President Don Sublett, vice president Dennis Padgett and council member Glen Vickroy refused to give a reason for the demotion and instead referred questions to town attorney Allan Yackey.
Council members John Davis and Judy Whitaker voted against the changes.
The move comes just one week after town elections in which Sublett ousted Davis, Vickroy won re-election and Terry Puffer and Stephen Caulkins were elected to the board. Whitaker did not seek re-election.
The council's decision drew muffled reaction, both for and against, from the capacity crowd at the town hall.
Hallam told the BannerGraphic after the meeting Tuesday that his firing was politically motivated and not based on his performance either as a town department head or as a police officer.
When Davis asked Sublett whether Hallam had any disciplinary action on file, the board president responded with, "I haven't looked in his file."
Hallam contends that he has always been within his budget and that he has no complaints against him on record.
Hallam has been with the department since 1997 and has been chief since April 2004.
Pearson's on-the-spot appointment will mean that Officer Jason Baugh, who has the least seniority in the department, will likely be fired in order for the police force to stay on budget, Sublett said.
Whitaker called the move "unjustified" and "deplorable."
Pearson is the former county coroner, and owner of the newly-founded Donald L. Pearson Mortuary in Cloverdale.
Sublett did not return a phone message from the BannerGraphic seeking comment Tuesday night.
The council also voted 3-2, Davis and Whitaker dissenting, to prohibit council members from reviewing the town's legal files at Yackey's office.
Yackey said Whitaker's requests to view the files were racking up legal fees for the town and disturbing the order of the files.
Whitaker said the files at Yackey's office, which detail his correspondence with board members and his billing schedule, belong to the town, not the attorney.
Padgett made an attempt to cancel the town's credit cards and the mobile phones for town police officers.
He cited a list of unnecessary expenses on the credit cards, including hotel and dining charges.
Clerk-Treasurer Patti Truax said her office needs the credit cards in order to handle billing and other basic functions.
All charges to the cards have been cleared by the State Board of Accounts audits, as well, she added.
Padgett's motion failed, with Sublett, Whitaker and Davis opposed.