June 24 (Bloomberg) -- Citigroup Inc., the U.S. bank that got $45 billion of government funds, will raise base salaries by as much as 50 percent to help compensate for a reduction in annual bonuses, a person familiar with the plan said.

The biggest increases will go to investment bankers and traders, said the person, who declined to be identified. Workers in consumer banking, credit cards, legal and risk management will see smaller salary adjustments. The New York-based company also plans to award stock options to try to keep employees after Citigroup’s market value plummeted 84 percent in the past year.

Citigroup joins Morgan Stanley and UBS AG in boosting salaries for executives and employees. Morgan Stanley said last month it will increase base pay for many of the New York-based firm’s top executives and double the pay of Chief Financial Officer Colm Kelleher.

“Citi continues to examine ways to ensure its employee compensation practices are competitive in this very challenging market environment,” spokesman Stephen Cohen said yesterday. “Any salary adjustments are not intended to increase total annual compensation, rather to adjust the balance between fixed and variable compensation.”

The worst financial crisis since the Great Depression has led to more than $1.45 trillion in writedowns and credit losses and almost 325,000 job cuts across the worldwide financial industry. Senior management at companies, including Citigroup and Morgan Stanley, lost their bonuses last year.

Biggest Expense

Citigroup managers began informing employees of the pay changes this week, the New York Times reported yesterday. In the new stock option program, workers will receive one stock option for every share of restricted stock they hold, the newspaper said. Citigroup rose 3 cents to $3.04 at 2:48 p.m. in New York Stock Exchange composite trading.

The Obama administration appointed Washington lawyer Kenneth Feinberg this month as “special master” to review compensation at companies that received government funds.

Feinberg will have the authority to regulate compensation for 175 executives at seven companies, including Citigroup, that received “exceptional” government help. He steps into the political maelstrom that erupted after disclosures that firms such as New York-based Merrill Lynch & Co., blamed for fueling the financial crisis, paid workers multimillion-dollar bonuses.

The American Federation of State, County and Municipal Employees, a union whose members’ pensions own about 3 percent of Morgan Stanley, asked the New York-based bank to reverse the “enormous” increases in base pay given to several executives.

‘Weakened Link’

The raises “weakened the link between the top executive pay and company performance,” Union President Gerald McEntee wrote in a June 22 letter to the bank. “We urge you to return base salaries to their previous levels and refine your compensation approach to reward executives for long-term value creation, not just showing up for work.”

Mark Lake, a Morgan Stanley spokesman, said the bank set up its compensation system to focus on long-term results.

“The salary adjustments for officers firm wide represent what many public officials and compensation experts have been advocating: de-emphasizing annual bonuses in favor of more fixed compensation,” he said.

Morgan Stanley and UBS have also added so-called clawback provisions that set aside portions of workers’ bonuses that can be recouped in later years if an employee leaves or is found to have behaved in ways that are harmful to the company.

Compensation and benefits were Citigroup’s biggest operating expense last year at $32.4 billion, down 4.3 percent from 2007. The bank had a record net loss of $28 billion in 2008, compared with a $3.62 billion profit in 2007.

UBS, Merrill

Zurich-based UBS raised banker base pay 50 percent and Bank of America Corp. in Charlotte, North Carolina, which bought Merrill Lynch, said in March it may boost salaries as a proportion of total compensation.

Bonuses make up about two-thirds of total compensation for bankers. Salaries typically range from $80,000 to $300,000, with bonuses often adding millions of dollars, according to compensation consultant Alan Johnson in New York. The five biggest Wall Street firms awarded their employees a record $39 billion of bonuses in 2007.

Merrill Lynch doled out $14.8 billion in pay and benefits last year before it was acquired by Bank of America, equal to an average $253,000 per employee, company filings show. New York Attorney General Andrew Cuomo is investigating $3.6 billion of bonuses paid to Merrill Lynch executives in December.

UBS cut its bonus pool by 78 percent in January after amassing the biggest loss in Swiss corporate history in 2008. Switzerland’s largest bank by assets came under pressure from government officials to cut variable pay after the state gave it capital and helped the company shift hard-to-trade assets off the books.

To contact the reporter on this story: Josh Fineman in New York at jfineman@bloomberg.net

Last Updated: June 24, 2009 15:32 EDT