Banker Luigi Lovaglio is running for a second term at the helm of MPS and Italian media have speculated the cap would seal his reappointment, by discouraging other bankers to come forward for the job.

However, two sources briefed on the matter told Reuters that the cap did not apply to MPS, based on the Treasury's interpretation of the rule.

In its 2023 budget, the right-wing administration led by Prime Minister Giorgia Meloni introduced a 240,000 euro ($257,232) ceiling on the annual pay of top executives named in 2023 at banks rescued by the state. MPS is 64% owned by the state following a 2017 bailout.

The salary cap compares with Lovaglio's current pay of 466,000 euros a year with no variable compensation, which is already well below peers. By comparison, Giuseppe Castagna, head of mid-sized bank Banco BPM, for example in 2021 earned 2.3 million euros.

With MPS's bailout pre-dating the 2023 budget, the Treasury believes it should not apply retroactively, the sources said on condition of anonymity given the sensitivity of the matter.

MPS declined to comment.

The MPS rescue deal Italy agreed in 2017 with European Union authorities cost taxpayers 5.4 billion euros. Lovaglio, 67, took over at MPS a year ago, hired by the Treasury which has since seen key changes at the helm.

In November he worked with Rome to pull off a make-or-break 2.5 billion euro new share issue that saw Italy pump another 1.6 billion euros into MPS. The bank's shares have gained some 20% since then.

The government will decide Lovaglio's fate in April, when several other senior roles at state-owned companies also come up for grabs.

The top job at MPS historically carries significant risks. The bank's troubled history has seen more than one top executive end up under investigation by Italian prosecutors.

MPS already enforces EU-mandated caps to its top executives' pay, which cannot total more than 10 times the average employee salary.

The Treasury is expected to look for a buyer for MPS after it names a new board in April, allowing it to cut its holding as agreed with Brussels.

($1 = 0.9356 euros)

(Reporting by Giuseppe Fonte in Rome and Valentina Za in Milan; Editing by Gavin Jones and David Holmes)

By Giuseppe Fonte and Valentina Za