American International Group, the US insurer that was recently bailed out by the government, agreed to freeze any payments that had been due to Martin Sullivan, its former British-born chief executive, whose contract calls for $19 million plus other benefits.

AIG, which has received $122.8 billion of government loans to stave off bankruptcy, has also agreed with Andrew Cuomo, the New York attorney general, to freeze the $600 million deferred compensation and bonus pot of its financial products unit. Joseph Cassano, the former head of that unit, is thought to have a share of about $69 million in the pot.

Mr Cuomo, who was instrumental in negotiating the freeze, said: "The American taxpayer is now supporting AIG, making the preservation of these taxpayer funds a vital obligation and priority responsibility [of the company].”

He added that the financial products unit was "largely responsible for AIG’s collapse".

In a letter to Edward Liddy, AIG’s present chief executive, Mr Cuomo said: "To be clear, it is my position that until the taxpayers are repaid with interest the more than $120 billion that has been used in the rescue financing for AIG, no funds should be paid out of these pools to any executives."

"As AIG recovers using taxpayer money, these pools should not be used to reward executives ahead of taxpayers."

"I believe that rebuilding trust in our capital markets requires executive compensation packages that are rational, fair and based on bona fide performance measures that are disclosed to the public," Mr Cuomo continued.

"We must ensure that executive pay package structures no longer create improper incentives for executives to over-leverage their companies and manipulate the books for their own short-term financial benefit."

Last week, AIG agreed not to make a payment – thought to be about $10 million – to Steven Bensigner, AIG’s departing chief financial officer.

AIG is in the process of slimming down its operations dramatically as it seeks to repay the loan. It plans to dispose of at least ten businesses, which are thought to include its life insurance and pension operations in America,

Europe, Latin America and Japan. The remaining business will focus on property and casualty insurance, its foreign general insurance operations and its foreign life insurance.

AIG’s shares fell by $0.01, or 0.45 per cent, to $2.20 in mid-day New York trading.