Oct. 21 (Bloomberg) -- Executives at seven bailed-out companies including Citigroup Inc. and Bank of America Corp. will have their pay cut by an average of 50 percent after negotiations with Kenneth R. Feinberg, the U.S. special master on compensation, two people familiar with the matter said.

The cash portion of salaries for the 25 highest-paid employees will be slashed 90 percent, according to a person familiar with the plan who spoke anonymously because the details haven’t been announced. Some cash will be replaced by shares that employees will be restricted from selling immediately, the same person said. An announcement could come this week.

“They have taken a very strong position,” said Gerald Rosenfeld, deputy chairman of Rotshchild Inc. and co-director of New York University’s Business and Law program. “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.”

Feinberg, 63, who was special master of the September 11th Victim Compensation Fund, was named to the Obama administration pay position in June. Executive pay came under scrutiny after companies got billions of dollars in aid last year amid the worst financial crisis since the Great Depression. Public outrage flared in March after New York-based AIG paid $165 million in bonuses to employees of the derivatives unit.

House Financial Services Committee Chairman Barney Frank was “very pleased” with the decisions and said he didn’t think the pay cuts were too deep.

‘Charity Cases’

“It may have the effect of giving them the incentive to pay back the TARP money, which is fine with me,” Frank, a Massachusetts Democrat, said in a phone interview. “I don’t think there will be any charity cases on Wall Street.”

U.S. lawmakers including House Speaker Nancy Pelosi have criticized the bonuses at U.S. companies that accepted aid from the Treasury Department’s Troubled Asset Relief Program. Feinberg is scheduled to appear before Congress Oct. 28 to discuss his proposal, which was reported by The New York Times earlier today.

Perks such as limousine service and use of a company’s aircraft valued at more than $25,000 must be approved by Feinberg, one of the people said. Feinberg’s report will urge AIG executives who have pledged to return their bonuses to honor that commitment, one person familiar with the matter said today.

Employees at American International Group Inc.’s derivatives unit, blamed for the insurer’s near-collapse last year, will be limited to $200,000 in pay, one of the people familiar with the decision said.

7 Companies

In addition to compensation at AIG, Citigroup and Bank of America, Feinberg is overseeing pay for top executives at Chrysler Group LLC, Chrysler Financial Corp., General Motors Co. and GMAC Inc.

On compensation, if the averages were applied, as an example, to Bank of America Chief Financial Officer Joe Price, his total pay would fall to $2 million from $4 million in 2008. James Forese, Citigroup’s co-head of global markets, would have his total pay cut to about $6.5 million, or about half the $12.9 million he got last year.

Citigroup spokesman Steven Cohen declined to comment, as did Scott Silvestri, a spokesman for Bank of America.

Consultants who advise companies on pay issues said Feinberg was being too aggressive.

“The government is acting like the owner they are, and they’re a pretty ticked-off owner,” said Steven Hall, managing director of New York-based compensation consultant Steven Hall & Partners LLC. “The fear is, will this make people throw up their hands and say, ‘I have to leave’?”

Lewis Pay

Bank of America Chief Executive Officer Kenneth Lewis, at Feinberg’s urging, agreed last week to give up his 2009 salary and bonus. Citigroup on Oct. 9 agreed to sell its Phibro LLC energy-trading unit to avoid a potential showdown with Feinberg over a $100 million pay package for Andrew Hall, the unit’s CEO.

Feinberg, in a speech yesterday in Washington, said he is “working daily” with the companies to reach agreement on their pay packages. “The result speaks for itself,” he said when asked about negotiations with New York-based Citigroup over Hall’s pay.

Pelosi said the American people are upset about the federal bailout of the nation’s banks and the bonuses that are being paid to executives as they struggle with unemployment and the cost of living.

‘Very Angry’

“The American people are very angry about it,” Pelosi said in a Bloomberg Television interview today. Bonuses being paid by some of the same institutions that received federal money “certainly” make her angry as well, Pelosi said.

The issue plays into decisions made by Congress, the California Democrat said. “It’s just really not good for our economy, our middle class and our democracy,” she said. Still, she said Congress wouldn’t step in to regulate pay at companies unless there was a “taxpayer implication.”

President Barack Obama has said some resistance to his regulatory agenda stems from resentment about expanding government involvement in the private sector, including bank bailouts. Reports about rising profits, executive salaries and bonuses following on the government rescue, may add to voter dissatisfaction.

GMAC CEO Al Molina last year received a salary of $1.2 million with stock awards and other compensation boosting total compensation to $11.6 million, according to data compiled by Bloomberg.

“We have been working on a proposal that aims at embodying the principles set forth for compensation along with balancing the need to retain critical talent necessary to execute our turnaround,” Gina Proia, a GMAC spokeswoman, said in an e-mail.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net.

Last Updated: October 21, 2009 18:26 EDT