Oct. 23 (Bloomberg) -- The Obama administration’s moves to rein in executive pay sparked criticism on Wall Street, as lenders such as Bank of America Corp. said the measures may hurt the very companies the U.S. is intent on saving.

“People want to work here but they want to be paid fairly,” said Scott Silvestri, a spokesman for Bank of America, the recipient of $45 billion of bailout funds. Rivals are “identifying our top performers and using pay concerns to recruit them away for fair-market compensation,” he said.

Kenneth Feinberg, the Treasury Department’s special master on compensation, said yesterday he had slashed total pay for the executives he scrutinized at firms including Bank of America, Citigroup Inc. and American International Group Inc. by 50 percent on average. The Federal Reserve, moving in tandem, announced guidelines aimed at making bank compensation more tied to risk management.

Together, the measures are meant to address what the Obama administration calls unchecked risk-taking fueled by excessive pay. The credit-market meltdown that followed led to a financial crisis that caused more than $1.6 trillion in losses and writedowns worldwide and 7.2 million U.S. job cuts.

“I believe we struck that proper balance between public dissatisfaction with principled decisions on compensation that will keep people at their chairs, attract talent and let the company prosper in order to pay the taxpayer,” Feinberg said today during a speech in Washington. “That’s the real goal.”

Bailed-out companies brought yesterday’s crackdown on themselves, said Stuart Grant, an investor lawyer and managing director of Grant & Eisenhofer PA in Wilmington, Delaware.

‘Own Damn Fault’

“What should have happened is the boards of directors at these companies should have been setting compensation in a way that was appropriate in size and incentive and in risk,” Grant said. “It’s horrible, but it was inevitable and it was their own damn fault.”

The financial industry remains lucrative for top managers. Even after the Feinberg-mandated pay cuts, 66 of the executives at the seven companies whose compensation he reviewed will have total long-term compensation of at least $1 million. Bank of America, based in Charlotte, North Carolina, will pay its top employees an average of $6.04 million this year.

Feinberg, 63, analyzed pay packages for 136 employees who got a combined $340 million, or an average of $2.5 million each. He had been authorized to review 175 people, the 25 highest-paid employees at each company. The gap is because some executives, including 13 at Bank of America and 12 at AIG, left their jobs before Feinberg finished his work.

‘Obscene’ Pay Packages

“For folks on Wall Street to be giving out outrageous compensation packages, in the middle of a recession, as they are being propped up by taxpayer dollars is obscene,” Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said in a statement. “Feinberg should keep the pressure on.”

At AIG, the New York-based insurer that took a federal bailout valued at $182 billion, Chief Executive Officer Robert Benmosche sought to assure employees they won’t be forced by the Obama administration to return pay they’ve already collected.

“Mr. Feinberg does not have jurisdiction over the vast majority of AIG employees,” Benmosche said in a memo to AIG workers this week. Feinberg had already approved Benmosche’s own $10.5 million compensation package.

AIG paid $165 million in bonuses to employees of the derivatives unit blamed for forcing the insurer to require a U.S. rescue. Lawmakers lashed out at Goldman Sachs Group Inc. in July when the New York-based bank set aside a record $11.4 billion for pay and benefits in the first half of this year.

Practices Changing

Some banks are already changing pay practices. Goldman Sachs, which set a Wall Street pay record in 2007, published a three-page set of compensation principles in May that include paying a higher percentage of an employee’s bonus in stock as the pay level increases and deferring the payout of the stock over several years. The company said it doesn’t believe in granting employees guaranteed bonuses for more than one year.

CEO Lloyd Blankfein, who was awarded a record-setting $68.5 million in salary and bonus for 2007, said in an April speech that the industry’s compensation decisions before the crisis “look greedy and self-serving in hindsight.” A Goldman Sachs spokesman didn’t reply to a request for comment yesterday.

Credit Suisse Group AG this week introduced two mechanisms that tie the bonuses of managing directors to share price performance over four years and returns on equity over three years. One plan adjusts down if the employee’s business unit losses money. The firm, based in Zurich, has also shut down business lines where risk-adjusted returns were too low.

Aligning Risks, Rewards

“We have closed down some businesses that had very good profit potential but the returns weren’t there given the risks, like commercial mortgage-backed securities,” Paul Calello, CEO of the firm’s investment banking unit and a member of the executive board, said in an interview yesterday. Compensation “needs to be aligned with the strategy of the firm,” he said.

The Credit Suisse model may prove a template for rival banks, said Mark Poerio, a partner focusing on compensation at Paul, Hastings, Janofsky & Walker LLP in Washington. “Hopefully Wall Street will follow that lead,” he said.

Feinberg’s reductions in the cash portion of executives’ salaries apply to compensation earned by employees for November and December and will be revisited at the start of 2010, Feinberg said. He said he isn’t seeking to claw back salary or bonuses already paid this year. The reductions, while only covering two months, are important because they are the starting point for negotiations on next year’s pay.

The pay cuts are “sheer stupidity,” said Kenneth Langone, co-founder of Home Depot Inc. and a former New York Stock Exchange board member. “The taxpayers have an enormous financial risk in these companies, and very simply stated, I want the best person. If I needed neurosurgery, I would want the finest doctor I could get, no matter what I had to pay for it.”

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Michael Moore in New York at mmoore55@bloomberg.net.

Last Updated: October 23, 2009 15:25 EDT