Major US banks are gearing up to announce annual bonuses for top executives while bracing for a political firestorm over compensation practices that critics say fueled the global financial crisis.
A number of multimillion-dollar bonus payments are likely, even though most of the payouts are likely to be in the form of stock, with restrictions aimed at discouraging excessive risk-taking at many banks.
With announcements expected in the coming days and weeks, the administration of President Barack Obama has warned that hefty payouts could lead to a political backlash.
"This big-bonus season of course is going to offend the American people. It offends me," said Christina Romer, chair of the president's Council of Economic Advisors, in a television interview.
White House spokesman Robert Gibbs told reporters Monday that many bank executives "just continue not to get it," referring to public displeasure on bonuses.
New York City Comptroller John Liu expressed similar concerns, saying that "paying record bonuses in the immediate wake of the largest taxpayer-funded bailout in history simply offends our sensibilities."
Analysts say banks are walking a fine line as they try to reward top employees without creating a political backlash that leads to tougher pay rules.
"The bankers are going to be paid a lot of money and the public is going to be very angry," said Douglas Elliott, a senior fellow at the Brookings Institution and a former investment banker.
"In the short run, the public would like these bankers to be burned or shot."
But Elliott said there is no easy answer to regulating pay: limiting bonuses would transfer more cash to shareholders, while taxing the payments may lead to a "brain drain" of the best executives.
"The public is extremely angry and I certainly understand their anger but for obvious reasons they don't understand the implications" of regulating compensation, he said.
"Some things that would be emotionally satisfying usually would harm us rather than help us."
Elliott said that if bankers generate new business, a bonus tied to that may be a fair reward, he said. But if bankers use the firm's own money for investing in risky assets, this can imperil the firm even if the impact comes months or years later.
Deferred payments, which are growing in popularity, may not offer enough to retain the best in the field.
"Wall Street is still wrestling with the issue of compensating traders," Elliott said. "There are no easy answers. You cannot just hold off on compensating the trader until the transaction is unwound."
Some new regulations are already in the works. The Federal Reserve is implementing new rules on incentive pay for large, complex banking organizations. Congress has been debating a variety of rules but has failed to reach a consensus.
A few firms, including investment giants Goldman Sachs and Morgan Stanley, are implementing guidelines voluntarily to offer bonuses in the form of restricted stock, with "clawback" mechanisms possible.
John Coffee, a Columbia University law professor and corporate governance specialist who has testified before Congress on executive pay issues, said many banks scrambled to repay government bailout funds before the end of 2009 to be free from limits on bonus payments.
"There are some (executives) who did not receive bonuses they thought they were entitled to last year, and now want to be compensated" with larger bonuses, Coffee said. "The culture has not changed."
Coffee said some banks have moved "marginally" to restructure bonus payments, but that in many cases they still misalign risk and reward.
"When you incentivize managers with bonuses, you are now persuading them to accept higher risk," he said.
"If you keep on rolling the dice, sooner or later they will turn up 'snake eyes.'"
Coffee dismissed fears that a new regulatory scheme would drive away talented executives.
"If this drives people out of banks and into hedge funds, that would be fine with me," he said. "These activities should be in institutions that are not too big to fail."