Wall Street bonuses likely will rise this year, despite the regulatory cloud hanging over compensation, as the financial sector recovers from recession faster than the broader U.S. economy, according to a published report.

Incentives at financial firms should rise from 2009 levels but remain below the record payouts of 2007, according to compensation consultant Johnson Associates.

Average compensation at investment and commercial banks is set to rise for the second straight year, while payouts at asset managers should rebound from a 2009 trough, the report said.

The pace of economic recovery, industry activity, business mix and evolving legislation are key bonus drivers for 2010, the New York-based consultant said in the report.

The report comes just weeks after U.S. pay czar Kenneth Feinberg scolded 17 financial firms for making ill-advised payments to executives in the last couple of years, stoking public anger that flared when taxpayer funds were used to rescue the financial sector in 2008.

While some corners of Wall Street are likely to see bonuses rise by up to 15 percent this year, others could see a 15 percent drop, the report said.

Businesses that will likely see the biggest increases include prime brokerage, due to higher client balances; equities-based asset management, due to growth in assets; and high net worth units. because of increased market stability.

Areas set for the steepest bonus drops are fixed-income units at both investment and commercial banks, because of declines from strong 2009 results; and equities, because volatility and economic uncertainty have sapped the appetite for risk.

The Johnson Associates report said politicians and regulators continue to scrutinize bonuses, bringing complexity and uncertainty that could prompt some firms to defer 2010 compensation.

Lawmakers in Washington have directed the U.S. Securities and Exchange Commission to enact new say on pay rules for compensation and golden parachutes at public companies, giving shareholders more say in decisions on executive compensation.

For the 2010 first half, compensation and benefits as a percentage of net revenue declined from a year earlier, the report said.

The projections in the report were based on financial firms' second-quarter data as well as Johnson Associates proprietary information.

(Reporting by Jonathan Spicer; editing by John Wallace)

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