Banks participating in the US government’s $700bn bail-out package could suffer a significant rise in their tax bill because of a little-noticed provision designed to curb outsized executive pay.

Wall Street bankers and compensation experts say the new rules, coupled with other measures to reduce executive pay, could dissuade companies from taking part in the rescue plan.

“It puts companies in a difficult position,” said James Reda, founder of James F. Reda & Associates, a compensation consultancy. “If they participate in the bail-out, they will get hit with a large tax bill.”

Under the new provision, companies that sell more than $300m in bad assets to the US government would lose the tax breaks they receive on the multi-million dollar bonuses paid to their executives.

In addition, the bail-out bill reduces the amount of an executive’s salary that is tax-deductible from the current $1m to $500,000.

The change could increase companies’ expenses and reduce their earnings by millions of dollars and prevent executives from collecting their large remuneration packages for as long as the company participates in the programme.

The legislation also states that the pay restrictions, which apply to top executives but not to other employees such as traders, remain valid even if the executive resigns or retires.

This means the rules would apply to deferred compensation, such as the large pension payments and severance packages often awarded to outgoing executives.

The provisions are part of measures designed to defuse criticism that taxpayers’ money is being used to bail out millionaires on Wall Street – a key concern of several Washington politicians, especially among the Democratic ranks.

But Wall Street executives argue that the rules are misguided as they will burden companies, rather than their executives, with millions of dollars in higher tax payments. “It is a crazy measure because instead of punishing Wall Street executives, it takes it out on shareholders, who will end up paying for this,” a senior banker said. “It is a progressive tax on companies that pay executives more than $500,000.”

US Treasury Secretary Hank Paulson, a former Goldman Sachs chief executive, had initially resisted measures that would reduce executive pay, amid fears that they would deter companies from participating in the bail-out plan.

But he later relented and Treasury officials say they do not believe the executive pay clauses will keep companies away from the plan.