WASHINGTON - Banks could eventually face higher fees for risky compensation plans under a proposal approved by regulators Tuesday, as policymakers continue to wrestle with public outrage over the pay culture of the financial services industry.

The Federal Deposit Insurance Corp.'s five-member board voted 3-2 in favor of a preliminary staff proposal that would use the deposit insurance fees banks pay the government as both a carrot and stick to encourage less risky pay practices. The goal, the proposal says, is to "provide incentives for institutions to adopt compensation programs that align employees' interests with those of the firm's stakeholders, including the FDIC."

The proposal, which is part of a multi-stage rule making process, suggests a compensation model that would favor banks that pay employees in high-risk business lines a significant portion of their compensation in restricted, non-discounted company stock that vests over a number of years and can be clawed back under certain circumstances. The system would also favor pay structures administered by independent members of boards of directors.

FDIC Chairwoman Sheila Bair stressed that the agency has no interest in setting specific limits on the amount bank employees can make. Instead, the proposal raises the question of whether to use deposit insurance fees as an incentive to encourage compensation practices that favor less-risky behavior.

"This isn't about levels; it's about structures," Bair said.

Still, not all board members were convinced of the need to move forward and Bair acknowledged ahead of the meeting that it could be contentious. Comptroller of the Currency John Dugan said he had "substantial concerns" about the proposal, particularly at a time when Congress is expected to address compensation as part of a broader overhaul of financial market oversight.

"It would be very unfortunate to have an end result where insured institutions ... were subject to inconsistent schemes evaluating the risk of their executive compensation programs," Dugan said.

John Bowman, the acting director of the Office of Thrift Supervision, added the proposal is "premature" and also opposed moving forward with the proposal.

"I need to ask what are the limits of the FDIC's authority," Bowman said.

Bair was critical of the opposition, insisting that too often federal regulators end up maintaining the status quo.

"To not even ask the question I think would be irresponsible," Bair said.

Government officials said a number of questions remain to be decided, including whether to reward firms with "good" pay structures with lower fees, or to charge firms with more risky compensation plans higher fees. Either way, officials said, firms that take steps to address the concerns of regulators will benefit.

"If a bank could attest to meeting these criteria ... they would somehow get an advantage in the pricing of their deposit insurance," government officials said in describing their thinking.

Another open issue is whether a final compensation rule covers just bank employees or employees at the financial holding company level. Government officials said that FDIC legal staff "thinks it could apply to the broader universe," which would subject a broader swath of employees to government scrutiny of compensation structures.

The staff also must decide on how such a proposal would apply to both large publicly-traded banks versus private community firms. Government officials said that is one of the issues still be determined, but that they could establish a multi-tiered system.

The staff said the new proposal, which will be put out for public comment, is meant as a complement to other government efforts to address concerns about executive compensation practices in the financial services industry. The Federal Reserve late last year proposed new supervisory oversight of compensation structures, which Bair said would not be affected by the FDIC's proposal if finalized.

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