Financial Firms Pumping Up Base Salaries over Bonuses

June 25, 2009 ( - With employers under heavy pressure to curb excessive performance bonuses, Citigroup is pumping up the base salaries of many employees -- reportedly by as much as 50% in some cases.

A New York Times news report said the plan is intended to offset the smaller annual bonuses the financial services firm has been awarding. According to the Times account, the company also plans to award millions of new stock options to employees to retain workers and neutralize a precipitous drop in the value of their stock holdings.

The Times said other financial services firms following a similar path include Bank of America, Morgan Stanley, UBS and other European competitors. The American Federation of State, County, and Municipal Employees (AFSCME), whose union pension fund holds about 3% of Morgan Stanley’s outstanding shares, this week called on the Wall Street investment firm to roll back large salary increases for senior execs and others (see AFSCME Blasts Morgan Stanley Exec Salary Hikes ).

In Citigroup’s case, the Times said, the government this month assumed a 34% stake in the company, whose share price has plunged nearly 84% in the last year.

The newspaper said Kenneth R. Feinberg, the administration’s new “pay czar,” has the authority to set compensation for only the top 100 employees at troubled companies (see Obama Administration Reportedly Drops Salary Curb Plans ). The rest – which at Citigroup, means fewer than 300,000 people – can be paid as executives see fit, provided any increase does not rank them among the 100 most highly paid workers.

On Monday, Goldman Sachs, which returned $10 billion of bailout funds, denied reports that it planned to pay out the highest bonuses in its 140-year history.

This week, Feinberg held introductory meetings with Citigroup executives and their counterparts at several other companies that have received two federal bailouts. He will start reviewing pay packages for the 25 highest-paid employees, as well as compensation formulas for the next 75, in the next two months, according to the Times.

Citigroup executives said the changes were aimed at retaining employees. Some Citigroup workers have already left for small, boutique investment banks or large rivals that are not so beholden to the government.

Industrywide, total compensation is expected to rise 20% to 30% this year, approximately to the levels of 2005, before the crisis, according to Johnson Associates, a compensation consulting firm, the Times said.