Wall Street's bonus baby steps

NEW YORK (Fortune) -- So much for Wall Street sobering up.

Under pressure to prevent another meltdown, Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) have been cutting back on cash bonuses and insisting on so-called clawbacks -- arrangements that allow companies to reclaim past bonuses when there is employee misconduct.

Yet for all their supposed reform-mindedness, the banks show no sign of pulling the emergency brake on the great compensation escalator.

A year after taxpayers saved the finance industry from collapse, the big banks will hand out billions of dollars in bonuses in the coming weeks -- at a time where unemployment tops 10% and many people are still losing their homes to foreclosures. To say this rankles in some quarters is an understatement.

"There is a need to show restraint considering the unusual circumstances of the past year or so," said Tim Smith, a senior vice president at socially responsible investment firm Walden Asset Management in Boston. "That's what you're not seeing right now."

Take Goldman Sachs. After losing more than $3 billion in the last four months of 2008, the securities firm is on track to lavish some $21 billion on its workers for 2009, now that the firm has returned to profitability. That's in line with the amount Goldman paid in its record profit year of 2007.

Goldman won't be the only one dispensing a lot of loot. Compensation expense at JPMorgan Chase's (JPM, Fortune 500) investment banking arm was up 20% in the first three quarters of 2009, the New York state comptroller's office estimates. Even Morgan Stanley, which only recently broke an embarrassing streak of quarterly losses, could pay workers $14 billion.

To be fair, Goldman and Morgan Stanley are reforming how they compensate top execs, doling out less cash and issuing more stock that must be held for several years.

But while some banks have been willing to engage critics of their compensation-setting processes, they haven't been inclined to limit the size of paychecks.

When times are good, those can be rather large. In 2007, for instance, Goldman's top five executives -- CEO Lloyd Blankfein, co-presidents Gary Cohn and Jon Winkelried, finance chief David Viniar and chief administrative officer Edward Forst -- combined to make $322 million, according to Securities and Exchange Commission filings

Though none of the firm's top five leaders received more than $5.3 million in 2008, this year's giant trading profits could mean a return to the eye-popping paychecks of yore.

That's inappropriate considering the risks taxpayers took on in financing the resuscitation of the banking sector last year, said Laura Shaffer, director of shareholder activities at the Nathan Cummings Foundation in New York, which owns a stake in Goldman Sachs.

She notes the billions of dollars in Troubled Asset Relief Program loans that the big banks took and then repaid, as well as the benefits they reaped via the bailout of troubled insurer AIG (AIG, Fortune 500) and the expanded federal backstops of bank deposits, bank bonds and money market funds.

All these stand as asterisks to the $51 billion in profits that the six biggest bank holding companies -- Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and Wells Fargo (WFC, Fortune 500) along with Goldman, Morgan Stanley and JPMorgan Chase -- posted in the first nine months of 2009. Goldman alone is responsible for almost a quarter of that.

"There's a sense on our part that the performance we've seen at Goldman isn't true performance," said Shaffer.

Accordingly, the Cummings foundation has sponsored a resolution calling on the Goldman board to report back to shareholders on whether senior executives' compensation is "excessive," judging by the gap between top execs' pay and that of other workers.

The so-called pay disparity resolution isn't the only one of its kind. A group of institutional investors belonging to the Interfaith Center on Corporate Responsibility (ICCR) this month filed shareholder resolutions along the same lines at 21 big health industry companies, including insurer Aetna, drugmaker Eli Lilly and mail order pharmacy Medco.

Those resolutions will go up for shareholder votes when the companies hold their annual meetings. Though it can take years to build enough stockholder support to give a proposal even a shot at passage, would-be reformers are hopeful that the disconnect between massive job losses and soaring CEO pay will win over some skeptics.

"There is a lot of discontent right now among shareholders," said Julie Tanner, assistant director of socially responsible investing at Christian Brothers Investment Services, which like Nathan Cummings is a member of ICCR.

Putting the details of giant pay packages before shareholders can shame board members into getting a stronger grip on the compensation process, Tanner said. This is the logic of the say-on-pay movement, whose advocates have enlisted more than three dozen companies -- including Goldman -- to hold advisory votes next year on compensation practices.

Investors aren't the only possible source of friction on giant paychecks. The Federal Reserve said this fall it will examine bank pay practices, in a review some experts expect to result in some "pushback" for big banks.

But it's not clear how aggressive the Fed will be. And while greater disclosure and transparency are surely welcome, they will do little now to bring down egregious pay on Wall Street.

"Putting pressure on boards is a long process," said David DeBoskey, a finance professor at San Diego State. "In the meantime, every day is Christmas for these guys."