Wall Street Bonuses to Drop by 14%

Wall Street cash bonuses for 2011 are expected to have tumbled 14% from a year earlier and will likely hit their lowest level since the financial crisis of 2008, according to a report released by New York State Comptroller Thomas DiNapoli.

New York securities firms will pay employees $19.7 billion in cash bonuses, down sharply from $22.8 billion in 2010.

A smaller bonus pool is the latest sign of pain for the big banks, which have been culling their ranks and slashing costs since last spring on the European debt crisis, a slowing U.S. economy and lower client trading volumes. It also has big implications for the budgets of New York state and New York City.

The steep decline in bonuses reflects a major slump across the investment-banking and trading businesses as profits for the broker/dealer operations of New York Stock Exchange member firms likely plummeted by more than half for the second straight year and didn't exceed $13.5 billion.

In a statement, Mr. DiNapoli said the cash bonus decline reflects a "difficult year on Wall Street," adding the securities industry "faces continued challenges as it works through the fallout from the financial crisis and adjusts to regulatory reforms."

In response to tough markets and weak client activity, the securities industry cut 4,300 jobs between April and December of last year, the report said. The layoffs reflect a return to the heavy downsizing at these firms three years ago. During the recent financial crisis, the industry lost 28,000 positions, of which only 9,600 returned prior to the latest round of cuts.

According to the report, the average cash bonus fell 13% to $121,150, but declined slightly less than the total cash bonus pool because the pool was shared among fewer workers than a year ago.

Michael Karp, a managing partner at Options Group, an executive search and consulting firm, said he believes Wall Street is in the third year of a five-year cycle and that compensation is in the midst of a "downward trend" over the next few years.

"Banks have finally figured out that business will not come back due to major regulations such as Dodd-Frank and the Volcker Rule, and there will not be enough jobs to hire for, hence they don't need to pay" for talent, he said.

The cash-bonus figures, which includes estimates of the payouts to employees who work in New York City during the "traditional bonus season," were calculated using personal income tax data. The numbers reflects cash bonuses and deferred compensation for which taxes have been withheld and don't include stock options or other forms of deferred compensation that hasn't been realized.

While several banks slashed cash bonuses by 20% to 30%, the data suggested a smaller decline in the bonus pool, which is likely due to the payment of bonuses that had been deferred from prior years.

"The increased use of deferred compensation should create a pipeline of bonuses that will be paid in future years, which will reduce volatility in industry tax payments," the report said.

Before the financial crisis, business and personal tax income collections from Wall Street-related activities accounted for up to 20% of state tax revenue, but that figure fell to 14% last year. The industry's contribution to the city's tax collections has dropped to less than 7% from 13%.

This story first appeared on WSJ.com.

Write to Brett Philbin at Brett.Philbin@dowjones.com