By Rob Taylor

CANBERRA (Reuters) - An Australian government-backed report into executive pay and bonuses, ordered after the global financial meltdown, has shied away from curbs on top-end salaries criticized as "obscene" by Prime Minister Kevin Rudd.

The Productivity Commission, an independent research and advisory body to the government on economic and social issues, proposed handing more control of directors' salaries to shareholders, but stopped short of recommending pay caps.

"We think actually we've strengthened that recommendation in a way that makes it more targeted on the companies where shareholders are feeling unhappy with recalcitrant boards ... without having significant unintended consequences," commission Chairman Gary Banks said after the report's release on Monday.

The center-left government commissioned the inquiry in March last year.

The move mirrors others in countries such as the United States where bank executive pay has become a political hot potato in the wake of the financial crisis. The U.S. has appointed a "pay czar" to look into salaries at banks rescued by government money.

Rudd faces re-election later this year and although riding high in polls, any perception among voters that he has backpeddled on a promise to rein-in executive pay excess could hurt the popularity of his Labor government among workers.

Rudd in late 2008 called for an end to the era of "extreme capitalism" and criticized the "triumph of greed over integrity," demanding action by leaders of the Group of 20 rich nations .

"The government understands fully the community's concerns about excessive executive pay that rewards reckless risk taking," Treasurer Wayne Swan said of the commission report.

The report called for greater transparency and barriers against conflicts of interest, including banning listed company executives from sitting on remuneration committees.

It also rejected a key "two-strikes" rule outlined in an earlier draft that would have forced boards to face immediate re-election if two consecutive shareholder votes secured 25 percent or more against current salary levels.

Instead, moves opposing renumeration would trigger a third vote requiring majority shareholder support, in a concession to business groups who had warned of board instability caused by minority shareholder groups, the report said.

Board vacancies could also be maintained provided directors could justify reasons for keeping them open. Salaries would be set by independent remuneration committees.

The commission found executive pay had grown by 250 percent in real terms since 1993 and the average annual salary among Australia's top 20 CEOs now topped A$7.2 million ($6.5 million) a year.