U.S. pay czar Kenneth Feinberg yielded on Monday to pleas from American International Group to modify terms for a top employee the embattled insurer said was vital to its regaining stability.

In a letter issued by the Treasury, Feinberg said the unnamed employee would now be able to get a grant of stock salary and an annual long-term incentive award in the form of long-term stock.

Previously, the employee was to get only a base salary of $450,000, but the pay czar agreed to reconsider that.

Feinberg said the insurance company also will be allowed to pay the employee incentive payments worth about $4.3 million, made up of an annual long-term restricted stock grant worth about $1 million and a stock grant valued at about $3.3 million on the grant date.

Feinberg said the incentives were allowed because the employee had been expected to leave but had decided to stay.

In light of the fact that the specified employee will remain in the employ of AIG, it is appropriate to provide ... long-term incentives to ensure that the employee contributes to AIG's long-term success and, ultimately, AIG's ability to repay taxpayers, Feinberg said.

Feinberg's job is to monitor pay levels at companies that received bailout funds from the government's Troubled Asset Relief Program, or TARP. His job in part is to respond to public anger at the fact that executives at companies that rely on taxpayer help reward themselves so highly.

The AIG employee was one of the top 25 most highly paid executives and had been expected to leave at the end of 2009. But AIG says the employee now is staying and is critical to AIG's long-term performance and stability.

A second letter issued by the Treasury concerned Citigroup Inc but made only a technical correction in a pay ruling by Feinberg.

It said that instead of four employees who were expatriates and able to qualify for some extra compensation, there were in fact five Citigroup employees who were in a position to do so.

(Reporting by Glenn Somerville; Editing by Kenneth Barry)