The Treasury Department ignored its own guidelines on executive pay at firms that received taxpayer bailouts. It approved compensation packages of more than $3 million for executives at General Motors, Ally Financial and AIG, according to a watchdog report. (Robert Miller/THE WASHINGTON POST)

The Treasury Department ignored its own guidelines on executive pay at firms that received taxpayer bailouts and last year approved compensation packages of more than $3 million for the senior ranks at General Motors, Ally Financial and American International Group, according to a watchdog report released Monday.

The report from the special inspector general for the Troubled Assets Relief Program said the government’s pay czar signed off on $6.2 million in raises for 18 employees at the three companies. The chief executive of a division of AIG received a $1 million raise, while an executive at GM’s troubled European unit was given a $100,000 raise. In one instance, an employee of Ally’s Residential Capital was awarded a $200,000 pay increase weeks before the subsidiary filed for bankruptcy.

“We expect Treasury to look out for taxpayers who funded the bailout of these companies by holding the line on excessive pay,” said Christy Romero, special inspector general for TARP. “Treasury cannot look out for taxpayers’ interests if it continues to rely to a great extent on the pay proposed by companies that have historically pushed back on pay limits.”

The inspector general’s report accuses Patricia Geoghegan, Treasury’s acting special master for compensation, of sidestepping protocol that kept pay packages at the midpoint of comparable firms. Geoghegan, however, said the audit is riddled with inaccuracies and mischaracterizes the data provided to the inspector general.

She said her office has “limited excessive compensation while at the same time keeping compensation at levels that enable the recipients to remain competitive and repay TARP assistance.”

Compensation at bailed-out firms became a lightning rod during the financial crisis. A public outcry erupted in 2009, when AIG paid $168 million in retention bonuses to employees at Financial Products, the unit whose complex deals had crippled the insurance giant. The nation’s biggest banks, including Morgan Stanley and JPMorgan Chase, also came under fire for doling out six-figure salaries and bonuses from taxpayer funds.

Treasury’s compensation chief at the time, Kenneth Feinberg, scolded companies for what he called “ill-advised” payouts to executives, and vowed to curb lavish pay. Nonetheless, Treasury allowed seven firms to bypass pay restrictions from 2009 to 2011, according to a report issued by the special inspector general in January 2012.

Monday’s report evaluates Treasury’s actions since then, with stinging allegations of lax oversight and supervision. Romero said Geoghegan deferred to the pay proposals provided by the companies, approving raises above pay limits and failing to link compensation to performance.

“Treasury made no meaningful reform to its processes,” the special inspector said in the latest report. “Lacking criteria and an effective decision-making process, Treasury risks continuing to award executives of bailed-out companies excessive cash compensation without good cause.”

According to the report, Treasury approved total pay packages exceeding the 50th percentile by more than $37 million for nearly two-thirds of the top 25 employees of AIG, GM and Ally. The three firms combined received nearly $250 billion in TARP funds. Only AIG has fully repaid its $182 billion bailout.

Feinberg, who resigned in 2010, limited executives’ cash salaries to $500,000 and shifted compensation toward stock to reduce excessive risk-taking, allowing for exemptions in special circumstances.

Romero made a point of noting that 65 of the 69 senior employees at AIG, Ally and GM were granted cash salaries of $450,000, while in 2011 the median household income of the taxpayers who funded the bailout was about $50,000.

“This is armchair quarter-backing by SIGTARP,” said Feinberg, who is now representing Penn State in resolving claims arising from the school’s sexual abuse scandal. “Geoghegan obviously was interpreting the regulations and rendering discretionary decisions involving just a few officials at very few companies.”

In the past year, Treasury has made significant progress in winding down its financial rescue program. The agency sold its final shares in AIG in December, bringing the total profit on the investment in the company to nearly $23 billion. Treasury is also in the process of selling off its remaining shares of GM. Ally owes the government about $13 billion, Treasury told Congress on Jan. 2.