Goldman Sachs, Morgan Stanley Bring Out Chainsaws

A greater portion of compensation is now fixed, compared to the past. Banks are deferring bonus payouts to discourage short-term risk taking. That has the effect of reducing compensation costs in the current year, but increases the payout in future years, reducing the flexibility to tinker significantly with compensation costs.

Universal banks including JPMorgan Chase (JPM) and Citigroup (C) have nevertheless made efforts to trim salaries for capital markets employees. Compensation declined 36% in 2010 at JPMorgan's investment banking division, with the average compensation per employee declining 8% to $341,551.

Citigroup does not breakout its "securities and banking" compensation costs but the bank is laying off nearly 5,000 workers, 25% of which is in the investment banking business.

At Goldman's smaller rival Morgan Stanley, plans are underway to lay off 1600 employees by the first quarter of 2012. Because of its substantial wealth management operation, Morgan has a slightly different compensation structure relative to investment banking peers, with compensation often taking up as much as 50% of revenues.

The investment bank may cap cash bonuses for senior management for 2011 at $125,000 and defer as much as 75% of their compensation, up from about 65% in recent years, according to a Wall Street Journal report . The same report suggested that Goldman Sachs may cut the bonuses of its 400 partners by half.

More long-term changes could still be in store for Goldman and Morgan Stanley employees. Bernstein analyst Brad Hintz expects Goldman to respond to Volcker by automating market making activities; reduce staffing on trading floors and shrink overhead to enhance business margins. "We foresee a "'new"' Goldman Sachs that will remain a powerful global securities house and investment bank, but with a much more tightly limited balance sheet and a much changed fixed income business model," the analyst wrote in a recent report.

Bernstein believes that "the new Morgan Stanley will be less reliant on trading and have a lower-risk business model, will control the leading market share position in retail brokerage, and will maintain its top ranking in M&A advisory and equity capital markets."

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