed providing feedback and recommendations for changes to improve the pay plans.

Under the Fed proposal unveiled last month, the central bank would not actually set compensation. Instead, it would review — and could veto — pay policies that it thinks could encourage too much risk-taking by employees.

At smaller banks, where compensation is typically less, Fed supervisors will conduct reviews. Those banks don't have to submit plans.

The public, banks and other interested parties have until Nov. 27 to weigh in on the Fed's proposal. After that, the Fed could revise the plan. But Fed officials have said they don't expect major revisions.

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.

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