Oct. 23--The CEO of TrustAtlantic Bank likens the Federal Reserve's proposal for regulating bank compensation policies to the teacher who punishes the entire class after just a few students misbehave.

"Don't punish the class. Punish the guilty parties," said Jim Beck.

On Thursday, the Federal Reserve Board proposed policing compensation policies at thousands of banks across the country -- even those that haven't received stimulus money from the U.S. Treasury.

The goal is to ensure that bank pay structures don't undermine their "safety and soundness" by encouraging executives, loan officers and others to take undue risks.

Under the proposal, the Fed would not set pay, but it could veto compensation policies that are too closely tied to short-term revenue or profit.

Many CEOs of small community banks aren't happy about the prospect. They see themselves as the convenient whipping boy for a deep recession that has its roots in subprime mortgages that their institutions never even offered.

"I think it is pushing envelopes that don't need to be pushed," Larry Barbour, CEO of North State Bank, said of the proposal. Raleigh-based North State has seven branches.

TrustAtlantic's Beck, whose Raleigh-based bank has three branches in the Triangle and one in Greenville, agrees with the underlying principle that bankers shouldn't be rewarded for taking inappropriate risks. But he worries about regulators getting too involved.

"I think there is always concern about the unknown," Beck said. "I think the concern that many business people would have is that there is just a strong trend of heightened government intervention -- not just in our business lives but in our lives as citizens. I'm certainly opposed to that."

Mike Carlton, CEO of Cary-based Crescent State Bank, said it makes sense for federal regulators to delve into the compensation policies of banks that it considers financially troubled. But he views it as unnecessary for the vast majority of banks.

For them, evaluating the appropriate compensation structure should be left to the bank's board of directors and shareholders, Carlton said. "If shareholders aren't satisfied with the compensation arrangement at a financial institution, they should and will let it be heard loud and clear."

Publicly traded Crescent, which has 15 branches, is one of three Triangle banks that accepted stimulus money from the U.S. Treasury. To receive that capital, banks had to show that they could survive without the extra funds.

Banks that received stimulus money already have limits on bonuses and total cash compensation for top executives until they repay the government. The Treasury also requires those banks to allow shareholders to express their approval or disapproval of top executives' pay packages.

But the new Federal Reserve proposal addresses the basis for employees' pay, rather than how much compensation they receive.

A spokeswoman for First Citizens Bancshares, with 430 First Citizens and Ironstone branches, said its executives' compensation consists mostly of base salary and retirement benefits. "Based on today's announcement, we're not concerned about being reviewed, if we are," said Barbara Thompson.

david.ranii@newsobserver.com or 919-829-4877

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