Banker bonuses expected to edge higher

NEW YORK (CNNMoney.com) -- Bonus payments across the financial services industry are expected to rise modestly this year as the banking sector continues to rebound from the crisis, according to a report from compensation consulting firm Johnson Associates.

While incentive compensation, including cash bonuses and stock awards, is expected to rise versus last year, payments are expected to remain below the highs of 2007, the report found.

The improved outlook for incentives overall comes as the financial industry has largely recovered from the crisis of 2008-2009. Banks have reported record profits in recent quarters as financial markets rallied last year and credit conditions improved.

The report said incentives will rise up to 15% at asset management firms and prime brokerages this year. For private equity and hedge fund managers, incentives could rise by as much as 10%.

However, bonuses for stock traders at major investment banks could fall as much as 10%, while bond traders could take a 15% hit. Investment and commercial banking performance has been hurt by recent market volatility and concerns about the European debt crisis, the report said.

The report said compensation in the financial services industry will continue to be a politically sensitive issue. Many critics have argued that skewed compensation practices helped bring on the financial crisis.

In addition, the recovery outside of the financial services sector has stalled, with unemployment remaining stubbornly high and economic growth expected to slow in the second half of the year.

As a result, the amount of incentive compensation that is deferred over time is expected to increase further this year, according to the report. Deferred compensation is designed to link payments to long-term performance, rather than short-term profits.

Last month, White House pay czar Kenneth Feinberg said nearly twenty financial firms paid an estimated $1.6 billion in "ill-advised" payments to their executives during the depths of the financial crisis.

Feinberg cited Wall Street investment banks such as Morgan Stanley (MS, Fortune 500) and Goldman Sachs (GS, Fortune 500) as firms that made excessive payments to executives.

More traditional lenders like PNC (PNC, Fortune 500) and Buffalo, NY-based M&T Bank (MTB) were also included on Feinberg's list, as was the troubled insurance giant AIG (AIG, Fortune 500) and small-business lender CIT Group. (CIT)

Feinberg acknowledged that the payments were not illegal, but he encouraged a number of the firms to adopt new rules that would allow them to restructure or cancel pay packages in the event of another financial crisis.

Earlier this year, the Federal Reserve and other industry regulators issued guidelines aimed at making sure that compensation practices at financial institutions do not encourage excessive risk taking.