Having successfully lobbied for exemptions from key provisions of the Obama administration's regulatory reform plan, community banks are now pressing the Federal Reserve Board to shield them from new compensation guidelines.

Community bankers argue they did not pay the exorbitant bonuses that have fueled widespread anger at Wall Street and they do not have the resources or the need to extensively review their pay programs. "Quite frankly, I have more than enough to do right now in my efforts to keep up with all of the other changes that have or soon will be imposed on us," Albert Christman, the president and chief executive of the $122 million-asset Delhi Bancshares Inc. in Delhi, La., wrote in a comment letter to the Fed. "I really don't need another issue to deal with, especially one that will not be helpful in any way to anyone."

Criticism of the Fed's proposed compensation guidance came from across the industry, but much of the pushback centered on community banks.

The Fed's guidance differentiates between small institutions and their mammoth counterparts. The 28 largest banks would be subject to a "horizontal review" where their pay packages would be stacked up against those at other firms. Large banks whose pay practices fall outside the norm would receive more scrutiny from the Fed.

For community banks, Fed supervisors would simply review compensation practices as part of the institution's examination process. But even that goes too far, say those who think most community banks should be exempt. "Few, if any, community banks had incentive compensation practices that had anything to do with the current crisis," wrote Christopher Cole, a vice president and senior regulatory counsel at the Independent Community Bankers of America.

The Fed's guidance would require bank directors to spend more time evaluating compensation for any employee or group of employees who could create risks for the bank. But community bank representatives say that would be an unnecessary burden on directors and an expense they cannot afford. The Missouri Bankers Association went so far as to raise concerns that the Fed's guidance might spur further industry consolidation.

"There is a very different 'moral hazard' that systemic risk will be ignored and community banks may surrender to consolidation, merger, or other means to realize value for their bank and end community banking," wrote Max Cook, the trade group's president.

Community banks have already won some big battles in Washington over new laws stemming from the financial crisis. The regulatory reform bill that the House passed in December would exempt banks with assets of less than $10 billion from supervision by the proposed Consumer Financial Protection Agency.

A Fed spokeswoman would not say when the compensation guidance issued in October might be finalized, but she signaled an openness to community bankers' concerns.

The Fed's guidance is a response to public outrage over hefty executive pay packages in an industry that has received extraordinary government assistance. Since the biggest banks have repaid money they received from the Troubled Asset Relief Program, the Obama administration's pay czar has lost sway.

But the Fed's guidance, as proposed, touches all bank holding companies. It also would apply to foreign banks operating in the U.S. and state member institutions.

The Fed did not explicitly ban big payoffs for departing executives, but questioned if such arrangements could increase "the risk-taking behavior of employees" and threaten a bank's safety and soundness.

The industry offered a hearty defense.

"Elimination of golden parachutes could potentially limit the attraction and retention of talent," wrote G. William Beale, the president and CEO of the $2.6 billion-asset Union Bankshares Corp. in Bowling Green, Va.

"The most senior positions at any banking organization are fraught with risk because of the intense oversight, demand for performance and oftentimes unreasonable expectations. Any reasonable person would expect some form of downside protection to be available."

Some say the guidance itself is unnecessary and that regulators already have authority to target compensation practices if they are endangering the bank.

But others say the Fed should go even further with its guidance. Justin Levis, a senior research associate at the Council of Institutional Investors, argues that banks should publish the metrics they use to determine pay.

Highlighting just how much of an issue compensation has become in the public's consciousness, citizens with no apparent direct ties to banking sound off in letters to the Fed.

"Our financial institutions and Wall Street just don't seem to get it," writes Linda Pressler. "The American public is struggling and the money guys still want bonuses that could support a small country's budget."

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