The US Treasury and the Federal Reserve today launched a pincer attack on executive pay at the companies that led the world economy to the brink of collapse.

The Federal Reserve said it planned to review compensation policies at 28 large banks and at several regional, community and other banking organisations to ensure incentive compensation practices do not encourage “excessive risk taking”.

Rejecting pay caps and shunning a “one size fits all” approach, the Fed said that “a single, formulaic approach to making employee incentive compensation arrangements appropriately risk-sensitive is likely to provide at least some employees with incentives to take excessive risks.”

Instead, Ben Bernanke, the Federal Reserve chairman, said the central bank was working on a case by case basis “to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system."

The policies would become part of the supervisory process, the Fed said, noting large, complex organisations would face special "horizontal" reviews that compare one bank's pay practices with those of its peers.

The Fed’s actions coincided with measures unveiled by Mr Obama’s pay czar, Kenneth Feinberg, who was appointed by the Treasury to look into the compensation issues of the top 175 earners at seven companies receiving federal bailout money.

"I am extremely sensitive to the public outrage about this," he said, adding that he hoped the review would help strike a better balance between compensation.

At Citigroup, Bank of America, American International Group (AIG), General Motors, Chrysler, as well as the financing arms of the two car companies, the cash portion of salaries of the 25-highest-paid employees will be slashed by 90 per cent, according to early reports.

Cash salaries are expected to be kept below $500,000. Some cash will be replaced by shares that cannot be sold for four years. The result is an average remuneration reduction of 50 per cent.

It is understood that the largest single compensation package will be less than $10 million, much less than standard payouts for star players on Wall Street, and is destined for a Bank of America employee. AT AIG, it is expected that no employee at the financial products unit will receive compensation of more than $200,000.

The pay restrictions for all seven companies will require any executive seeking more than $25,000 in special benefits, such as country club memberships, private planes and company cars, to get permission from the government.

The average pay cut may have been skewed by Ken Lewis, the outgoing chief executive of Bank of America, who has already agreed to take no salary for 2009. Even so, the terms came as a shock to some, with one executive telling the Wall Street Journal that the compensation restrictions "were clearly much worse than what had been anticipated."

Mr Feinberg told reporters that without exception, all of the pay plans that the firms submitted were inconsistent with the public's interest. He called for executives to now receive most of their pay in company stock that may only be sold over the long-run.

President Barack Obama praised the Treasury’s moves. “It does offend our values when executives of big financial firms that are struggling pay themselves huge bonuses even as they rely on extraordinary assistance to stay afloat,” he said.

The moves will be closely watched in the UK, as ministers grapple with how to limit the excesses of bonus culture at British banks. Lord Myners, the City Minister, has warned bankers to expect close scrutiny on "exorbitant" rewards that are being made on the back of the billions of state aid.

The Feinberg reforms triggered an immediate and passionate debate about government interference into private industry, the likelihood of other companies following suit and the possibility of a brain drain from US firms.

“Politically it’s a slam dunk for the administration,” Dan Schnur, who was communications director of Republican Senator John McCain’s 2000 presidential campaign, told Bloomberg. “As the administration takes on the CEOs of these companies this forcefully, even if it’s a relatively limited number of companies, the voters are going to react very positively.”

But Steven Hall managing director of New York-based compensation consultant Steven Hall & Partners, had a different take. “The fear is, will this make people throw up their hands and say, ‘I have to leave’?”

In a separate move, the influential congressional Financial Services Committee approved the creation of a controversial Consumer Financial Protection Agency.

The new agency would strip consumer-protection rule writing and enforcement responsibility away from the Federal Reserve and other bank regulators and would have rule-writing and enforcement authority over banks and other financial institutions, such as "pay-day lenders" that have escaped regulation

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