* Also adding over 300 staff for small business loans

* Boosts small business lending by $4 billion

* Unclear if CEO Dimon will get bonus; did not last year

* To pay $500 award to employees earning under $60,000

* Reinstates 401(k) match for 2009 (Adds background on regulation, Dimon’s pay, lending efforts)

By Elinor Comlay

NEW YORK, Nov 9 (Reuters) - JPMorgan Chase & Co JPM.N is lifting a salary freeze it put in place last year, according to an internal memo, a sign of its growing confidence in the economic recovery after it reported several quarters of improving investment-banking profits.

Separately, the bank said it is adding more than 300 staff to its branches to support a $4 billion increase in small business lending. The initiative, like its mortgage modification program for homeowners, is an effort to show it is extending lending and helping to revive the U.S. economy.

As year-end bonus season approaches, bankers’ compensation looms as a hot-button issue again. When the financial crisis was deepening, the industry came under fire from lawmakers for paying large bonuses to its executives even as it was being propped up with taxpayer money and cutting loans to a trickle.

The decision by JPMorgan to lift the salary freeze is part of its year-end performance and compensation review process, according to the memo from human resources director John Donnelly.

The memo was confirmed by a spokesman for the firm, which has returned $25 billion it got from the government -- unlike peers Citigroup Inc C.N and Bank of America Corp BAC.N.

JPMorgan believes its pay practices for top executives follow best principles, Donnelly wrote in the memo, noting that the bank’s senior executives receive most of their compensation in stock that vests over multiple years and it eliminated so-called golden parachutes for executives in 2005.

Chief Executive Jamie Dimon did not receive a bonus last year and it is not yet clear whether he will get one this year. For 2008, he received about $19.7 million in total compensation, including a $1 million salary and stock and options awarded in previous years, according to regulatory filings.

The second-largest U.S. bank will also return to matching eligible U.S. employees’ 401(k) pension plan contributions, after suspending those payments earlier this year, according to the memo.

REGULATION

The Federal Reserve last month issued bank pay guidelines aimed at curbing incentives for risk-taking that officials say contributed to the financial crisis.

U.S. Senate Banking Committee Chairman Christopher Dodd was expected on Tuesday to unveil draft legislation to tighten bank and capital market regulation. [ID:nN094842]

“It is possible that the regulatory rules will change compensation standards and we will, of course, adhere to all regulatory standards,” Donnelly wrote in the memo.

“We will continue to be committed to being highly competitive and paying for performance,” he added.

Dimon has publicly defended the bank’s need to pay for talented staff, although at a recent industry gathering he said the bank would not actively seek to hire from banks including Citi and Bank of America that still face pay restrictions.

The New York-based bank will pay a $500 special award to employees globally that receive less than $60,000 in total compensation, Donnelly wrote in the memo.

As JPMorgan announced it was boosting staffing for its small business lending, the Federal Reserve on Monday announced the percentage of banks tightening lending standards declined in the third quarter, while the pace at which loan demand was falling eased as the economy began to grow.

While showing credit was still tight and loan demand soft, the Fed’s October survey of bank loan officers signaled a further easing in the number of banks tightening credit, which hit a peak last year in the depths of the financial crisis.

JPMorgan this summer repaid $25 billion it received from the U.S. government’s Troubled Asset Relief Program but the Treasury still holds warrants to buy the bank’s stock as part of that program. The bank has said it is letting the Treasury auction the warrants, rather than pay an inflated price to buy them back.

Citigroup and Bank of America have yet to return the money they got from the government and still face pay restrictions for their top executives. (Reporting by Elinor Comlay; Editing by Gerald E. McCormick, Gary Hill)