Morgan Stanley (NYSE:MS) reported better than expected fourth quarter earnings today. The investment bank announced a net profit of $507 million or 25 cents a share, including a tax benefit of $155 million during the quarter, compared to a lot of $250 million or 15 cents in the same period a year ago. The results were affected by one-time accounting charges. Excluding the charges related to its credit spreads, the bank earned a profit of 45 cents a share.

Morgan Stanley

Revenues surged 23 percent to $6.97, or $7.48 billion without the effect of debt valuation changes. Analysts were expecting profits of 27 cents on a revenue of $7 billion, excluding debt valuation adjustments. Compensation expenses for the quarter came down to $3.6 billion from $3.8 billion in the same period last year.

The institutional securities unit that includes banking and fixed income business posted a revenue of $3.5 billion, up from $1.9 billion in last year’s fourth quarter. The company’s fixed income business, especially bond-trading unit, is under pressure to deliver better results. The fixed income and commodities sales and trading revenues came at $811 million, compared to $493 million in losses last year. Revenues from equity sales and trading were almost flat at $1.3 billion.

According to the report, Morgan Stanley (NYSE:MS) is shrinking some parts of its fixed income business by reducing the risky assets by 20 percent by the end of 2014. The company is also getting more involved in electronic trading, in an attempt to  reduce its dependence on a large number of employees. The company eliminated 665 jobs during the fourth quarter.

The firm has deferred all bonuses for top earners. Morgan Stanley (NYSE:MS) said that employees earnings more than $350,000 will receive bonuses in installments instead of a lump sum. The bank has set aside about $6.65 billion to pay its employees, down 7.6 percent from last year.

Morgan Stanley is not alone in their changes to bonuses; most of the banking behemoths are setting aside a small portion of their revenues for pay in an attempt to pare costs. Compensation costs for the year 2012, that include salaries, bonuses, benefits and cost of deferred pay added up to $15.6 billion, 4.4 percent lower than compensation costs in 2011. The costs amounted to about 60 percent of its revenue.

JPMorgan Chase & Co. (NYSE:JPM), which reported an impressive 53 percent increase in the fourth quarter earnings, has cut employees compensation costs for corporate and investment banking by 3 percent to $11.3 billion in 2012. The unit’s 52,151 employees received an average of $216,928 in compensation.

Goldman Sachs Group, Inc. (NYSE:GS) had increased its employee compensation by 6 percent as revenues surged 19 percent. It set aside $12.9 billion or 38 percent of revenue in 2012. The per employee expenses averaged at $399,506.

A few days ago Morgan Stanley reached a settlement with the Federal Reserve over allegations of foreclosure abuses. The firm has agreed to pay $227 million, of which $130 million in cash and the remaining in foreclosure assistance.

Morgan Stanley (NYSE:MS) shares were up 5.59 percent to $21.90.