The U.S. Federal Reserve Board issued a proposed rule intended to rein in bankers’ pay.

The Fed said that the proposal is designed to ensure that banks’ incentive compensation policies do not undermine the safety and soundness of their organizations.

It includes a supervisory initiative applicable to 28 large, complex banking organizations, that will review each firm’s policies and practices to determine their consistency with the principles for risk-appropriate incentive compensation. The policies and practices adopted by these firms in response to the final supervisory principles will become a part of the supervisory expectations for each firm and will be monitored for compliance.

Additionally, supervisors will review compensation practices at regional, community, and other banks as part of the regular, risk-focused examination process.

“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” Federal Reserve chairman, Ben Bernanke, said.

“The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system.”

To monitor and encourage improvements, Federal Reserve staff will prepare a report after the conclusion of 2010 on trends and developments in compensation practices at banking organizations.

“These proposed rules will likely affect compensation for hundreds if not thousands of professionals working in our industry. We appreciate the Federal Reserve addressing the regulation of compensation policies through a standard rulemaking process, allowing market participants and interested parties to provide substantive comments to their proposal,” said the Securities Industry and Financial Markets Association’s president and CEO, Timothy Ryan.

“Ensuring pay is tied to sufficient risk management, long-term performance and shareholder interests are goals we share, and are reflected in the industry’s Guidelines for Compensation that we released this summer. We look forward to working with the Federal Reserve as this regulatory process moves forward,” he added.

IE