The investment banking bonus bonanza, set in motion by Goldman Sachs on Tuesday, continued yesterday as Lehman Brothers and Bear Stearns reported record profits for the fourth quarter and the full year.

A surge in revenues from fixed-income sales and trading was the principal driver of profits and bonuses at both banks as traders made successful bets on the direction of bond prices.

Lehman Brothers revealed that it would pay its average employee $335,441 (£170,500) this year as it reported a record fourth-quarter profit of $1.0 billion, which took its full-year net income to $4.0 billion, a 23 per cent jump on 2005.

The US investment bank is paying its 25,936 staff a total of $8.7 billion in salary, bonuses and other benefits for 2006, which represents a 20 per cent rise on 2005’s total compensation figure.

Lehman Brothers did not break down its bonus allocations, although the City will have profited handsomely from the handouts.

The bank employs 5,450 staff in Europe — implying a salary and bonus pool of about $1.8 billion — the majority of them based in London.

Lehman Brothers’ profits for the fourth quarter jumped by 22 per cent, from the year earlier period, to $1.0 billion, as revenue from fixed-income sales and trading rose by nearly a third to $2.1 billion. For the year, revenue from bond sales and trading rose by 15 per cent to $8.5 billion.

Revenues from equities sales and trading rose by 21.6 per cent to $900 million for the quarter ended November 30, although fees from advising on mergers and acquisitions increased by only 5 per cent — to $256 million — despite the surge in deals worldwide.

Lehman was not alone in announcing a record year for profits and bonuses yesterday.

Bearn Stearns, the US investment bank best known for packaging home loans into mortgage-backed bonds, reported its highest quarter in the three months to November 30, chalking up a 38 per cent rise in net income to $563 million.

This fourth-quarter profit was made on the back of a 25 per cent increase in fixed income revenues to $1.1 billion and a 58 per cent jump in investment banking fees, to $364 million, as the bank attracted more M&A advisory work. The quarter contributed to a 40 per cent rise in net income for the year — to $2.1 billion — and handed its 13,500 staff an average of $321,740 in salary, compensation and other benefits for the year. The total compensation figure of $4.3 billion is a 22.2 per cent rise on last year.

Bear Stearns employs about 1,100 staff in London, implying a salary and bonus pool of about $350 million for the bank’s City-based workers.

For the full year, fixed income revenues jumped by 23 per cent to $4.0 billion on a strong performance by its mortgage-backed securities operation.

But the record compensation dished out by Lehman Brothers and Bear Stearns this year pales by comparison with Goldman Sachs.

On Tuesday, Goldman Sachs announced that it would pay its 26,400 staff an average of $622,000 in compensation this year as it announced a 70 per cent rise in profits to $9.5 billion for 2006.

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