By Brai Odion-Esene

WASHINGTON (MNI) - The Special Master for TARP Thursday said the initial compensation packages submitted by the seven firms that received significant government aid had not been in the public interest, which is why he chose to switch the emphasis from cash to long-term stocks.

"This assignment that the law conferred on me was very, very difficult," Kenneth Feinberg told reporters before his rulings on executive compensation at the firms where made public.

He said he had to determine compensation packages designed to get money back to the tax payer, while at the same time ensuring the packages avoid excessive risk, are based on prospective performance, and ensure officials remain at the seven firms.

"What I tried to do, to the best of my ability was balance those considerations," he said. "I am extremely sensitive to the public outrage about this, very sensitive."

The numbers in the compensation packages submitted by the seven firms for review, Feinberg said, were found to be "inconsistent with the public interest."

"They were both too high and there was not the right degree of mix

Special Master's office found it necessary to adjust not only the dollars ... but the mix of cash to performance-based stocks."

Also, as reported before, the Special Master retains the right to "clawback" later on excessive amounts that have been paid "in light of material misrepresentations or changed circumstances," Feinberg said.

His priority was to first of all is to see money returned by these firms to the U.S. Treasury, he said, followed by working to change compensation practices within those companies. At no point did the idea of punishment or "vindictiveness" enter the decision making process.

Gone are guaranteed cash bonuses based on short-term performance, instead Feinberg mandates that executives receive company stock that must be held for the long-term. And in the case of the significant bonuses guaranteed to Citi's Phibro unit, the ruling stated that may be paid until the sale to Occidental is complete.

No company was treated with a heavier hand than others, he stressed, saying the same methodology was used for all. Vindictiveness.

"The White House has played absolutely no role whatsoever in my independence or in my ability to make these determinations, there's been zero intervention ... in the entire process."

One goal was to "substantially reduce the amount of guaranteed salary, Feinberg said, and retaining talent by the giving the executives a stake in the future financial success of the company.

This is achieved, he continued, by providing the officials with "salarized" stock that must be held of as long as four years before it can be cashed. Even then, the stock may only be sold in one-third installments beginning in 2011 -- or, if earlier, when TARP is repaid.

"The value of that stock will depend on the overall financial success of the company and that will help determine what these officials are going to get," Feinberg said.

Feinberg also cut average cash compensation down by more than 90%, limited approved cash salary to $500,000 for more than 90% of relevant employees, and brought average total compensation down by more than 50%.

So for example, employees at AIG's financial products unit will only receive cash base salaries through the balance of 2009. For Citigroup, the Special Master states that, "Where applicable, compensation should reflect the employee's role, if any, with respect to the change in Citigroup's financial health during 2008."

Although, the 90% cuts in salary are limited to November and December 2009, it will act as a base from which to begin consideration of salary in January of 2010, Feinberg said. "So do not underestimate the importance of these salary determinations."

However, he noted that exceptions where necessary to retain talent and protect taxpayer interests. For example, base salaries greater than $1 million were approved in just three cases: for the new CEO of AIG, as previously announced, and for two employees of Chrysler Financial, which will wind down its operations in the near term and cannot grant employees long-term incentives.

These seven firms are also required to immediately reform practices "not aligned with shareholder interests." This includes additional limitations on golden parachutes, and freezing supplemental executive retirement plans.

Thursday's rulings by the Special Master's are aimed at significantly altering the way senior executive officers and next 20 most highly compensated employees of each of the seven recipients of "exceptional" assistance under the TARP; AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial, are paid.

They have the option to appeal Feinberg's ruling to the Special Master within 30 days.

He stressed that his aim is not to micromanage these firms and that his rulings are limited to just the seven mentioned above. Still, Feinberg voiced his hope that other firms will voluntary apply his rulings to their own executive compensation packages.

"I hope that there is some value in what we are doing here," he said. "What will happen and the impact of what I am doing beyond these findings remains to be seen."

** Market News International Washington Bureau: 202-371-2121 **