By Anthony Burke Boylan – As bankers make their way to Capitol Hill to have heart-to-heart conversations with government officials about their pay, we are about to encounter an odd round of public debate, if I guess correctly. The Federal Reserve is going to review bank compensation plans, not so much for excess in the amounts paid in salary or in bonus, but to make sure that there are no perverse incentives that could create undue risk or rogue behavior by employees.

This is exactly what the public was calling for earlier this year when outrage reached a zenith over huge bonuses paid to the executives of bankrupt institutions that had to be bailed out by the U.S. taxpayers. And the outrage has been rekindled with recent announcements that big bank execs will get billions in bonuses triggered in good part by trading gains.

“There ought to be a law,’’ Joe Sixpack groused.

“Why aren’t there rules against this?’’ people asked in incredulous tones.

“Who’s got oversight on this?’’

Well now that the Fed is going to try to take a hand in ironing out a recognized problem, what do you want to bet the plan becomes part of the socialist conspiracy theory sweeping much of the nation? 

That this is just another step in the Federal Government’s seizure of the economy, or at least meddlesome, do-gooder policy gone too far.

But the rules don’t appear to be onerous at all.

For example: the Fed likely will look with extreme prejudice on incentives that reward the volume of loans generated, rather than the quality and profitability. It will frown on loan generation that pays a flat bonus up front, but instead the compensation should be spread out so some of it is the result of a loan that proves to be a good investment sometime down the road.

Given the state of the banking industry in the last two years, what else is the Fed supposed to do?

It may be cliché, but the definition of insanity is doing the same thing over and over again and expecting different results. The Great Depression resulted in sweeping reforms of the banking industry, particularly the Glass-Steagall Act, which has been systematically dismantled.

There are regulatory rhythms to any industry – stringent after a large-scale failure and public outrage, lax when times are good. And it seems quite obvious this is a time for the former.

The largest money center banks would face the most scrutiny. They would have to submit compensation plans to the Fed for review and approval, and those plans would be reviewed to ensure they balance long-term risk with productivity.

For all but the 20 or so largest banks, the Fed simply will issue supervisory guidance on pay, so those institutions are not going to have their plans subject to approval.

While the concept seems pretty simple, it’s clear that the political debate and actual implementation of the rules will be anything but.

At the end of the day, though, it seems to indicate that institutions are going to have to accept a little responsibility in return for the “too-big-to-fail’’ designation and all that comes with it.

Anthony Burke Boylan is a financial journalist and PR and media consultant in Chicago. Reach him at TonyBoylan@CapitalInsight.com