WASHINGTON—American International Group Inc. will be permitted to pay retention bonuses to top executives deemed “particularly critical” to its long-term financial success under new rules announced Friday by the U.S. pay czar.

The awards, which AIG called “legally binding contracts,” were outlined in a broader report by Kenneth Feinberg, the Treasury Department's special master for executive compensation.

“Due to the unique financial circumstances currently found to exist at AIG,” restructuring the 2009 contracts would not be consistent with the public interest, the report said.

The report also outlined compensation rules on the 26th to 100th highest-paid employees at AIG and three other companies that received bailout funds. Mr. Feinberg previously ruled on compensation for the 25 highest-paid employees.

Under the rules, cash salaries are largely limited to $500,000, except in “exceptional cases.” Overall cash is limited to 45% of an employee's total compensation, and all other pay must be in the form of company stock. Stock that is salary will vest immediately, but it must be held for one year. Incentive stock, meanwhile, cannot be transferred for at least three years.

Mr. Feinberg identified 12 “exceptional cases” as being exempt from the salary cap because the individuals were necessary to help their companies “thrive and compete.” However, it was unclear how many exceptions were granted to AIG, which declined comment.

The rules apply for the rest of 2009 but are expected to be applied toward pay structures for 2010, observers say.

The move came after a firestorm of controversy surrounding executive pay curbs at the bailed-out insurer. The battle over pay curbs escalated last month when AIG President and Chief Executive Officer Robert H. Benmosche reportedly threatened to quit due to his frustration with the constraints. Mr. Benmosche, who later changed his mind, had argued the pay policies hurt his ability to retain top executives.

In addition, five AIG executives reportedly threatened last week to leave over the pay cuts. At least three of the managers retracted their threats, according to the Wall Street Journal.

Meanwhile, AIG General Counsel Anastasia D. Kelly reportedly has resigned due to the pay curbs, according to the New York Times.

AIG is working to sell assets, streamline its operations, and improve profitability in an effort to repay the government after it received a 2008 bailout package of about $180 billion, in which the government took a roughly 80% stake in the company.