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Fed urges banks to focus on their own profitability in issuing bonuses

126px-US-FederalReserveSystem-Seal.svgAs part of an effort to discourage executives from taking on unnecessary risk, the Federal Reserve is pressuring banks to focus more on their own profitability and less on their competitors’ performance when issuing bonuses.

The move comes as the Fed expressed concern that pay-for-performance encourages bank executives to take on extra risk to keep up with competitors and encourages banks to reward executives even when the institution has under-performed. Regulators have also expressed concern that banks are paying out large bonuses during a period when compensation should be reduced to boost capital reserves, according to Reuters.

While the Dodd-Frank Act requires the Fed to issue new rules pertaining to Wall Street bonuses, the Fed has not yet issued final rules or regulations on the matter.

The proxy statements of America’s largest banks, including Goldman Sachs, JPMorgan Chase, Morgan Stanley, Bank of America and Citigroup, issue bonuses based on their competitors’ performance. Nearly half of the 120 largest US firms use relative performance in issuing executive bonuses, Reuters reports.

Some individuals that oversee compensation plans at big banks have said that rewarding relative performance encourages the bank’s top executives to perform well and helps the institution retain talent.

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