May 13 (Bloomberg) -- President Barack Obama wants shareholders to have a greater say in executive compensation as the administration crafts proposals to rein in practices regulators blame for contributing to the financial crisis.

“There is an important interest in ensuring some fairness” and giving shareholders a role in “the type of compensation that their executives receive,” White House spokesman Robert Gibbs said in Washington today. “Executive compensation, as it related to the average worker” has “ballooned in only a short period of time,” he said.

The idea is one of several to address incentives that Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy Geithner have blamed for producing an excessive focus on making risky bets for short-term gains. The central bank within months plans proposals to use its authority to influence compensation practices at bank holding companies.

Officials are at the beginning of discussions with regulators about finding the best way to align compensation with sound risk management and long-term value creation, an Obama administration official said on condition of anonymity.

Treasury Guidelines

The Treasury is expected within weeks to publish its guidelines for executive compensation at the firms that have received federal rescue funds, including Citigroup Inc. and Bank of America Corp. Officials need to specify how they will implement their own proposals on limiting some executives’ salary, and a law sponsored by Senate Banking Committee Chairman Christopher Dodd that restricts bonuses.

Lawmakers are also likely to push for new legislation that addresses pay practices across the industry, including firms that don’t accept taxpayer assistance.

Dodd’s counterpart in the House, Democratic Representative Barney Frank of Massachusetts, said Congress should act. “It should be legislated,” he said today.

Obama kicked off the executive-pay effort in February, when he announced new limits on executive compensation at banks that received capital injections from the government.

“These guidelines we’re putting in place are only the beginning of a long-term effort,” Obama said Feb. 4. “We’re going to be taking a look at broader reforms so that executives are compensated for sound risk management and rewarded for growth measured over years, not just days or weeks.”

AIG Example

Geithner cited the compensation practices at American International Group Inc. as one example of where pay wasn’t aligned with the firm’s risk-taking. AIG racked up billions of dollars of profits earlier this decade, when it sold credit- default swaps on items such as securities tied to subprime mortgages. The government seized the insurer in September to prevent its disorderly collapse.

Still, there is no universal agreement on how to change pay practices. Former Securities and Exchange Commission Chairman Arthur Levitt today warned the Obama administration and U.S. regulators against attempting to change the way executives at financial firms are compensated.

“Government can jawbone, but for government to regulate I think is overkill and very mistaken because you don’t know where it’s going to end,” Levitt said in an interview with Bloomberg Television today. Efforts by the Obama administration to change Wall Street pay practices are “totally wrongheaded,” he said.

Levitt’s Criticism

The criticism from Levitt, a Democrat appointed to the SEC by former President Bill Clinton, shows that efforts to overhaul pay practices will prove contentious even after a popular outcry over Wall Street bonuses.

Geithner this month made clear that all parts of the financial industry, from banks and insurers to hedge funds and private equity, must be incorporated in the new guidelines for compensation. “That is going to apply -- has to apply across the financial system,” he said in a May 6 interview with PBS television’s Charlie Rose program.

Federal Deposit Insurance Corp. Chairman Sheila Bair said yesterday that regulators need to look at mortgage industry pay. In a speech to the National Association of Realtors, she suggested linking compensation to the long-term performance of related mortgages.

“We need to make sure that incentives are aligned among all parties by making compensation contingent on the long-run performance of the underlying loans.”

To contact the reporters on this story: Matthew Benjamin in Washington at Mbenjamin2@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net

Last Updated: May 13, 2009 15:47 EDT