Meltdown 101: How will executive pay curbs work?

Seven companies on government life support - bailout recipients like General Motors and Citigroup - face a deadline Thursday to propose compensation packages for their highest-paid employees, which will have to get the thumbs-up from the Obama administration's "pay czar."

It's the first time a federal official will have veto power over the how much private-sector executives are compensated. Some fear this new power encroaches on the free market, but Congress decided the government should have a say when it comes to the companies relying most heavily on taxpayer money.

How will the pay restrictions work? Here are some questions and answers.

Q: Who's running the show?

A: The administration's pay czar - technically called the Special Master for TARP Executive Compensation - is Kenneth Feinberg, 64, a high-profile lawyer and mediator. Feinberg is best known for running the government's fund for families of 9/11 victims.

Q: How did that go?

A: That job got off to a bumpy start. Initially, some 9/11 victims' relatives accused Feinberg of being arrogant and distant.

As the program continued, Feinberg won over many of his critics and garnered praise as a pragmatic mediator. He personally heard appeals from families who felt the original payment offered was too small. He earned the respect of some families simply by sitting in a room and listening for hours as they described their lost loved ones.

Q: What has Feinberg done so far?

A: Feinberg has been consulting with the seven companies that have received "exceptional assistance" from the government. They are: American International Group Inc., Bank of America Corp., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial.

Q: So what happens Thursday?

A: Thursday is the last day the companies can submit proposed pay packages for the 25 highest earners at each one. At least one company, General Motors, said Tuesday it already had submitted its plan.

Q: What's next?

A: Feinberg has 60 days to review the proposals, then accept or reject them. He is expected to meet and negotiate with the companies during this period. He also will approve broader compensation formulas that will apply to the 75 next-highest-paid workers at each company.

Q: Why can't he just set a very low cap on all the executives' salaries, to protect taxpayer money?

A: The companies argue that if they can't pay competitive wages to their best employees, they will lose them to other employers.

A bank's best-paid employees are compensated based on the revenue they produce, and many make millions for their companies. If banks lose their best people, that could put a major dent in their profits, making it harder for them to recover and repay the government's money.

Q: Why are they so worried about losing employees to competitors? Aren't there thousands of bankers out there already looking for work?

A: It's true that the financial services industry has seen massive layoffs. But an employee valuable enough to rank in the top 25 probably makes a lot of money for the company. That's an employee any bank would be happy to have - including healthier competitors and foreign banks not subject to the government rules.

Q: Then why not just let the companies set their own compensation packages?

A: Outsize bonuses at AIG and other firms with government money have sparked public and congressional outrage. Feinberg has to walk a careful line - being tough enough to satisfy Congress and the public but not so tough that he undermines the companies' competitiveness.

House Financial Services Committee chairman Barney Frank, D-Mass., said "the public has a right to be angry" about the huge pay packages at companies that depend on taxpayer dollars, and that it is a "legitimate part of the function of government to respond to that anger."

Q: So what is Congress's role?

A: Feinberg's was appointed to carry out rules Congress passed as part of the $787 billion stimulus package. The House passed legislation last month that would apply the same pay standards to all financial businesses, which Frank said would address the concern about burdening only the most troubled companies.

Q: Are there any limits to Feinberg's power over the pay packages?

A: He can't tear up pay contracts or retroactively claw back compensation already paid out. But he has a very strong voice in how much elite employees will make in 2009.

Q: What sorts of things might he insist on?

A: Compensation experts expect Feinberg to push for changes that would align pay packages with executives' performance. These could include disbursing their pay over years so that the long-term results of their decisions become clear, allowing banks to revoke some of that pay if the bankers' bets go bad, or having them pay more compensation in restricted stock - which can rise and fall in value based on a company's performance - and less in cash.

Q: How much will Feinberg make to tell others how much they can earn?

A: As with his work on the 9/11 fund, Feinberg is serving as pay czar pro bono.

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Associated Press Writers Stevenson Jacobs and Devlin Barrett contributed to this report.