Earnings at Salomon Rise 8% in 3rd Quarter : Securities: The increase, which came despite the company’s recent bond scandal, boosts the stock price.

Salomon Inc. said Tuesday that its third-quarter profit jumped nearly 8% despite the effects of its Treasury auction scandal, giving a boost to the securities firm’s battered stock price.

Investors were impressed by the increase even after Salomon set aside a $200-million reserve for expected legal costs from the scandal. They also were buoyed by word that Salomon’s interim chairman, Warren E. Buffett, intends to revamp the way the firm pays its executives.

Buffett, implicitly criticizing Salomon’s former management, said more of Salomon’s profit will go to shareholders and less into enormous bonuses for top executives. He also said an increasing share of employees’ compensation will be in Salomon stock. Under his plan, employees will have a 25% stake in the firm in a few years.

Salomon’s stock rose $2.25 to $28.375 in heavy trading on the New York Stock Exchange.

Still, securities analysts who follow the company said the stock market may have overreacted to the news.

They noted that Salomon’s modest gain came at a time when other Wall Street firms are reporting far bigger increases because of the strength of the stock and bond markets. They also said that much of the increase was from a $110-million cut in what would have been set aside for bonuses, rather than from improved operating results.

Revenue actually declined slightly in the quarter--to $2.42 billion from $2.57 billion last year.

Lawrence W. Eckenfelder, an analyst with Prudential Securities, said Salomon’s third-quarter results “were OK at best, really a little disappointing” considering the strength of the bond market, to which much of Salomon’s business is linked.

The company’s net income for the quarter was $85 million, or 60 cents a share, a gain of 7.6% over the $79 million, or 55 cents a share, a year earlier.

In August, Salomon disclosed that it had made false bids for government notes and bonds, at times exceeding the Treasury’s 35% limit on the share of securities one firm may buy in such an auction.

The admission led to the resignation of Chairman John Gutfreund and other executives. It also prompted investigations--still under way--by the Justice Department and other federal regulatory agencies.

In an apparent effort to appeal directly to investors, Buffett took the unusual step of announcing Salomon’s earnings in advertisements covering two full pages in the Wall Street Journal and two East Coast newspapers. In a lengthy statement, he said the firm’s $4 billion in capital ensures that the cost of the scandal, expected to exceed $200 million, “will not be crippling.”

He said the firm’s wrongdoing was the result of egregious behavior by a few employees and “was not pervasive.”

But Buffett, a billionaire and widely respected investor who is chairman of Omaha-based Berkshire Hathaway Inc., called Salomon’s compensation plan “irrational.” He said pay and bonuses have been too high relative to what the firm has earned. He also said that extremely large profits earned by a few Salomon departments were being used unjustifiably to pay excessive bonuses throughout the firm.

Buffett said that in a big company backed by shareholders’ capital, “it is appropriate that the excess earnings of the exceptional performers--that is, what they generate beyond what they are justly paid--go to the stockholders.”

In holding down compensation to levels slightly below last year’s, Buffett evidently is seeking to avoid a crucial mistake that Drexel Burnham Lambert made in the aftermath of its insider trading scandal. In an effort to stem employee defections, Drexel paid out huge bonuses even though its income was declining. The move contributed to the collapse of the firm.

Buffett instead seems intent on keeping employees by giving them a bigger equity stake in the company and encouraging a long-term outlook.