Third-quarter numbers for the country's biggest banks are ugly. It's bad enough that the country's nine most prominent banks posted a combined $1.6 billion net loss versus a $14.3 billion profit for the same quarter last year. But the figures that are really causing a storm are disclosures in their quarterly public filings that they have reserved $108 billion so far this year for salaries and bonuses.

Those same nine institutions are recipients of half of the U.S. Treasury Department's $250 billion infusion into the banking industry through its capital purchase program, and the compensation figures hit the wires just as Uncle Sam was opening his wallet. As layoffs escalate across America, cries of indignation arose from Capitol Hill, corporate governance watchdogs and unions.

Rep. Henry Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee, demanded that the banks' chiefs explain why they are hiking bonuses to traders and other employees despite "one of the financial industry's worst years on record."

Regardless, the housing bubble that brought on the current economic troubles was fueled in no small part by a compensation structure that rewarded short-term profits with little regard to whether mortgages and housing-­related investment vehicles would hold up over the long term. That fact is forcing a re-evaluation of the financial industry pay structure, and not just for banks' senior executives. Rank-and-file brokers and traders can make outlandish pay too, and many critics say it's time to make sure commissions don't reward hucksters pushing risky products that will threaten their firms later.

The financial services industry "has to change the entire compensation model," says James Wareham, a litigation partner at Paul, Hastings, Janofsky & Walker LLP. "Every single tenet of it does not work anymore."

He describes the broken model: "I put together a very complicated structured product. I sell it to my firm's wealth management/broker-dealer side, and the bank recognizes a profit of $200 million. I get $30 million; I have a big party," he says. "And in three years what I put out is trading for 3 cents on par. Do I give back my $30 million? No."

He says it almost seems designed to burn down the house. "The whole Wall Street banker, proprietary desk, commission-based, short-term compensation system has to be completely changed," he says.

An examination of rank-and-file employees who happen to be highly paid would add a new wrinkle to the debate over corporate pay packages, which to date has focused almost exclusively on the top five or so senior positions within a company. Indeed, shareholder rights advocates are seizing on the latest compensation dustup to revive "say on pay" campaigns to give shareholders a voice on how top executives are paid.

House Financial Services Committee Chairman Barney Frank, D-Mass., told the Quincy, Mass., Patriot Ledger last week he expects to bring his say-on-pay legislation to a House vote in early 2009. His bill passed overwhelmingly in the House in 2007, but it did not reach a vote in the Senate. He's optimistic a Senate vote will be held this time around and predicts it will pass. Will the next president sign it? If Democrat Barack Obama is elected, almost assuredly. Obama sponsored the Senate companion to Frank's bill.

Frank's legislation would require all public companies to submit pay deals for their top five executives to shareholders for a nonbinding vote each year.

Nell Minow, co-founder of research firm the Corporate Library LLC, predicts public frustration with the financial industry will resuscitate the say-on-pay movement. Only slightly more than 40% of shareholders, on average, cast votes in favor of the 88 say-on-pay proposals that were considered at annual meetings during the past three years.

Not all shareholder activists want Congress to legislate compensation. But Peter Flaherty, president of the National Legal and Policy Center, a conservative-leaning group focusing on government and corporate accountability, says it is inevitable unless companies themselves put in place pay structures that do not give employees incentive to neglect their employers' futures.

"I would not deny a secretary at Goldman her bonus, but firms that come to the government for a handout are poorly advised to give the kind of bonuses we've been hearing about," says Flaherty, whose center is currently opposing federal funding to facilitate a merger of General Motors Corp. and Chrysler LLC.

The notion that big bonuses are necessary even in bad years "makes no sense," he says. "With all the cutbacks in the industry, we're in a buyers' market. Good people will be floating around."

Flaherty himself is just coming off an unsuccessful attempt to win a say-on-pay measure at Procter & Gamble Co.'s Oct. 14 annual meeting. Next year, his group plans to target the financial sector. "We'll go after some banks for sure," he says.

His overture to P&G shareholders prompted a tense 20-minute debate between management and supporters of the initiative. Flaherty's appeal to shareholders expresses his view that shareholders' interests will be threatened if managers don't set pay responsibly. "Unless corporations voluntarily tame executive pay," he told P&G's investors, "Congress will do it. ... I would prefer that the issue be settled right here among shareholders, especially if crony-filled boards will not do their jobs."

He warns that anger over excessive executive compensation makes corporations more susceptible to demands of the "anti-corporate left," which is starting to blackmail companies into endorsing its "pet causes," such as climate change initiatives.

"I'd much prefer shareholders to deal with the problem than Barney Frank," he tells The Deal. "If companies are getting access to government money and becoming wards of the state, then they have to realize some rules will come with it."

In fact, the Treasury Department did set some rules for its capital purchase program. Participating banks must ensure that compensation for a bank's chief executive, chief financial officer and the next three most highly compensated executives does not encourage "unnecessary and excessive risks that threaten the value of the financial institution." Also, banks must take back any bonus or incentive compensation paid to those employees if they are based on earnings results or other criteria that later turn out to be materially inaccurate. Golden parachutes for senior executives are prohibited, and participating institutions may not deduct compensation for any executive in excess of $500,000 from taxes.

Those rules, however, apply only to banks' five most senior employees and do not address huge commissions and bonuses paid to those just below them. If maintained through the end of 2008, compensation at the nine institutions would finish ahead of last year.

Whether Congress will impose limits further down the corporate ladder is unclear, but Waxman is looking into their pay scales. The senator sent letters to the heads of the nine banks Oct. 28 requesting that they send his committee documentation on the total and average per-employee compensation for 2006 through 2008 broken down by salary and bonuses and "a description of the reasons for the year-to-year changes in these amounts." He also asked for a recounting of the number of employees who were paid or are projected to be paid more than $500,000 in total compensation, a breakdown of the 10 highest-paid employees and policies governing granting of bonuses. He asked that the information be submitted by Nov. 10. New York State Attorney General Andrew Cuomo followed up with a similar demand the next day.

Waxman is incensed over reports that bonuses at some firms would exceed $6 billion, an amount he contends might not be possible without government infusions. "While I understand the need to pay the salaries of employees, I question the appropriateness of depleting the capital that taxpayers just injected into the banks through the payment of billions of dollars in bonuses," he wrote.

The bonuses came under quick attack from the United Steelworkers, which last week prepared an analysis comparing terms of Treasury's investment in Goldman, Sachs & Co. and one made a few weeks earlier by Warren Buffett. The price Treasury paid was roughly twice what Buffett paid, USW argues. That means, wrote USW president Leo Gerard in an Oct. 28 letter to Treasury Secretary Henry Paulson, "half the money is invested and the other half ... is gifted to institutions after they paid out hundreds of billions in undeserved bonuses and shareholder dividends and engaged in reckless speculation. ... In my world such gifts are rarely offered to working people."