The US treasury has ordered seven companies that received multi-billion dollar bailout packages at the height of the US financial crisis to halve their overall compensation payments to senior executives.
Kenneth Feinberg, the US treasury official who is leading the pay review, said on Thursday that basic salaries for the top 25 executives will be cut 90 per cent, starting next month.
The cuts will affect senior executives at Bank of America, American International Group (AIG), Citigroup, General Motors, GMAC, Chrysler and Chrysler Financial.
The US government had not sought to make executives return compensation that they had already received this year.
However, the reduced salary levels will form the backbone for decisions on salaries paid in 2010, Feinberg said.
Feinberg was given the task of leading the pay review after the US congress amended the bailout law to require that compensation paid to executives at companies getting government funding be reduced.
Obama welcomes move
Barack Obama, the US president, said that the treasury's decision was correct and congress should pass legislation to grant shareholders a say on how much compensation executives should receive.
"It does offend our values when executives of big financial firms that are struggling, pay themselves huge bonuses even as they rely on extraordinary assistance to stay afloat"
"It does offend our values when executives of big financial firms that are struggling, pay themselves huge bonuses even as they rely on extraordinary assistance to stay afloat," Obama said.
Timothy Geithner, the US treasury secretary, also welcomed Feinberg's announcement.
"We gave him the difficult task of cutting excessive pay, striking a balance between compensation and risk-taking and keeping strong management teams in place to help the economies recover - all in the public interest," Geithner said.
Feinberg's announcement comes after criticism of plans by some firms, such as Goldman Sachs and Morgan Stanley, to pay massive bonuses as the US recession continues to bite.
Goldman Sachs, which has paid back its bailout money, has said that it has put aside $16.7bn for compensation so far this year - equal to about $500,000 per employee.
But companies that have repaid the bailout money that was allotted to them at the height of the financial crisis last year - such as Goldman Sachs and JPMorgan Chase - will not be affected by Feinberg's plan.
As the plan was announced, the US central bank unveiled a proposal to monitor the pay schemes of US banks in an attempt to limit the scope for employees to take big gambles in return for bonus payments.
The Federal Reserve's proposals would cover thousands of banks, including those that did not receive money from the US government's $700bn economic stimulus plan.
Under the Fed proposal, the US's 28 biggest banks would develop their own plans
to make sure compensation does not spur undue risk-taking.
If the central bank approves, the plan would be adopted and bank supervisors would monitor compliance.
At smaller banks, where compensation is typically less, Federal Reserve supervisors will conduct pay reviews.