The government's announcement that it will be announcing 50% pay cuts at certain TARP recipients is pretty big news; to my knowledge, there has never been as aggressive an attempt to manage executive compensation.  We'll have to wait to see the details, but if the Times's whisper story is accurate, some observations:

• The strategy here was not to try to pass definitive rules about bonuses, but to delegate the parsing of bonuses to Kenneth Feinberg, the special master of the 9/11 compensation fund, and a lawyer with a strong reputation in Washington.
• At the time, the government said that the delegation was necessary because of the care that needed to be taken in tailoring specific compensation plans to specific business plans of the government charges.  The idea was that you might pay (and pay bonuses to) AIG execs, who are winding up the firm, differently than you would Citibank exec, where you want the bank to lend, lend, lend.  It sounded good, but it also looked like it was kicking the can down the road.
• There's politics as well as content to Feinberg's rules - you always know that you're playing to Congress and the cheap seats when you go after perks: "any executive seeking more than $25,000 in special perks — like country club memberships, private planes, limousines or company issued cars — will have to apply to the government for permission."  There's probably less than $ 5 million at stake for these perks ... but that doesn't mean that it won't be fun to tell executives that they can't go play golf.
• The political nature of the whisper rules isn't necessarily a bad thing, though this is pure editorialization on my part:
  • harsh compensation rules will effectively deter future executives from from seeking government bailouts, and, unless that, or the outflow of Citi's talent, leads to the collapse of the institution, that's a good thing.
  • People don't want to subsidize corporate jets.  I suspect they don't want it, somewhat oddly, more than they don't want to pay someone $10 million.  So the rules probably had to do something about perks, which, I would imagine, would make it easier to pay actual bonuses that will approximate prior compensation.
• The firms covered by the rules will find that they will not be able to avoid them to pay their traders a ton, while forcing the top five executives to take home nothing.  Feinberg's mandate makes him "Responsible for Reviewing Any Compensation for Senior Executive Officers and Next 20 Most Highly Compensated Employees at Firms Receiving Exceptional Assistance" and requires him to "Approve Compensation Structure for Senior Executive Officers and the 100 Most Highly Paid Employees at Those Firms."
• Just to be clear, the rules do not apply to all TARP recipients - there are hundreds of those - but only to the special extra critical TARP recipients (or those who received funding under the Systemically Significant Failing Institutions, the Targeted Investment Program, the Automotive Industry Financing Program).  These include, as the interim final rule says, "AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial."  So in that sense, this is a symbolic effort to limit executive compensation.
• The government hopes, however, that these rules will encourage other firms to develop compensation best practices modeled off the Feinberg approach.  Will it work?  I have my doubts, but other TARP recipients will probably start trying to pay back their money as quickly as possible so that they do not have to think about it.
• Can these executives or firms sue?  The government's TARP decisions are subject to judicial review: so yes, they can.  The basis of the delegation to Feinberg is probably okay, but hardly contemplated by Congress (which instructed Treasury to come up with compensation rules, but not to appoint a special master).  But I cannot imagine a court parsing individual compensation decisions of the government in these sorts of cases, apart from the likelihood of a Judge Jed Rakoff demanding stocks and rotten tomatoes for the executives in addition to steep pay cuts (and most district court judges are not ideologically similar to Judge Rakoff). I'm unaware of the Office of Personnel Management or supervisors being sued successfully for the bonus programs that do exist in the federal administrative structure for merit-related (as opposed to employment discrimination related) reasons.  I'm sure it has happened, I just haven't heard of a successful effort.

UPDATE: Here's Ribstein and Bainbridge with meaty posts.  When the corporate law bloggers all weigh in (to say nothing of the lead story status at the times), you know you've got an interesting issue.

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