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Huntington Bancshares Inc. chief executive officer Thomas Hoaglin made a surprisingly blunt confession when he wrote to shareholders to explain the bank's dismal 2007 results.

“I did not deserve an annual cash incentive and did not receive one,” Mr. Hoaglin acknowledged this spring, lamenting an 84-per-cent plunge in the Ohio bank's profit.

The juxtaposition of inflated pay packages and the mortgage implosion has put U.S. bankers in an awkward spot, to say the least.

They've been hauled before U.S. congressional investigators and publicly lashed by investors. Some have lost their bonuses. A few, their jobs.

Now with hundreds of billions of dollars of stock market value wiped out, pressure is mounting to overhaul an executive compensation system that critics blame for drawing banks into high-risk mortgage investments, with few consequences for the CEOs who steered them there.

“Wall Street, by its nature is high risk and high pay,” said David Larcker, an accounting professor and compensation expert at Stanford University in Palo Alto, Calif.

“But what happens when the risk goes the other way. Should pay also be adjusted?”

During the mortgage boom, there was a “weird incentive” to take on risk, and top banking executives made “tremendous sums,” Prof. Larcker pointed out.

Congress signalled its revulsion over excessive executive pay in the banking sector by giving itself the power to cap the salaries of top executives at troubled mortgage lenders Fannie Mae and Freddie Mac – part of a sweeping housing rescue package enacted by U.S. President George W. Bush.

Large investors are also making noises about compensation reform on Wall Street. Institutional investors such as U.S. pension plan giant TIAA-CREF are pushing companies to more closely link executive pay to performance – good or bad.

So-called “say-on-pay” resolutions on proxy statements, which would give shareholders an opportunity to weigh in every year on executive salaries, have won significant support from shareholders of major banks. Investors are also demanding tighter scrutiny of stock options, salary increases and are even calling for clawback provisions if companies restate their results or are guilty of misconduct.

Other critics want bonuses tied to indicators, such as loan-loss provisions, not just profits and revenues.

The private sector remains essentially a free market, constrained only by what shareholders and directors are willing to tolerate.

Compensation packages for a select few are now in the tens of millions of dollars a year, typically linked to short-term growth targets, rather than long-term corporate health.

Several CEOs, ousted for misadventures in the mortgage market, have walked away with massive payouts, including Citigroup's Charles Prince, Merrill Lynch & Co.'s Stanley O'Neal and Countrywide Financial Corp.'s Angelo Mozilo.

And yet there are tentative signs of change. Bonuses have been slashed dramatically. Vikram Pandit, who took over as CEO at Citigroup from Mr. Prince, received retention incentives, but no bonus. And John Thain, who succeeded Mr. O'Neal at Merrill Lynch, has stock options that will only be activated if he can get the stock price up – something he has so far failed to do.

Regulating compensation is probably a bad idea, said Prof. Larcker, an avowed free market thinker. But he pointed out that the ground rules fundamentally changed when U.S. authorities orchestrated a bailout of investment bank Bear Stearns and threw an implicit lifeline to the rest of the banking industry.

That has fundamentally altered the dynamics between Wall Street and the government, Prof. Larcker explained.

“The government stands ready to bring funds forward because it deems these companies too big to fail,” he said, a pledge that alters the balance of risks.

Economist Peter Morici, a business professor at the University of Maryland, is more blunt. He said enhanced oversight should be the quid pro quo for government bailouts.

“If these companies have to be bailed out by taxpayers, the compensation packages have to be regulated,” he said.

Commercial banking, a relatively low-margin business, was never where young executives went to make their fortunes. Historically, the real money was in investment banking and private equity. Even manufacturing bosses earned more than bankers.

But that changed in the past two decades as banking deregulation blurred the lines between the various pillars of the financial services industry.

“The compensation system has migrated to a big risk, big reward model, and it's been adopted by commercial banks,” Prof. Morici said.

“That's how this mess got made.”

At a hearing on CEO compensation this year, Democrat Henry Waxman expressed the frustration felt by many Americans when he scolded Wall Street executives for reaping rich rewards while their companies' fortunes foundered.

“Most Americans live in a world where economic security is precarious and there are real economic consequences of failure,” said Mr. Waxman, chairman of the House of Representatives oversight and government reform committee.

“But our nation's top executives seem to live by a different set of rules.”