It’s that time of year again. Nothing to do with maxing out contributions to 401(k) plans, spending down the remainder of health benefit entitlements by ordering a new pair of glasses, using up leftover vacation time, or even battling through crowds to buy holiday gifts or drafting New Year’s resolutions. Rather, it’s the time when those who toil on Wall Street get to celebrate while the rest of the world looks on with varying degrees of envy. In other words, bonus season is here again.

Every three months this year, analysts, journalists, and the growing ranks of Wall Street’s critics have perused the financial statements of publicly traded firms like Goldman Sachs, looking for signs as to how big this year’s bonus pool will be and which parts of the firm stand to benefit the most. Those questions are relatively straightforward, and anyone who doesn’t want to wait until early 2011 for real answers can turn to compensation consultants like Johnson Associates for insight.

Bankers who specialize in managing prime brokerage accounts will see big gains, that New York-based firm reported. Anyone involved in wealth management or running stock mutual funds will do well too. On the flip side, traders could see bonuses that shrink by as much as 20 percent, and investment bankers toiling within both debt and equity capital markets divisions should brace themselves for lower payouts as well, Johnson Associates recently predicted.

In other words: The level of joy both on Wall Street and within the growing ranks of its critics is likely to be muted indeed. Sure, Wall Streeters can still expect to pocket anywhere from a measly $250,000 to tens of millions of dollars in bonuses—and, assuming the last-minute agreement on taxation goes through, won’t have to relinquish any more of it to the IRS than they did this year when those bonus checks are cut in the early months of 2011.

But, as Alan Johnson pointed out last month, the overall expected 5 percent gain in bonus payments is relatively modest. More worryingly to bankers of all stripes is the slide in client activity that hit both investment and commercial banking in the summer. “Many firms were forced to scale back their bonus pools from earlier in the year,” he commented. Other analysts are putting out more depressing bonus forecasts still, with Barclays Capital calculating Morgan Stanley may fork over 23 percent less in bonuses in exchange for its bankers labors this year, and the traditional big spender, Goldman Sachs, may cut bonus payouts by 40 percent.

But it isn’t just the recent behavior of financial markets, the economy, and tax legislators that has proven unpredictable and downright worrying to those on Wall Street. It’s the attitude of the public—and thus politicians of all stripes—to the financial community, which far from dissipating as the 2008 crisis recedes in time, seems to be growing as the banks have returned to financial health while individuals, entrepreneurs, and small businesses and the economy as a whole merely sputter along. The comments more than a year ago by New York Attorney General Andrew Cuomo (recently elected governor of the state) that “there is no clear rhyme or reason” behind Wall Street compensation and bonuses in particular is now received wisdom.

Post-crisis, what the Council of Institutional Investors (which recently released a white paper on Wall Street pay) described as “a tidal wave of regulation” hit Wall Street’s compensation policies. From clawbacks to nonbinding shareholder votes to attempts to rein in excessive risk taking by banning compensation that encouraged it to withhold payouts for anyone who violated risk parameters, the proposals and innovations multiplied like rabbits left unattended.

But this is a long-term issue, and it’s far from clear that these efforts to devise long-term solutions to what some Wall Street denizens still are reluctant to admit is even a problem—i.e., the fact that paying people well for successfully taking risks with the institution’s capital can lead them to take bigger and less well-analyzed risks with more of that capital—will transform Wall Street. And that is what angry vox populi commentators are sensing and responding to when they lash out at rumors that Goldman bankers will walk away with fat bonus checks again this year.

True, there are attempts to draw up new compensation plans that will hit all the hot-button issues, says Michael Frank, a partner in the Palo Alto, California, office of Morrison & Foerster LLP. The idea of paying employees their bonuses in the form of stock rather than cash and then requiring them to wait before being able to cash in those securities is well established—now some Wall Street firms are taking a similar approach to bonus payouts, Frank says. “The intent is to remind people that it’s not enough to do the work and then stick around for five years,” he explains. “They would only get the full benefit of their bonus if, in the same time frame, bad things didn’t happen at the company.”

Some of these structured-payout plans wouldn’t just withhold benefits but could actually punish some employees. “Let’s say that when the stock grants vest, the stock is at $50, and that’s the level at which the employee must pay tax, even as they are still required to hold the shares,” hypothesizes Frank. “And let’s say that there’s a bad year or two, and the stock goes down to $20.” That’s not only a double whammy, as the tax payment has multiplied the pain, theoretically, that should focus the employee’s mind not just on maximizing profits but on minimizing losses to themselves, and by extension, the bank, its investors, and the financial system.

Other models are being explored, says Frank. “If the basic model remains—rewarding people for their personal performance, however that is defined—there is a growing interest in finding a way to put an enterprise-wide risk filter on the payouts, so that not everyone in the business is rushing to conduct the riskiest business,” he says. For instance, some models being contemplated wouldn’t treat two bankers who each earned $25 million for their firm the same way if one took a lot more risk to earn that sum.

But bankers are finding ways to avoid living under those parts of new rules that they view as too restrictive. For instance, as the Council of Institutional Investors pointed out, a handful of companies, including AIG and Associated Banc-Corp, got around bans on golden parachutes spelled out in the American Recovery and Reinvestment Act (ARRA) by simply renaming and redefining those payouts.

That could be a harbinger of future bank reactions, sadly. Banks need to hire top talent, still defined in terms of the bankers and traders able to generate the maximum amount of profit for their institution without blowing up the firm. While the events leading up to 2008 do mean that most institutions will pay more heed to risk, that’s likely to occur more in the risk-management function than in compensation. “That’s what lay behind the scramble to exit from TARP—the need to pay their people ‘properly,’” says Frank. “At the end of the day, people are still answering to shareholders on a quarterly basis,” and those shareholders, for now, are still focused on profitability.

He points out the conundrum many financial institutions faced when Congress mulled limiting the deductibility of executive pay of more than $1 million: Would the impact on shareholders of the lack of the tax deduction be offset by the amounts that could be earned by high-priced talent?

The fact that that is the kind of thinking underway about executive compensation on Wall Street itself is perhaps the reason that the Council of Institutional Investors concluded in its recent white paper that “on balance, pay practices have worsened.” Only two banks—Morgan Stanley and Wells Fargo—have put long-term performance incentives in place, although “long term,” in some cases, amounts to only two or three years.

This isn’t a matter for a Pay Czar or even for Congress. At best, these groups can only exercise pressure and wield the threat of legislation. But Wall Street has shown an ability to stonewall when faced with the former, and ferociously combat the latter (not to mention, later overturn any legislation that does end up being passed, up to and including the Glass-Steagall Act.) “There’s no consensus about what reasonable pay practices are,” says Frank—and no incentive for Wall Street to devise one.

The only solution may be for the intended audience of the CII’s white paper—institutional investors, such as giant pension funds—to become true activists. They are the only constituency to whom the management will pay heed, because they are the only group, collectively, to which the likes of Lloyd Blankfein and James Gorman owe a fiduciary duty. The more that these investors deliver the message that they don’t want Wall Street to put the fate of the financial system in jeopardy once more, and that they see compensation reform as a key element in that equation, the more likely those investment banks will be to codify real reforms that remain on the books into the next bubble.

True, that may mean that the years to come will witness even more depressed bankers lamenting their loss of seven-figure bonus checks—and a corresponding dip in sales of champagne and high-end automobiles. But if that’s the price to be paid for a more stable Wall Street, it’s a cheap one. And a banker or trader who is chased out of the business because their sole interest lies in making as much money as possible as rapidly as possible without thinking about the longer-term consequences is no long-term loss to the system.

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