The U.S. Federal Reserve is working on plans to make sure executive pay does not promote dangerous risk-taking, as part of steps to reform financial rules after a devastating crisis, a top Fed official said on Monday.

Compensation systems that incentivize employees to take actions that entail excessive risk taking in light of expected returns and costs can also have adverse effects on firm safety and soundness, Fed Governor Daniel Tarullo said in a speech to the Peterson Institute for International Economics.

While acknowledging the topic is sensitive, Tarullo said supervisors should take additional action on executive pay rules to supplement guidance they have already provided.

Tarullo is a regulatory expert and is President Barack Obama's only appointment to the Fed board. He said he and his colleagues are working on a proposal that will make sure executive pay takes the riskiness of a firm's activities into account as well as the firm's performance.

(Reporting by Mark Felsenthal; Editing by James Dalgleish)

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