UPDATE 4-Citigroup to boost salaries, cut bonuses - sources

* Compensation mix changes, total expenses about the same

* Buffett says incentives created too much risk in banking

* Citigroup shares rise 3 cents (Adds Treasury Department comment, closing prices)

By Jonathan Stempel

NEW YORK, June 24 (Reuters) - Citigroup Inc (C.N) 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 (BRKa.N) (BRKb.N), 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."