Dec. 17 (Bloomberg) -- Morgan Stanley, which today reported its lowest full-year net income since 1995, cut annual compensation expense 26 percent to $12.3 billion as most employees had their year-end bonuses trimmed in half on average.

Total compensation and benefits for the company’s 46,964 employees was an average $262,030, down from $339,556 a year ago. Excluding the 8,426 financial advisers in Morgan Stanley’s wealth management unit, the bonus pool for employees was reduced by 50 percent, the New York-based firm said in a statement today. The company cut 1,782 jobs during the year.

Chief Executive Officer John Mack, 64, and Co-Presidents Walid Chammah and James Gorman aren’t taking year-end bonuses for 2008 and Morgan Stanley is changing its compensation practices to give the firm more power to recoup money from employees if problems arise. Goldman Sachs Group Inc., Morgan Stanley’s larger rival, yesterday disclosed a 46 percent decline in its compensation expense, giving workers an average $363,654.

Three-quarters of Americans in a Bloomberg/Los Angeles Times poll conducted this month said they don’t think banks such as Morgan Stanley and Goldman Sachs that accepted taxpayer funds in a $700 billion financial rescue package should pay any bonuses at all. Morgan Stanley and Goldman Sachs each took $10 billion from the government in October.

The cuts give Morgan Stanley its lowest full-year compensation expense since 2005. Writedowns on debt securities, losses on private-equity holdings and a decline in investment- banking fees cut 2008 revenue to $24.7 billion, the lowest since 2005.

The average pay figure doesn’t necessarily reflect what any individual employee receives, as some will be paid much higher salaries and others will get less. Morgan Stanley doesn’t disclose a median for employee salaries or bonuses.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: December 17, 2008 13:46 EST