By Karey Wutkowski and Steve Eder

WASHINGTON/NEW YORK (Reuters) - The U.S. pay czar on Friday expanded a crackdown on pay packages at four companies rescued with taxpayer money, limiting most cash salaries at $500,000 for a second tier of top earners.

The Treasury Department's Kenneth Feinberg issued the new limits amid outcries from some companies on a government lifeline that they cannot retain or attract key employees, sending the firms racing for a bailout exit.

He set the compensation structures for the 26th through 100th highest-paid employees at four firms: Citigroup Inc, American International Group, General Motors Co, and GMAC.

Chrysler and Chrysler Financial were exempted during this round of rulings because total pay for their second-tier executives is already under $500,000.

Feinberg, a Washington lawyer appointed by President Barack Obama in June after public anger exploded over high pay at bailout firms, said he granted less than a dozen special exemptions from the cash salary cap.

"In a very few cases, we did recognize there was an individual who, based on company input, was deemed to be truly essential," he told reporters.

Those exempted from the new pay caps included several at insurer AIG. The exempted executives were not identified and generally were allowed cash pay up to $950,000, although one was granted $1.5 million, Feinberg said.

The pay czar's control has caused significant friction with AIG, where top executives, including new chief executive Robert Benmosche, have reportedly considered quitting because of the pay constraints. AIG has received pledges of up to $180 billion in taxpayer aid.

The pay restrictions also have prompted Citi to race to repay its $45 billion in bailout funds. The bank remains locked in negotiations with the government over repayment terms.

Feinberg, in his latest rulings, also targeted bonus pay. He insisted that incentive pay be limited to a "fixed pool" of funds to be negotiated with Feinberg, which would require companies to carefully choose who to reward.

"There cannot be runaway bonuses," Feinberg said. All incentive pay can be clawed back if results prove illusory.

When asked by reporters about GM, which is scrambling to find a new chief executive who can retool the giant automaker, Feinberg indicated the firm may get a break. He said he was willing to take a "fresh look" at proposed pay for GM's new CEO, adding it was "vital" that GM, majority owned by the government, be competitive.

CALMING THE PUBLIC, PRESERVING TALENT