The U.S. pay czar on Friday expanded a crackdown on pay packages at four companies rescued with taxpayer money, limiting most cash salaries at $500,000 for a second tier of top earners.

The Treasury Department's Kenneth Feinberg issued the new limits amid outcries from some companies on a government lifeline that they cannot retain or attract key employees, sending the firms racing for a bailout exit.

He set the compensation structures for the 26th through 100th highest-paid employees at four firms: Citigroup Inc, American International Group, General Motors Co, and GMAC.

Chrysler and Chrysler Financial were exempted during this round of rulings because total pay for their second-tier executives is already under $500,000.

Feinberg, a Washington lawyer appointed by President Barack Obama in June after public anger exploded over high pay at bailout firms, said he granted less than a dozen special exemptions from the cash salary cap.

In a very few cases, we did recognize there was an individual who, based on company input, was deemed to be truly essential, he told reporters.

Those exempted from the new pay caps included several at insurer AIG. The exempted executives were not identified and generally were allowed cash pay up to $950,000, although one was granted $1.5 million, Feinberg said.

The pay czar's control has caused significant friction with AIG, where top executives, including new chief executive Robert Benmosche, have reportedly considered quitting because of the pay constraints. AIG has received pledges of up to $180 billion in taxpayer aid.

The pay restrictions also have prompted Citi to race to repay its $45 billion in bailout funds. The bank remains locked in negotiations with the government over repayment terms.

Feinberg, in his latest rulings, also targeted bonus pay. He insisted that incentive pay be limited to a fixed pool of funds to be negotiated with Feinberg, which would require companies to carefully choose who to reward.

There cannot be runaway bonuses, Feinberg said. All incentive pay can be clawed back if results prove illusory.

When asked by reporters about GM, which is scrambling to find a new chief executive who can retool the giant automaker, Feinberg indicated the firm may get a break. He said he was willing to take a fresh look at proposed pay for GM's new CEO, adding it was vital that GM, majority owned by the government, be competitive.

CALMING THE PUBLIC, PRESERVING TALENT

Feinberg earlier this year slashed the pay of the top 25 employees at the same companies, gaining cheers from shareholder activists but sending fears through bailed-out firms trying to hang on to key workers.

Executive pay at all big banks remains a sensitive issue.

The United Kingdom this week slapped a 50 percent tax on bank bonuses and France is considering a similar move. On Thursday, Goldman Sachs -- which already repaid its bailout funds -- announced its top executives will not receive cash bonuses for 2009.

Feinberg lauded Goldman's compensation changes, which also mandated that managers receive all discretionary pay in stock that must be held for five years and is subject to a clawback provision.

That is precisely the type of impact that we at Treasury and the administration are hoping to have, he said.

Feinberg's latest pay caps were met with some skepticism.

Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, said setting an arbitrary pay limit is ineffective.

Either people will leave or there will be people who evade it and find clever ways around it, or people will move up to the cap inappropriately, Elson said.

Feinberg's pay cap applies only to the final weeks of 2009 and he will not claw back money already paid. The limits will affect the large bonuses typically paid at the end of the year. Also, the rulings will be the baseline for 2010 compensation.

The new plan also mandated that a majority of total compensation will not be released to an executive for three years. In most cases, at least 50 percent of compensation must be long-term stock awards, according to Feinberg.

Further, overall cash is limited in most cases to 45 percent of the total and all other pay must be in company stock.

(Additional reporting by David Lawder; Editing by Neil Stempleman)

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