THEIR VIEW

Step forward on pay not enough

The following editorial appeared in The New York Times.

It sounded good when the Treasury’s pay czar, Kenneth Feinberg, announced that top executives at Citigroup, Bank of America and the other five institutions surviving at taxpayers’ expense would see their compensation packages cut in half this year and their cash salaries reduced by 90 percent.

If you read the fine print you will discover that these reductions apply only to the remaining two months of 2009. Feinberg might be equally tightfisted when he sets pay for all of 2010 — he should be — but there is no guarantee. And as soon as any of these institutions pay the government back, they will be free of the constraints.

Feinberg’s job was always fated to be a sideshow. Far more important are the proposed guidelines the Federal Reserve has come up with to align the risks taken and the rewards earned by executives, traders and loan offers at the nation’s 28 biggest banks.

Fed officials get the basic idea — that bankers’ compensation must be structured in a way that makes them think twice before they place bets that could lead their institutions (and the rest of us) over the cliff again. Their guidelines unveiled last week are a good start. But we fear they may still give banks too much leeway.

The Fed says it has also begun a review of current payment practices at the 28 banks and will veto payment structures it does not like. It must be ready to impose more specific restrictions if bankers game the system.

The Fed has not put any caps on pay. It is concerned only with how wages and bonuses can be structured to encourage bankers not to take excessive risks. It has offered a menu of suggestions.

It suggests that if two traders generated the same amount of profit, the one who took more chances should be paid less. It suggests that big chunks of bankers’ remuneration could be paid out over time — to keep more skin in the game. And if a banker’s investments were to go sour and lose money a few years down the road, some of the remuneration should be clawed back.

These are all sound ideas. But they are only guidelines, not rules. For example, the Fed expresses concern that golden parachutes could also lead to risky behavior, but it does not ban them or say how they should be used. And while some European countries are drafting regulations to ensure that 40 to 60 percent of executive bonuses for top bankers are paid out over several years, the Fed only suggests that these kinds of deferrals might be an appropriate tool.

The Fed insists that there can be no one-size-fits-all rules for more than two dozen highly complex banks with different business strategies. That may well be true. Fed officials say that as their review progresses, they may identify some egregious practices to ban outright or salutary formulas to adopt.

We still worry about leaving all of these critical details up to the banks — even with a promise from the Fed to be more vigilant. During the past several decades, banks have been given far too much room to write their own rules. The economic disaster around us is the result.