Now the Fed is proposing to regulate the pay and bonuses of top executives, traders, loan officers and others. The 20 largest financial institutions (FIs) would have to present their compensation plans to bank regulators, who could then demand changes. The Fed rules would also apply, in a different form to a total of 5,000 FIs.

So while the comp cop's work pertains to paying executives at FIs with Troubled Asset Relief Program (TARP) money -- which will overlap with the Fed's jurisdiction -- the Fed's proposal would apply after the TARP is history.

The Fed proposes to alter the structure of bank compensation rather than the amount -- with the idea of discouraging FIs from paying people to take on too much risk. The Fed is adopting three principles:

• Defer bonus payment. Fed examiners would see whether FIs defer bonuses for several years to see whether risks and potential losses would surface;
• Punish risk. They would examine whether FIs pay smaller bonuses to those who take greater risk; and
• Take-back bonuses retroactively. And they'd check whether FIs can "clawback" bonuses if profits evaporate after an executive gets paid.

One of the biggest conceptual problems with the Fed proposal is that it leaves open what is meant by risk. That may sound academic, but the simple fact is that one of the biggest practical problems with the Fed proposal is that what looked very safe for years might end up being disastrously risky in the future. Moreover, by encouraging FIs to pile into that historically safe activity, the Fed might inadvertently create the kind of market behavior that forces participants to turn that activity from safe to risky.

Also, it's pretty clear that if the Fed rules go into effect, bankers who can do so will bolt to FIs that are not subject to the Fed's pay limitations. After the recent financial crisis, it's not clear whether the resultant brain drain from FIs covered by the Fed rules would be a good or bad thing.

But one thing I am sure of is that if you give economic power to people and encourage them to take short-term risks to boost their bonuses, that's just what they'll do. That's why I'll keep talking about the idea of putting their pay in escrow.

Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter.