A wide-ranging plan by the Federal Reserve to limit executive pay would allow government regulators to probe private financial institution's pay practices—and let the Fed block any policy it thinks may encourage undue risk. The plan is still being formulated and won't be finished for weeks, but it requires only a board vote and not approval from Congress. For the Wall Street Journal, the compensation plan is the latest show of muscle from an increasingly assertive central bank.
The Fed claims it has the legal authority to regulate compensation thanks to its supervisory powers, which let it oversee the financial soundness of banks and other institutions. The proposal is expected to advocate clawbacks of pay to punish overly risky employees, plus remuneration in restricted stock that would only reward long-term performance. But one financial services executive cautioned, "If the restrictions on income-producers or salespeople are too draconian, it will actually undermine the strength of the institutions."