The pay package given to Freddie Mac’s new chief financial officer should have sent a message from Washington to corporate America about how executive compensation standards must change. Instead, it did just the opposite.

The government-controlled mortgage finance company is giving CFO Ross Kari compensation worth as much as $5.5 million. That includes an almost $2 million cash signing bonus and a generous salary that could top $2.3 million.

The Federal Housing Finance Agency, which oversees Freddie Mac, approved the pay package. A spokeswoman pointed to a statement that justified the agency’s approval of the pay, which was done in part because the amount was comparable to what others in the financial services industry make.

That way of thinking is exactly what helped feed the surge in executive pay over the last decade. Everyone wants to make at least as much, or more, than their peers.

Freddie Mac is not just another company. It’s alive today, and nearly 80 per cent owned by the government, only because almost $51 billion in taxpayer funds were pumped into it over the last year. More bailout money also may be needed in the quarters ahead as losses from its troubled mortgages mount.

Outside pay experts are outraged. “We are in a period when this shouldn’t be acceptable,” said Paul Hodgson, a senior research associate at The Corporate Library, an independent corporate governance research firm. “Even if pay is competitive to the market, that doesn’t make it OK today.”

Lawmakers, regulators and corporate directors have spent the last year talking about how to “fix” executive pay following the outcry over what many Americans deem as excessive compensation.

Banks have come under fire for paying top executives big bonuses, which many see as encouraging excessive risk-taking and a focus on short-term results. The Obama administration also has proposed giving shareholders of all public companies a nonbinding vote on compensation.

Financial companies that receive bailout funds under the $700 billion Troubled Asset Relief Programme, or TARP, are bound by rules on compensation. So long as they hold the government money, they can’t pay cash bonuses to top executives, retention awards to top managers or stock compensation subject to performance-based vesting.

Freddie Mac doesn’t have to follow those restrictions because its government aid has come from outside TARP.

Instead, Freddie Mac and its sibling, Fannie Mae, operate under “conservatorship” of the U.S. government after being crippled by losses last year. That was done because of the vital role both companies play in the mortgage market by purchasing loans from lenders and selling them to investors. Together, they own or guarantee about half of all U.S home mortgages.

The McLean, Va.-based Freddie Mac has been without a permanent CFO for more than a year, when its two top executives stepped down as part of the government takeover in early September 2008. Acting CFO David Kellermann committed suicide in April.

Given the close government control over Freddie Mac, the pay package for its new CFO could have been held up as an example of reasonable compensation. Instead, his pay package doesn’t reflect much restraint.

When Kari joins Freddie Mac on October 12, he will receive a base salary of $675,000 and is entitled to an additional $1.66 million in cash for the year. The company said Kari will be paid in installments, but did not specify the timing of those payments in a September 24 securities filing. The company declined to comment beyond the filing.

Kari will also receive performance-based pay at the board’s discretion. The target amount for that cash compensation is $1.16 million, but what is actually given to Kari could be higher or lower.

His cash signing bonus totals $1.95 million and will be paid out in semi-monthly installments over the year. That money is supposed to cover what he forfeited in stock options and grants when he left Fifth Third Bancorp, where he served as CFO since last November.

Freddie Mac also said it would immediately allow him to sell his home to the company, waiving a 60-day offer period that is required for other executives. It did not, however, specify which of his homes would be covered; Kari has residences in Ohio, Oregon and Washington State, according to the filing.

No doubt that Kari is an able executive and has a hard task at hand. Before his 10-month stint at Fifth Third, he worked in the executive ranks at the insurance company Safeco and Wells Fargo.

Freddie Mac’s regulator, the FHFA, highlighted his qualifications in a statement it made after the pay package was disclosed. The agency said the approval of Kari’s pay was done after consulting with the Treasury Department. The FHFA declined further comment, and the Treasury Department didn’t return a request for comment.

In its statement, FHFA also said that Kari’s hire came at a “critical time for our nation’s economy and for the company.”

A better approach for Kari’s compensation would have been to require him to wait at least three years to receive a bulk of his compensation, instead of allowing him to get as much as 80 percent of it in cash over one year.

“It’s that kind of pay package that got us into trouble in the first place, because it encourages short-term thinking,” said Richard Ferlauto, director of pension and benefits policy for the American Federation of State, County and Municipal Employees, a Washington-based labour group representing government workers.

At Fifth Third, Kari’s yearly salary was $580,000 and he received a $100,000 signing bonus. He also received a restricted stock grant of 20,000 shares and 40,000 stock appreciation rights, both of which would have vested after four years but were terminated once he left the Cincinnati-based bank.

Had he stayed at Fifth Third, he would not have been able to cash out of his equity compensation until the bank repaid the $3.4 billion in TARP funds it received. But Carol Bowie, head of the Governance Institute at RiskMetrics Group, a financial risk management firm, notes that his cash signing bonus at Freddie Mac effectively allows him to accelerate his receipt of equity he forfeited when he left Fifth Third.

Bowie acknowledges that attracting top talent is critically important to a troubled company like Freddie Mac, and supports the idea of executives being paid for their skills.

But she also thinks figuring out what’s fair in pay doesn’t mean sticking with the bad practices from the past.