Citigroup Inc. (C) has allocated several million stock options this week to more than a quarter of its employees, encouraging them to remain with the company especially when their competitors are on a hiring spree.

Citigroup employees have witnessed massive erosion of their stock options as the bank’s share price plummeted to about $4 from about $56 a few years ago.

As an added incentive for its employees, Citigroup also said that it would grant one stock option at just above the current market price for each invested share employees had accumulated. If the share price rebounds and as it has at Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM), Citigroup employees could see an impressive increase in their 2009 compensation.

As per the program, an employee who had accumulated 3,000 shares would get an additional 3,000 options for staying. The options carry a strike price of $4.08, granting a current value of about $11,000. Employees will be able to cash out the options in equal installments over the next three years.

The program was first announced in June this year and covers about 75,000 Citigroup employees, but excludes its 100 highest-ranking executives and other top earners who fall under the surveillance of the federal pay czar. The company could issue stock options from 200 million to 300 million worth an estimated $1.1 billion at current prices.

Citigroup’s third quarter 2009 loss from continuing operations of 23 cents per share was in line with the Zacks Consensus Estimate. This compares favorably with a net loss of 72 cents in the prior-year quarter. Results for the quarter included $8 billion in net credit losses and an $802 million in net loan loss reserve build.

The U.S. government injected $45 billion in bailout funds into the bank, $25 billion of which was recently converted to a 34% equity ownership stake.

We expect Citigroup to incur higher credit losses in the upcoming quarters as its restructuring process continues. As such, we are maintaining our Neutral recommendation on Citigroup.
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