Rewarding employees for hard work, and not just for showing up, has become a key tenet of good corporate compensation policy. So why are some Wall Street firms sending a very different message?

Wall Street has long showered lucrative annual bonuses on bankers and traders who delivered big profits.

But the dozens of big banks that accepted bailout funds from the $700 billion Troubled Asset Relief Program must now rethink how they reward top performers, as the government caps what they can dole out, and taxpayers and politicians demand greater accountability.

It's kind of ironic in a way, because over the last 10 years everybody has been pushing for pay for performance, said Michael Melbinger, who runs the employment benefits and executive compensation practice at Chicago law firm Winston & Strawn LLP. Now, with TARP, it is 180 degrees the other way.

Wall Street bonuses themselves have historically provided the bulk of investment bankers' total pay, and are not likely to go away. A report from pay consultant Johnson Associates Inc on Thursday said many investment banking employees should see bonuses rebound this year from 2008 as earnings improve.

But for some executives at big banks whose bonuses have been crimped under the bailout rules, compensation is being revamped in ways that pay experts say may prove counterproductive over the long term.

A case in point, experts say, is a move by TARP recipient Morgan Stanley to significantly boost base salaries for top officers. Bank of America Corp and Citigroup Inc, which each took $45 billion from TARP, have also looked at boosting base salaries.

The idea behind salary increases is to try to retain valuable employees who may try to defect to companies not subject to the government's pay rules. Even UBS AG, a Swiss bank, has said it will boost salaries of some investment banking employees to discourage them from jumping ship.

Yet the problem, pay experts say, is that increasing guaranteed pay does nothing to motivate employees to perform well over the long term.

ANGER ON MAIN STREET

Few average Americans would shed any tears over curbs on the high six- or seven-figure pay figures still common on Wall Street. Indeed, bankers' bonuses have drawn much populist anger on Main Street and in Congress.

Even in the worst of times, investment bankers and other financial professionals can earn many times what most U.S. workers take home.

Many also would argue that Wall Street's bonus structure helped fuel the global financial crisis by encouraging investment banking employees to take outsize risks in credit and mortgage markets to deliver short-term profit that would translate into lucrative bonuses.

But bonuses, pay experts say, do have a place on Wall Street if used properly to reward top performers.

They say, though, that they expect more banks to start awarding more pay as salary rather than bonus, given the political atmosphere.

Companies now are saying, we are going to decrease the risk by increasing the salaries, said David Leach, co-founder of Strategic Apex Group LLC, which advises companies on executive pay. The flip side is that there is then more of a guarantee and it is more of an entitlement.

A senior executive at a TARP recipient, who spoke on the condition of anonymity because of the sensitivity of pay discussions, said boosting salaries and reducing bonuses makes little sense.

You're going to overpay them regularly, instead of just sometimes? this person said. Maybe they will worry less about financing their daily lives if they get more money during the year, so maybe they will work a little harder because that fear is gone. But that seems like a real stretch.

Melbinger, of Winston & Strawn, said banks participating in TARP have little choice other than to boost base salary levels if they want to try to retain key employees.

Indeed, government pay limits restrict these executives from getting many other types of compensation until their companies repay the federal money. That's one reason -- generally left unstated by TARP recipients -- that banks want to repay the government as quickly as they can.

I do not see it as a continuing trend, Melbinger said of recent Wall Street pay changes. The day the TARP restrictions lapse, they will go back to annual and long-term bonuses.

(Reporting by Martha Graybow; Additional reporting by Dan Wilchins and Jonathan Stempel in New York; Editing by Richard Chang)

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