The ruling, imposed by White House "pay czar" Kenneth Feinberg, will impact 75 out of the 100 highest-paid employees at four companies - Citigroup (C, Fortune 500), AIG (AIG, Fortune 500), automaker General Motors as well as GMAC.
Except in a just a handful of cases, no employee will receive base compensation of more than $500,000 this year in terms of cash and stock.
Bank of America dodges a bullet
Feinberg's edict, which officially takes effect Friday, is part of a broader effort by the administration to protect American taxpayers' massive investment in these companies by trying compensation to the company's performance.
"We want to minimize these runaway perks and other compensation practices," Feinberg said during a briefing in Washington with the media.
This marks the second step in what is expected to be a series of reviews looking at employee pay at the country's biggest bailout firms.
Will the US tax bank bonuses?
It In October, the pay czar cut total compensation for the top 25 executives at seven rescued firms by about half, scaling back salaries by 90% and transferring payments into performance-based, longer-term stock options.
That review affected 136 top executives at seven companies including Chrysler and its financing arm Chrysler Financial, all of whom received more than one round of bailout funds.
Those two outfits are exempt from this round because Feinberg was only looking at employees making more than $500,000.