If there's an active copyright on the music, then legally the game developer must pay a license fee to the license holder to use the music. Not that this always happens.
However, if the copyright has expired and the work has passed into the public domain, it can be used without paying any royalties to anyone since there's no one to pay royalties to. In this case, the work can be adapted, remixed, or altered in any way without any legal repercussions whatsoever. For example, various renditions of the compositions of Mozart find their way into video games every now and then.
However, as public domain works go, actual live recordings may be protected under copyright and licensing fees would apply.
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