The Federal Reserve Board, The Administration, and Executive Compensation: Heading Off Congress

Stories floated last week that the Fed was about to propose rules that would effectively regulate compensation practices at the 5000 or so financial institutions that it supervises.  The approach wasn't specifically aimed at CEO compensation but at compensation practices that might affect the soundness of financial institutions.  So what's going on at the Fed?

First, it is becoming quite apparent that comprehensive reform of the financial markets is foundering.  That means the dynamics that allowed the crisis to happen in the first place, including abusive compensation practices, look to remain in place.  The Fed is trying to strike while the iron is at least tepid, before it cools off entirely.

Second, at the G-20 meeting approaches, France and Germany seem to be racing ahead of US regulators in proposing limitations on compensation, particularly bonuses. 

Third, the Fed's approach looks remarkably like the one taken by Barney Frank in his compensation reform bill (HR 3269).  He called for rules that would regulate compensation practices that resulted in excessive risk.  The Obama Administration apparently opposed this effort.  The Fed, apparently with the tacit approval of the Administration, seems to be trying to head off the legislation by getting out front where it can argue that the legislation is unnecessary.

Of course, it could be a result of the latest proposals afoot to reform the financial system.  Senator Dodd's proposals would not augment the Fed.  It seems, therefore, that the Central Bank's star has fallen.  Perhaps the efforts to regulate compensation are a way of trying to regain some lost stature.