AIG Executive Salary Cap to Remain in Place: Source

Reports that government "pay czar" Ken Feinberg will lift a $500,000 salary cap imposed on some AIG executives is "absolutely false," according to a source close to the government.

Aig Headquarters

However, the source told CNBC that a soon-to-be released compensation plan for the 26 to 100 highest paid employees at the insurance company provides some flexibility for the company's CEO Robert Benmosche to increase the cash portion of their salaries above the limits recommended by the pay czar, if good cause is shown.

Reports earlier Monday said five AIG executives had threatened to quit because of the pay restrictions, though two later changed their minds. The source said the other three executives are in the second grouping of executives, numbers 26 to 100, not the top 25 whose pay plans have been adopted for the remaining two months of 2009.

In October, Feinberg released a plan for the top 25 executives at the insurance giant limiting the cash salary portion of their compensation to $500,000. The exception being the company's new CEO Robert Benmosche, who received $3,000,000 in cash salary as part of a $10 million dollar compensation plan approved by Feinberg.

The source says Feinberg's ruling a pay plan for the next 26 to 100 executives at AIG, and the five other firms under his watch is due by the end of this week, or early next week.

As one of original seven firms that received exceptional assistance from the government, AIG's compensation plans for its top 100 executives must be approved by Feinberg who's formal title is Special Master for Excecutive Compensation. In the last year the government has provided $180 billion in aid to the insurance giant in the form of loans and loan guarantees.

One of the seven firms, Bank of America is on track to repay the $45 billion in TARP funds it received from the government, so it will no longer be under the watch of Feinberg. The remaining six firms, including AIG, are Citigroup , General Motors, Chrysler and the finance arms of both automakers.