Goldman Sachs, Morgan Stanley Bring Out Chainsaws

So far, banks have remained cautious in their commentary about the impact of Volcker, as regulators continue to seek industry input on a range of issues. But the uncertainty has made it difficult to make long-term decisions on capital allocation and staffing.

Goldman Sachs has, so far, maintained that the current weakness in the environment is purely cyclical and it would take sustained weakness for more than two years for it to make sizeable cuts to its workforce. Still, in the first nine months of 2011, Goldman laid off about 1900 jobs across entities, bringing its total workforce to 36,800.

Any significant cuts to compensation in the fourth quarter at Goldman, best known for its hefty bonuses, will get the markets to sit up and take notice. Its 38,700 employees in 2010 earned an average salary of $397,312, a rough calculation shows. The averages are, of course, skewed by eye-popping bonuses paid out to the company's partners.

Goldman has historically has a fourth-quarter compensation "true-up", a practice wherein it adjusts its compensation relative to revenues in the final quarter to boost overall profits. Analysts however, do not expect the company to make significant adjustments this time to its compensation-to-revenue ratio.

Wells Fargo Securities analyst Matthew Burnell expects the bank to report a compensation-to-revenue ratio of 43% in the fourth quarter, higher than the 39% reported in 2010, given a "challenging top-line picture."

Overall, he expects compensation to decline by just 20%, led by a 10% reduction in employee count. That could lower the average compensation per employee by a little more than 10% to about $350,000.

That may not be enough to please shareholders, who are increasingly tired of single-digit returns on capital. It certainly won't be enough to silence critics of Wall Street who argue that traders and investment bank employees are overpaid.

But Wall Street has had less flexibility to use compensation as a lever in recent years since the crisis, primarily because the backlash against bonuses has led them to change compensation practices.

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