American International Group Inc. (AIG) is facing pressure from the U.S. Treasury Department to reduce $198 million in scheduled retention payments pledged to employees of its trading business unit, AIG Financial Products.

Kenneth Feinberg, the Treasury's special master for executive compensation and notable pay czar, is reviewing bonus payment deals cut before last year’s Troubled Asset Relief Program (TARP) rescue plan went into effect. Those deals set off public criticism of the carrier and its policies, in spite of the fact that they are considered pre-existing contracts. And it posed problems for the federal government, unable to wrangle free of the legal implications involved in such transactions.

When, amidst a public outcry, AIG paid $165 million in bonuses to its trading unit in March, it promised to try to recover much of the money as possible.  Since then, according to the Washington Post, the company has recovered only $19 million of the $45 million it asked the recipients to repay, according to an audit of its compensation program and the government’s oversight.

Now, a report from the special inspector general for the government's $700 billion financial rescue plan says the Obama administration's pay czar has informed AIG management that the retention payments for AIG's financial products division should be reduced, notes the Wall Street Journal.

Feinberg also is reportedly threatening to reduce executive compensation packages under federal control, according to a source.  Federal requirements allow Feinberg to approve or reject cash pay that exceeds $500,000 for top executives. What that will mean for AIG’s new chief, Robert Benmosche, is unclear. Benmosche received a compensation package that includes an initial payout of $3 million and about $4 million in stock must be retained for five years, as well as annual bonuses based on performance.

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