Congress' mandate to Kenneth Feinberg, the so-called pay czar (pictured), was simple: Set (read reduce) the compensation of executives at the seven companies that still owe the U.S. government substantial sums under the Troubled Asset Relief Program (American International Group Inc., Citigroup Inc., General Motors Co., GMAC Inc., Bank of America Corp., Chrysler Group LLC and Chrysler Financial Services Americas LLC).

Feinberg has yet to issue his first compensation determination, but with the power of Congress and public opinion behind him, he has already changed the executive compensation landscape by forcing the sale of a business and the renegotiation of existing contracts. While those actions almost certainly will be popular with the general public, they put politics ahead of sound business analysis and judgment.

This is not to criticize or blame Feinberg. Given the terms of his mandate, he realistically has done only what he was appointed to do. After all, he is a political appointee who has seen the kind of intemperate statements many congressional representatives have made about excessive executive compensation during 2009.

Congress certainly signaled its intentions when it required Feinberg to provide that a portion of the compensation of these executives be paid in stock (which itself may be so restricted that it may not be monetized for years) and limited bonuses to one-third of salary. These restrictions virtually compelled Feinberg to reduce the compensation of the executives under his control. Still, his continued intrusion into corporate decision making is troubling.

The most telling example of Feinberg's use of his "shadow" authority began this summer when he was faced with a compensation package for Andrew Hall, the lead trader at Phibro LLC, then a Citigroup unit, that could have exceeded $100 million in 2009. Public statements indicate that the compensation was nearly entirely performance-based. Unsurprisingly, the package was unacceptable to Feinberg, who so advised Citigroup. Fearing a public relations disaster if it paid the compensation, Citigroup sold the unit to Occidental Petroleum Corp.

While one can argue that, morally, $100 million is too much for anyone to earn, there is no question that Hall was legally entitled to this compensation. Apparently, there also was no question that Phibro had been a significant profit center for Citigroup for years, largely attributable to his efforts. A rational, dispassionate business analysis could well have concluded that the better action for shareholders (who include the government) would have been to retain Phibro, particularly since the sale almost certainly was not at fair value, inasmuch as the buyer undoubtedly knew of Citigroup's predicament.

Feinberg's other well-publicized actions to date have centered on trying to persuade executives at AIG and Bank of America to voluntarily agree to salary reductions and/or return bonuses already paid them. Feinberg has stated that he believes the enabling legislation gives him the right to "claw back" already-earned compensation if he considers that appropriate. As evidenced by the haste with which companies repaid TARP loans when the potential restrictions tied to them became known, the marketplace's view is that reducing compensation to levels easily exceeded by others will cause talented executives to seek employment elsewhere. This could make it easy for private and foreign companies to hire executives, substantially damaging businesses subject to the legislation.

The means already exist if Feinberg and Congress wish to amend compensation programs in ways that could be beneficial to the companies affected. The answer is to couple a reasonable salary and cash bonus with a stock-based incentive plan that provides the potential for significant awards if performance is maintained for a period of four to five years. Such a long-term incentive plan directly aligns the interest of the executives and shareholders so that if one prospers, so does the other.

The argument against such plans is that they provide executives with too much incentive to maximize short-term gains to inflate stock prices and thus their gain. This criticism can be blunted simply by making the incentive payable only for true long-term gains. If a further safeguard against short-term thinking is wanted, a meaningful but not punitive portion of the gain could be held back for a future period of two to three years and be subject to additional performance criteria before being paid. The quid pro quo for such restrictions should be that the gains are uncapped and Congress promise not to impose an arbitrary cap on compensation.

Arthur F. Woodard is chairman of the employee benefits group of the law firm Kaye Scholer LLP.