Citigroup (C) said Friday afternoon it gave Pandit, its CEO since its meltdown began in late 2007, what it called a well-deserved raise. Pandit made just $1 last year, as part of a gesture he made in February 2009 to quell rising bailout rage.

But by now, Citi has paid back the government and returned to full-year profitability, and the government has sold its Citi stock at a $12 billion profit. So Pandit’s salary will rise to $1.75 million — and not a moment too soon, the board claims.

“The board is very pleased with the progress that the company has made under Vikram’s leadership,” Chairman Dick Parsons said in a regulatory filing. “Vikram has worked tirelessly to put Citi back on the right track, spearheading a restructuring that has returned the company to profitability and positioning the company for future growth. In light of these highly positive accomplishments, the base salary established for Vikram is merited.”

The announcement comes at the end of a mixed week for Citi, whose shares tumbled after a weak fourth-quarter earnings performance but regained some ground after Pandit promoted his longtime righthand man John Havens to the post of president.

It is easy to see where that move would give investors confidence. Havens and Pandit came up through the ranks together at Morgan Stanley (MS) before leaving to start a hedge fund called Old Lane that Citi cannily bought in 2007 for the low, low price of just $800 million. In a sign of what a savvy bunch of operators Chuck Prince led, the fund quickly turned in negative returns, prompting Citi to shut it down 11 months later.

That didn’t keep Pandit from making $165 million on the trade, though. Nor did it prevent Citi’s board from showering him with stock awards in January 2008, shortly after he took over for Prince. Pandit got $37 million in stock awards then to go with a 2008 salary of $958,333 — though it must be said none of that stock seems to be in any great danger of coming into the money any time soon (it’s priced at between 5 and 7 times Citi’s recent price).

He was on track to collect the same salary for 2009 before the backlash over excessive pay for bailed-out executives derailed that plan. That left him to take $1 in salary for the rest of that year and all of 2010.

A look at Citi’s stock performance (see chart, right) suggests that $1 was probably about right for Pandit’s contributions. But obviously the board had to give him a raise. After all, the competition is making much more for, let’s face it, similar results.

And the board can’t risk having this talent flee just as Citi is turning it all around, yet again.