Citigroup Inc is raising salaries companywide to offset restrictions on bonuses after the troubled bank accepted $45 billion of federal bailout money, but the move could backfire if it drives top-performing workers to other employers.

According to people familiar with the plans, the changes mean some employees may be paid more and others less, but overall compensation should remain unchanged as higher salaries offset lower incentive payouts.

Citigroup also expects to issue new stock options to cushion a roughly 95 percent drop in its stock price since late 2006, one of the sources said. The sources requested anonymity because they were not authorized to discuss the plans.

The changes may help Citigroup better control risk by reducing the focus of investment bankers and traders on performance-related bonuses. Yet because bonuses often account for the bulk of pay for top talent, capping total pay might make it harder for the bank to attract and keep key personnel.

I don't discount the value of raising guaranteed pay in an uncertain environment, said Ravin Jesuthasan, who leads the rewards and performance management practice at Towers Perrin in Chicago. It raises the issue of whether that is the best use of money for the most pivotal talent. The superstar might go with the million-dollar deal rather than see his pay capped.

Citigroup's changes follow the Obama administration's naming this month of Kenneth Feinberg as a special master to oversee pay practices at the third-largest U.S. bank and six other companies that received exceptional federal aid.

Feinberg's authority over compensation, though, extends only to the 100 highest-paid employees, not the rank-and-file. Citigroup employs close to 300,000 people worldwide.

The bank has lost $36 billion in the last six quarters, and is conducting a stock swap that is expected to leave the government with a 34 percent ownership stake.

BUFFETT: REIN IN WRONG INCENTIVES

Lawmakers have attacked the payment of bonuses and other compensation they deem excessive to employees of companies that received government aid.

U.S. President Barack Obama himself has said bank pay packages encouraged excessive risk-taking, one cause of last September's near meltdown of the financial system.

We got way overleveraged in the financial arena, Warren Buffett, the billionaire investor and chief of Berkshire Hathaway Inc , said on CNBC television. We do need something to address institutions where the wrong incentives are in place, their personal incentives are at real variance with what our national incentives should be.

Citigroup declined to comment on specific changes to its pay structure. The bank in 2008 paid out $32.44 billion in compensation and benefits. It has slashed tens of thousands of jobs to help lower overall operating costs by about one-sixth.

Investment banking employees will be the first to see the changes, which will later be put in place throughout the bank.

Retaining and attracting the best talent is very important to the success of Citi and all its stakeholders, the bank said in a statement. Any salary adjustments are not intended to increase total annual compensation, rather to adjust the balance between fixed and variable compensation.

COST CUTS

A Treasury Department representative declined to comment directly on Citigroup's plans, and said Feinberg is trying to ensure that companies he monitors strike appropriate balances between retaining talent, rewarding good performers and protecting taxpayer money.

Feinberg may review compensation for top earners at Citigroup, American International Group Inc , Bank of America Corp , General Motors Corp , Chrysler LLC , GMAC LLC and Chrysler Financial.

Prior to his appointment, Feinberg oversaw the government compensation fund for victims of the Sept 11, 2001, attacks.

A spokesman for Bank of America, which is the largest U.S. bank and also took $45 billion of bailout money, did not immediately return a call seeking comment.

Citigroup shares closed up 3 cents at $3.04 on the New York Stock Exchange.

(Reporting by Jonathan Stempel; additional reporting by David Lawder; editing by Gerald E. McCormick, Derek Caney and John Wallace)

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