Some of the world's most powerful central bankers and financial regulators are proposing that the U.S. Securities and Exchange Commission and its counterparts in other countries extend their powers to include the regulation of executive compensation.

Adair Turner, the top financial regulator in Britain, laid out the powers that he and some of his international colleagues hope to wield to ensure that bankers' bonuses do not rely solely on the pursuit of profit.

Not only would regulators insert themselves into the secretive realm of bank compensation practices, Turner said, but they also would also demand that banks set aside more capital if their pay packages were too high.

"This has never been done before," said Turner, who heads the Financial Services Authority in Britain. "But the days of light- touch regulation are over."

Turner made the remarks in an interview before a speech at the Cass Business School in London in the past week.

The main theme of his speech was a call for banks to hold more capital to guard against future losses.

But buried in the fine print was the outline of a new global approach to regulating bankers' compensation that represents a direct challenge to practices at the heart of the British-U.S. financial model. If put into practice, the policies could fundamentally change the way that Wall Street and the London financial district - the City - operate.

Amid the uproar over bonuses at the American International Group and Merrill Lynch, the question of how bankers are compensated has never been more hotly debated. A similar debate has erupted in Britain over the pay practices at a number of major banks - not just those that have received government bailouts, but also others, like Barclays, that have not.

Although Turner's remarks focused on Britain, in recent weeks a small group of senior regulators, central bankers and government officials working under the framework of the Financial Stability Forum has been preparing a proposal that its members hope will be endorsed by political leaders at the summit meeting of leaders of the Group of 20 industrialized and emerging economies in early April.

Prepared by a panel headed by Philipp Hildebrand, the vice chairman of the Swiss National Bank, the report will effectively back the financial authority's approach to pay. It proposes that national regulators ensure that compensation awards at financial institutions are based not just on profitability, but also on the extent to which a trader or banker avoided excessive risk in generating high returns.

Deferred payout plans and clawback measures would also be proposed.

"The system is dysfunctional now, so you need something to break the pattern," said Gary Lutin, an investment banker and public critic of executive compensation levels.

Still, he said, it is one thing for regulators to promise to crack down on pay and quite another for them to do it.

Traditionally, the S.E.C. in the United States and the Financial Services Authority in Britain - both of which contributed to the report - have supervised areas like capital adequacy and broad compliance with securities law.

They have limited their involvement in pay issues to trying to restrain bonuses at financial institutions that receive public funds, and even there they have generally moved cautiously and on an ad hoc basis. But there are signs that governments are going to play a much more active role.

At the government-controlled Royal Bank of Scotland, for example, this new austerity is exemplified by a bonus system that pays top- earning executives only their base salaries - traditionally about 10 percent to 20 percent of total compensation - in cash. The rest of their yearly awards is to come in subordinated debt, as opposed to deferred stock, to be parceled out over a three-year period and subject to a clawback provision if the profits on which the bonuses are based prove to be illusory.

Originally published by The New York Times Media Group.

(c) 2009 International Herald Tribune. Provided by ProQuest LLC. All rights Reserved.

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