Passed bank stress tests? Check. Raised enough additional capital? Check. Paid back TARP bailout money? Check. Surely, this bank can now pay out more in salary to its top executives, right? Not quite.

Still looking for more ways of implementing reforms in a financial industry that was brought to near collapse if not for timely intervention, the White House through federal regulators is now mulling over the possibility of putting limits on the executive compensation that a bank may pay its top managers. The plan calls for banks and companies which have received federal bailouts to submit any proposals for major executive pay change to a government official who will particularly be tasked to monitor compensation.

While the rules are expected to apply to the top 20 highest-paid executives of financial institutions which received at least $500 million in federal bailout money, the government does not intend to stop there. Treasury and Federal Reserve officials are also planning to give more power to the Fed and the Securities and Exchange Commission (which regulate banks and financial institutions respectively) to be able to monitor the rate of salaries in institutions which are not tied to taxpayer funds as well.

The reason for this latest ruckus over exec pay? Government officials believe that the banks’ compensation packages and incentive system prior to this recession promoted excessive risk-taking. Star risk managers and top traders could then walk away with millions in bonuses even if the bets they made fell short later on. Too many failed bets have helped put the country into this current economic crisis.

Appearing before the Senate Appropriations Subcommittee Tuesday (June 9), Treasury Secretary Timothy Geithner said, “A centerpiece of sensible reforms will be to tie compensation to better measures of long-term investment and return and to adjust them to reflect the risk.”

While it is not yet clear how stringent the rules are going to be for both bailed out and non-bailed out banks, one can already hazard a guess that some of the institutions that will be most affected by these new regulations include Citigroup, Bank of America®, the American International Group (AIG), and General Motors and its financial subsidiary, GMAC.

Lobbying for the chance to pay off TARP funds and break free from government oversight on executive pay (among other restrictions), the bigger banks like Goldman Sachs Bank USA and Chase have recently been given the go signal to start making payments on the bailout money. However, once the broader version on the executive compensation polices pushes through, these banks will still be subject to pay cap.

The administration plans to put lawyer Kenneth R. Feinberg as the official in charge of monitoring executive pay. Feinberg is also credited to have overseen the allocation of payments to victims’ families of the Sept. 11, 2001 terrorist assault.

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