Investment banks, faced with a weak industry outlook, probably will reduce the amount of revenue set aside for pay and should cut 20 percent to 30 percent of managers, according to Boston Consulting Group Inc.

Investment banks also will bring down compensation costs by dismissing flow traders as electronic trading becomes more prevalent, BCG said in a report today. The industry will see little to no growth in the total revenue pool over the next few years, the firm said.

Many of the largest investment banks including Goldman Sachs Group Inc. (GS), Credit Suisse Group AG (CSGN) and JPMorgan Chase & Co. (JPM) cut pay last year amid a slowdown in trading and mergers. Firms must eliminate more levels of management and some should reduce the proportion of employees with managing director titles, according to the report.

“Given that 50 percent of revenues were historically allocated to compensation, clearly people costs will have to be attacked,” Chandy Chandrashekhar, a partner at BCG, told journalists in New York today. Savings “will come from management as well as from the displacement of manual activity through automation.”

Firms must choose a more explicit model within their trading businesses, focusing on one of three options, according to the report. Some will build out large electronic flow-trading platforms, which will account for 70 percent of activity, while others will have traders cater to individual client needs with a broad range of products, constituting 20 percent of volume.

Other banks will focus on principal trading, which will bring higher margins and demand more capital and risk management. Principal trading will contribute 10 percent of trading and probably will be captured primarily by non-banks as the largest firms face stiff regulations, BCG said.

“Not all the banks are making the right choices,” said Philippe Morel, leader of BCG’s capital markets segment. “Lots of them are hesitating across models.”

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net