The US Treasury said late today it has established standards for executive compensation at firms receiving TARP assistance.

The restrictions are meant “to protect the taxpayers and mandate compensation practices that maximize the value of the firm for shareholders,” the Treasury said in a press statement.

The new regulations will limit executive compensation for certain executives and highly compensated employees at companies receiving TARP funds, curtailing the payment of golden parachutes.

Under the new standards, a “special master” will be appointed to review compensation plans at firms receiving “exceptional assistance” the Treasury said. The master will approve compensation structures and will also possess the authority to negotiate reimbursements made before February 17, 2009.

Regulations will implement and expand upon key recovery act provisions, essentially extending the required risk analysis of compensation, and requiring a luxury expenditure policy for all TARP firms. Further, the rules will prohibit tax gross-ups and mandate the disclosure of compensation consultants.

In a statement this morning, Treasury secretary Tim Geithner discussed the government’s efforts to “better align” compensation practices — particularly  in the financial sector.

But Geithner said: “I want to be clear on what we are not doing. We are not capping pay. We are not setting forth precise prescriptions for how companies should set compensation, which can often be counterproductive.”

Instead, he said the Treasury we will continue to work to develop standards that reward innovation and prudent risk-taking, without creating misaligned incentives.

“By outlining these principles now, we begin the process of bringing compensation practices more tightly in line with the interests of shareholders and reinforcing the stability of firms and the financial system,” he concluded.

Write to Kelly Curran.