NEW YORK ( TheStreet) -- The big investment banks refrained from announcing further plans to significantly cut their workforce, contrary to expectations, suggesting that Wall Street bonuses may absorb most of the pain in 2011.

Difficult market conditions roiled third-quarter investment banking and trading revenue for the nation's biggest banks including JPMorgan Chase ( JPM), Goldman Sachs ( GS) and the outlook for the fourth quarter bleak amid ongoing uncertainty in Europe.

Expectations that the weakness will ensue for several quarters had spurred talk about impending layoffs on Wall Street, as compensation remains the biggest lever for investment banks to boost profitability.

But banks at the moment seem more focused on cutting compensation through bonus reductions rather than shedding jobs.

During its third-quarter earnings conference call, JPMorgan Chase CEO Jamie Dimon said the investment banking unit will likely see some "trimming of sails" but there was no major layoff program.

Goldman Sachs, which said last quarter it will target 1,000 layoffs as part of a cost cutting program by 2012, did not announce any further headcount reduction plans. The firm shed 1,300 jobs in the third quarter, although 800 of those cuts came from the sale of its mortgage servicing unit.

Citigroup ( C) CEO Vikram Pandit said compensation will be calibrated to performance but fell short of announcing any plans to slash jobs.

That means traders and investment bankers may see their bonus check shrink significantly in 2011, as banks move to rein in expenses.

Although the third quarter saw compensation cuts across the board, the reductions have not been enough to offset the adverse impact of declining revenues on profitability in all cases.

Goldman Sachs slashed compensation expenses by 59% in the third quarter from the year-ago quarter in pace with its revenue decline. Still, its compensation-to-revenue ratio is at 44% for the first nine months of 2011, up from 43% in the year-ago period, as revenues have declined at a greater pace.

RBC Capital analyst Fiona Swaffield forecasts bonuses at Goldman Sachs to fall by roughly 50% in 2011, as compensation expenses decline 24%.

Morgan Stanley ( MS), which has a different compensation structure from its peers due to its significant global wealth management business saw its compensation- to- revenue ratio rise to 51% in the third quarter from 45% in the second quarter.

CFO Ruth Porat said expenses played "catch-up" in the third quarter, with the year to date ratio coming in at a lower 46%.

Still she added that the investment bank would seek a balance between "protecting our important franchises and paying those employees who are delivering differential value" and the "need to deliver acceptable returns to shareholders."

JPMorgan has been more aggressive in controlling compensation expenses, setting aside only 35% of its investment banking revenues towards compensation in the first nine months, down from 39% a year earlier.

With the fourth quarter performance likely to be similar to the third, Dimon said that the investment bank would pay out a smaller percentage of its revenues as compensation than newspapers like the New York Times will this year.

One reason why banks seem to be leaning more towards bonus adjustments than layoffs is because executives still likely hold the view that the current downturn in capital market activity is cyclical. That makes them more inclined to retain talent, so that they are ready to ride the upside when the cycle turns.

"In a tough year for revenues and compensation, when the earnings for the year don't really amount to much anyway, management is willing to sacrifice the P&L a bit to protect the franchise and retain people but not at the expense of the capital position. Expenses will be less than revenues," Oppenheimer analyst Chris Kotowski said in a report following Morgan Stanley's earnings.

Morgan Stanley's CEO James Gorman also hinted that bigger changes may be in store if the outlook on the industry were to change materially.

"We are constantly reassessing whether we're experiencing something that is secular or cyclical and under what conditions we would act to shrink or change businesses, product lines or balance sheet and level of risk weighted assets," Gorman said in the third quarter conference call. " We will continue to make whatever decisions are necessary if we indeed determine we are experiencing a secular change. We're not focused on our size, only on the returns we generate for shareholders. "

The market seems to believe that investment banks are due for a long-term change, with shares of Goldman Sachs and Morgan Stanley trading at substantial discounts to their tangible book values. If the market is right, bigger layoff announcements might be inevitable.

--Written by Shanthi Bharatwaj in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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