The move helped the Wall Street bank report better-than-expected fourth-quarter net income of $4.95 billion.
It also helped Goldman answer critics who have lambasted the bank for setting aside so much for bonuses months after U.S. taxpayers rescued the banking industry during the financial crisis.
Political scrutiny of Wall Street firms is intensifying. President Barack Obama plans to propose stricter limits on financial risk-taking on Thursday. Curtailing risk-taking could wallop Goldman, which often trades its own funds to help bolster the bottom line.
Goldman shares rose in early trade but later gave up those gains. They were down $1.86, or 1 percent, to $165.93 in morning trade.
Responding to outrage over high pay, the bank set aside 36 percent of net revenue for compensation for 2009, Goldman's lowest percentage as a public company. Compensation for the year totaled $16.19 billion.
Goldman Sachs is not a banking or financial story now, it's a political story, said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati.
A protest demonstration over Wall Street excess was planned for Thursday in front of Goldman's headquarters in New York. The investment bank, famously referred to as a great vampire squid wrapped around the face of humanity in a scathing piece in Rolling Stone last summer, is seen as a poster child for the excesses of Wall Street.
Goldman Sachs is not deaf to the calls for restraint, the bank's chief financial officer, David Viniar, told reporters on a conference call. The bank consulted U.S. pay czar Kenneth Feinberg regarding its bonus policies.
On average, Goldman employees made $498,000 in 2009, up from $317,000 in 2008 but down from $661,490 in 2007.
It will alleviate some political pressure, said Keith Davis, bank analyst at money manager Farr, Miller & Washington in Washington, D.C. They've been in everyone's cross-hairs for how much money they make. I think they'll still be there, but the fact that they took down the bonuses will help incrementally.
The bank recorded negative compensation expense in the fourth quarter because of the contribution to Goldman Sachs Gives, the firm's charitable arm.
The compensation total was far below the record $20.2 billion the firm paid in 2007, and well below what the firm was expected to pay this year as it reported blockbuster profits.
The House of Representatives Financial Services Committee will hold a hearing on Friday to discuss compensation for top executives in the finance sector.
Goldman's fourth-quarter profit amounted to $8.20 a share, topping analysts' average forecast by $3. In the year-earlier fourth quarter it posted a loss of $2.12 billion, or $4.97 a share.
The fourth-quarter compensation actions boosted profit dramatically. If the company had set aside about $3.3 billion in the quarter for pay, which would have brought total compensation expense to about $20 billion for the year, Goldman would have earned less than $4.00 a share.
But low compensation expense may be difficult to repeat in the future, raising questions about how strong Goldman's performance really was in the fourth quarter, analysts said.
The bank's trading momentum fell off in the quarter. Goldman reported trading and principal investments revenue of $5.1 billion, down 43 percent from the third quarter.
Rivals Morgan Stanley , Bank of America Corp and JPMorgan Chase & Co reported similar declines in trading in the fourth quarter.
Investment banking was a strong spot in Goldman's earnings, reporting revenue of $1.6 billion, up 58 percent from a year earlier.
Goldman also drew down risk in the fourth quarter as its average Daily Value at Risk (VaR) declined to $181 million from $197 million a year earlier and $208 million in the third quarter. VaR, one measure of risk, stands for the maximum that could potentially be lost trading on a single day.
The firm paid $6.44 billion in corporate taxes, resulting in a tax rate of 32.5 percent for 2009. That's up from less than 1 percent in 2008.
(Reporting by Steve Eder and Dan Wilchins; editing by John Wallace)