Hospitals and agencies that continue to make payments to senior staff that exceed public pay policy will have the equivalent amount deducted from their annual HSE grant.
HSE Director General Tony O' Brien announced the policy at the Oireachtas Public Accounts Committee.
He said there needed to be a full picture of the extent of the issue and open disclosure by hospitals.
Mr O'Brien said there would have to be a clear plan by hospitals of the steps they will take to achieve compliance and a new basis for verifying compliance, including seeing P60s.
He said there was a need to consign a "nod and wink" culture to the past.
The HSE said that some extra payments to senior hospital or agency staff have been in place since 1996.
Geraldine Smith, HSE Assistant National Director, Internal Audit said that the Department of Health indicated in 2008 to the HSE that there could be problems with top-up payments.
Mr O'Brien told the committee he was not in the HSE at the time but it is possible a more robust approach could have been taken then.
He said a verification process will be undertaken with all agencies involved.
Mr O'Brien said that of the 42 voluntary hospitals or agencies that have responded, 30 agencies have categorised themselves as compliant and 12 as non-compliant.
He said that of the 30 agencies confirming compliance, seven are considered by the HSE as being in compliance.
Mr O'Brien said he was not satisfied that self-declarations of compliance were all valid.
One agency has submitted formal approval from the Department of Health for a non-compliant allowance being paid.
The committee has heard that there are just three records of a business case being approved by the Department of Health for extra payments for voluntary hospital senior staff or agencies since 1995.
No other paper trail exists.
Ms Smith told the committee that some hospitals say they received 'verbal approval' from the Department but there is no documentary evidence.
