Pay czar Feinberg shocks Wall St with salary cuts

President Obama's pay czar Kenneth Feinberg is set to order that compensation for 175 employees at seven US firms that received bailout funds is cut by half. The cash portion of salaries for the 25 highest paid bankers will be cut by 90 per cent; others will see their bonuses tied to long-term performance.

Some of Feinberg's toughest measures are reserved for employees of AIG's financial products unit, the arm widely held responsible for billions in losses and the firm's near-collapse.

AIG employee compensation will be limited to $200,000. The vast majority of salaries at firms under Feinberg's special master of compensation purview, including Bank of America, Citigroup, General Motors, will come in at under $500,000.

Any executive seeking more than $25,000 in special perks - like country club memberships, private planes, limousines or company cars - will have to apply to the government for permission.

The latest measure come days after Feinberg ordered Bank of America CEO Ken Lewis to receive no 2009 salary, while Citigroup will not have to pay its top trader close to $100m since it agreed to sell the unit he works for.

The draconian measures come as some Wall Street banks prepare to hand out near-record bonuses at the end of the year, triggering a wave of populist outrage.

In Britain, where bonus payouts in the financial sector are expected to rise to £6bn this year, according to a report from the Centre for Economics and Business Research, City Minister Lord (Paul) Myners called yesterday for bank pay to be regulated more closely than already planned.

"The banking industry has a social obligation to the taxpayers of this country," said Myners. "We are willing to take action if necessary, but I would like to see the sector address this situation itself."

Chancellor Alistair Darling also condemned the banks - in particular Goldman Sachs - for preparing to hand out massive bonuses despite billions spent by the Government supporting them.

While US politicians are reluctant to reform banking by separating retail from investment operations, Feinberg will still demand a series of corporate governance changes, including splitting the positions of chairman and CEO and requiring boards of directors to create a committee to assess risk.

Feinberg's pay restrictions speak clearly to the humbling of institutions that once illustrated the might of the US corporate world. An executive at one of the companies under the pay czar's control said the terms came as a shock. The compensation restrictions "were clearly much worse than what had been anticipated".

"They have taken a very strong position," Gerald Rosenfeld, deputy chairman of Rothschild told Bloomberg. "There are going to be a lot of active poaching attempts, most likely by European banks. This certainly is going to be a problem for Citigroup and Bank of America."

In the UK, Barclays, HSBC, Lloyds, the Royal Bank of Scotland and Standard Chartered have said they will comply with measures such as bonus clawbacks and greater transparency about the salaries of their top earners.

But Feinberg has no remit to restrict pay at firms like Goldman Sachs, JP Morgan Chase and Morgan Stanley that received billions in loans but have now returned the funds. For those institutions moral censure is the politician's prescription.

"What happened with Goldman Sachs last week sends the wrong signals," Darling said yesterday. "I've spoken to all our banks and none of them would be standing here today if the taxpayer hadn't put their hand into their pocket."

Lord Griffiths, vice-chairman of Goldman Sachs International, retorted that huge salaries were a price worth paying. "We have to accept that inequality is a way of achieving greater opportunity and prosperity for all," he said during a debate on ethics at St Paul's Cathedral. ·