WASHINGTON - Citigroup Inc.’s Indian American chief executive Vikram Pandit and chairman Win Bischoff would forego bonuses for 2008, the ailing banking giant announced as it formalised its bailout agreement with the US government.

Bonuses for other top executives will be ‘reduced substantially,’ Pandit said in a memo to Citigroup employees Wednesday.

Citigroup has received $45 billion in federal capital infusions and a government-financed arrangement to insulate it from hundreds of billions of dollars in potential losses after the bank lost three-quarters of its market value.

‘The harsh realities of 2008, primarily our earnings results, mean that our bonus pool is dramatically lower,’ Pandit said.

Citigroup, the biggest recipient of US bailout funds, completed an agreement for a $20 billion government investment, Pandit said in the memo. That was on top of an earlier $25 billion and a US guarantee on $306 billion in troubled assets.

Pandit is cutting 52,000 jobs worldwide after four straight quarters of losses tied to bad loans and failed investments with the last quarter alone accounting for a loss of 2.8 billion dollars.

Citigroup expects ‘major challenges’ to continue into 2009, Pandit said, describing the proposed actions as part of a major overhaul of executive compensation to confront the problems for the company and banking sector.

The new plan may also include ‘clawbacks’ to ‘recoup executive compensation that over time proves to be based on inaccurate financial or other information,’ according to the memo.

‘The most senior leaders should be affected the most,’ Pandit said. ‘Win and I believe this is fair, in light of the challenges of the year and the need for compensation elsewhere in the organization.’

The memo said bonuses for the ’senior leadership committee ‘will be reduced substantially.’ Members of Citi’s executive committee would see bonuses ‘cut even more’ and in some cases given as deferred compensation.

Pandit said the principles to guide the company’s executive pay would include ‘pay for performance’ and ‘meritocracy,’ adding that ‘compensation will vary based on each person’s performance - again, relative to the overall performance of the company.’

Severance compensation will be subject to ’significant new limitations’ for executives and that the top five executives ‘no longer can receive severance,’ said Pandit, who became Citigroup CEO in December 2007.

Those affected executives are Pandit, Bischoff, Chief Financial Officer Gary Crittenden and Vice Chairmen Lewis Kaden and Stephen Volk.

Pandit noted that former treasury secretary Robert Rubin, an advisor to the company who has no direct management responsibilities, ‘has elected to take no bonus for the second consecutive year.’

‘The overall objective for all of us at Citi is to build shareholder value, serve our clients and customers superbly well and create growth opportunities for our employees,’ he said.

‘Adherence to the principles of compensation outlined above is fundamental to achieving these goals.’

Pandit, 51, received 1 million shares from Citigroup as part of a ’sign-on’ bonus in January, in addition to a $2.5 million ‘retention equity award,’ the company said in March. He was paid $250,000 in salary in 2007.

Pandit got $165 million from Citigroup in 2007 when he sold Old Lane Partners LP, the hedge fund he co-founded and ran. Citigroup closed New York-based Old Lane in June and took a $202 million writedown on its $800 million investment.

Citigroup shares lost 9 cents, or 1.32 percent, in trading on the New York Stock Exchange Wednesday, closing at $6.71.