NEW YORK (Reuters) - Goldman Sachs Group Inc, which had been on track to pay employees a near-record amount, instead set aside nothing for compensation in the fourth quarter and gave $500 million to charity.

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 US taxpayers rescued the banking industry during the financial crisis.

Political scrutiny of Wall Street firms is intensifying. President Barack Obama proposed stricter limits on financial risk-taking yesterday. 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 amid concerns about Obama's plans. The shares were down $3.95, or 2.4 percent, to $163.85 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 totalled $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 yesterday 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 US 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, DC. "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.

Goldman's UK staff is likely to bear the brunt of the bonus cut as the firm curbed payouts in light of Britain's supertax on bonuses, an industry source said.

The firm last month moved to deflect criticism on pay by announcing its top 30 managers would receive their bonuses entirely in long-term stock. The banking industry has moved to pay in equity in an effort to tie compensation to long-term performance and curb risk-taking.

Morgan Stanley, which has also changed its pay structures, on Wednesday reported an annual loss for 2009 but still paid out more than $14 billion as it ratcheted up its compensation ratio to 62 percent.

The House of Representatives Financial Services Committee, led by Rep. Barney Frank, will hold a hearing today to discuss compensation for top executives in the finance sector.

Last week, a commission investigating the financial crisis called Goldman CEO Lloyd Blankfein to testify on Capitol Hill, quizzing him on the firm's role in the financial crisis.

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 $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 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.