By LIZ RAPPAPORT And COLIN BARR
A dismal year means Wall Street is about to take a big hit to its wallet.
As banks prepare to report fourth-quarter results and make final bonus decisions for 2011, total compensation is likely to be the lowest since 2008, when the financial crisis destroyed some firms and left many survivors on government life support.
While still lofty compared to the rest of the U.S., pay for some Wall Street workers will be the lowest in years, at a time when critics have been lashing out at what they deem excessive finance-industry compensation.
At Goldman Sachs Group Inc., many of the roughly 400 partners can expect to see their 2011 pay cut at least in half from 2010, according to people familiar with the situation. Pay for some employees in the New York company's fixed-income trading business will shrink by 60%, with some workers getting no bonus, these people said.
Morgan Stanley is expected to shrink bonuses for some investment bankers and traders by 30% to 40% from 2010, said people familiar with the matter.
Pay worries have been mounting up and down Wall Street for months amid lower trading revenue, languid deal-making, new regulations and anxiety about the global economy. Other pressures include weak financial-company stock prices and sour public sentiment that culminated in the Occupy Wall Street encampment in New York.
J.P. Morgan Chase & Co., one of the biggest banks, is set to report earnings Friday, followed next week by Goldman and other major banking firms.
For most of 2011, Wall Street executives offered few specifics about how the lackluster year would affect compensation, especially the large portion that will be paid out as bonuses in the coming weeks.
Each quarter the banks set aside a percentage of revenue for benefit costs. Through the first three quarters of 2011, total compensation and benefit costs at 34 publicly traded financial firms tracked by The Wall Street Journal were on pace for a record-high $172 billion. The calculation is based on the companies' reported results and projections by analysts.
But industry observers expect that when all is said and done for the year, many firms will adjust their benefit costs sharply downward, partly to appease shareholders frustrated by soft profits.
If the companies apply the same ratio for 2011 as 2010, overall compensation and benefits for last year would be $159 billion for the 34 companies tracked by the Journal, the smallest total since 2008.
At Goldman, average compensation per employee would fall 10.7% to $385,000 for 2011 from $431,000 in 2010 if the New York company keeps its payout rate steady in the fourth quarter. In 2007, Goldman employees received an average of $661,000 each, and people throughout the firm are bracing for disappointment.
Analysts who follow Goldman expect the securities firm's revenue to fall 23% for 2011 compared with 2010, according to a survey by FactSet Research Systems Inc.
For the typical Goldman partner, pay for 2011, including base salary and bonus, is likely to range from $3 million to $6.5 million, according to people familiar with the matter. In better years, payouts have been at least twice as high, these people said.
On Friday, Sanford C. Bernstein analyst Brad Hintz said he expects Goldman to earn just 77 cents a share for the fourth quarter, down from his previous estimate of $3.15 a share. "We do not expect a robust recovery in 2012," Mr. Hintz wrote.
More ominously, executives at some financial firms foresee longer-term changes as a result of economic and regulatory shifts that will limit profitability.
"Companies definitely have to realize the party as they know it is over," said Rose Marie Orens, a senior partner at Compensation Advisory Partners, a New York firm that works with compensation committees at public-company boards.
In many cases, pay cuts on Wall Street will come mostly at the top because that is where the largest bonuses are paid. Before the crisis, financial firms competed aggressively to attract and keep up-and-coming talent to groom for the future.
As a result of the looming cuts, though, some midlevel employees at investment banks might make more than their managing-director or executive bosses this year, said people familiar with the matter.
Wall Street has always reined in pay when times are tough, but competition for star traders and investment bankers discouraged firms from making big overall changes. In the wake of the financial crisis, some firms shrank bonuses and increased base salaries to bend to political pressure. Regulators argued that heavy reliance on bonuses encouraged excessive risk-taking.
A broader reckoning is under way now amid widespread cost-cutting. In the second half of 2011, two dozen major global banks and securities firms made plans for a total of 103,000 job cuts.
For many Wall Street executives and staff, the new pay structures and cuts in company perks already have hampered their lifestyles. Instead of large cash payouts each year, bankers now are getting more and more of their own companies' shares. Some cash-strapped employees have sold second homes or gotten loans from their companies to pay bills, said people familiar with the matter.
For now, companies are still using larger chunks of their revenue for employee pay. The Journal's analysis projects that 36% of revenue will go toward compensation and benefits in 2011, up from 33% in 2010.
The analysis assumes that the banks, securities firms, asset managers, exchange operators and other companies for the fourth quarter will hold steady the percentage of revenue used for compensation as in the first three quarters.
They don't always do this, however: In each of the past two years, Goldman has reduced its pay ratio in the fourth quarter, holding down compensation and boosting profits.
One bright spot this year could be bonuses given out in stock. The stock-price slide that battered most financial firms in 2011, wiping out $295 billion in market capitalization from the 34 companies in the Journal's analysis, means that stock-based bonuses about to be doled out will be cheap compared with previous years. That could mean a big windfall down the road for employees if financial firms' stocks climb.
—Aaron Lucchetti contributed to this article.Write to Liz Rappaport at liz.rappaport@wsj.com
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