In a striking display of government authority, pay czar Kenneth Feinberg is taking a knife to the pay packages of certain companies receiving U.S. funds. According to media reports, the government will slash the compensation of the 25 highest-paid employees at the seven firms receiving the most aid.

The biggest drop will be to salaries, which will plummet 90% on average for these firms, while total compensation will fall by an average of about 50%. (Those numbers could be skewed by agreements reached with executives like outgoing Bank of America CEO Kenneth D. Lewis, who is forgoing all of his 2009 salary.) The reports also say that no top executive at AIG’s financial products unit, which bore the blame of the insurer’s near-collapse last year, will make more than $200,000. And any perks packages that total more than $25,000 at these firms will have to be approved by Feinberg.

While the numbers may be most startling, what’s also notable in Feinberg’s moves are the corporate governance changes reportedly being demanded at these troubled firms. The positions of Chairman and CEO will be split, boards will have to create risk assessment committees, and “staggered” director elections will be eliminated. In boards that have such elections, not every director comes up for vote each year, making it harder for shareholders to make their voice heard on the performance of individual directors.

While the pay cuts are sure to get the most attention, especially following months of public furor over Wall Street bonuses, the governance moves matter, too. Far too little focus has been placed on directors’ role in the crisis, and what their oversight might have done to prevent it. Names like Andrew Hall, Citigroup’s $100 million man, may have become overnight fodder for water cooler chatter, but how many people angry over executive compensation levels can name members of Citigroup’s pay committee?

It’s unclear whether these governance changes will have much impact–several of these bailed out firms already have separate chairman and CEO posts, for instance–but they at least strike at the heart of the matter. It is directors, after all, who have been responsible for setting pay for executives. By slashing pay as deeply as he is, Feinberg is saying, in a sense, that he doesn’t trust boards to make those decisions. Still, perhaps the moves now being put into effect could help shareholders trust them a little more.

Post written by: BusinessWeek – Management IQ