The Swedish government is fast-tracking a bailout package that could impact the executive and non-executive director compensation plans of the country’s banks and financial institutions.

Under the proposal, participating banks would have to “restrict salary increases, bonuses, board fee increases, and executive severance payouts.” While the restrictions would nominally expire at the end of the guarantee period on Dec. 31, 2009, it is as yet unclear whether the restrictions would in practice persist beyond this date.

The government plans to guarantee up to 1.5 trillion Swedish kronor ($205 billion) in borrowing by the banks. Sweden joins the United Kingdom, Germany, the Netherlands, and other European nations in taking action to shore up financial institutions. Also this week, France said it would spend 10.5 billion euros ($13.9 billion) to buy subordinated-debt securities from six major banks.

The guiding principle of the Swedish legislation would be for the brunt of any losses to be born by the financial institutions themselves and their shareholders, rather than taxpayers. Participation would be on an ostensibly voluntary basis, and participating institutions would be assessed a risk-based guarantee fee in the form of either cash or super-voting shares.

The proposed legislation, which has just cleared a comment period without major comment from Sweden’s financial authorities, states that executive compensation restrictions are needed to mitigate the moral hazard inherent in the bailout package. The government asserts that variable compensation could namely exacerbate risk-seeking behavior arising from guaranteed investments. Indeed, the principle that banks not profit from any risks born by the Swedish taxpayer is a central component of the proposed legislation.

The reaction to the bailout package among the major Swedish banks has been mixed. While Swedbank welcomes the plan, Svenska Handelsbanken (SHB) believes itself stable enough to remain outside the framework. Financial Markets Minister Mats Odell has nevertheless stated that he expects all banks to participate eventually, and attributes all statements to the contrary to private individuals rather than the institutions themselves.

The political and media response to SHB’s decision has been similarly mixed. Prime Minister Fredrik Reinfeldt has stated that participation should be purely voluntary, while both Finance Minister Anders Borg and Shadow Finance Minister Thomas Östros stress that all major banks should participate. Given that the program would lower the risk of the Swedish financial sector in general, Borg argues that anything less than full participation would allow some banks a free ride at the expense of others.

Beyond SHB, many banks have been lukewarm to the proposal, owing to the vagueness of the legislative text. The financial terms of the guarantee and credit fees, as well as the executive compensation restrictions, are as yet undefined and will be determined by the Swedish National Debt Office, which will administer the plan. The lack of interest has been reflected in the fact that the interbank loan rate reportedly fell less than expected following news of the bailout package.

Conversely, the government would formally have leeway to drop the executive pay restrictions entirely when negotiating with banks. Depending on the terms offered as well as the bargaining positions of the banks, executive pay considerations may be taken off the negotiating table. Time will tell, as negotiations will presumably begin immediately after the new legislation comes into force on Oct. 28. Top Swedish banking talent have in the past jumped ship as a result of pay cuts, meaning that the terms of the bailout package, as well as the final roster of participating institutions, could potentially impact the banks’ leadership structures.