NEW YORK (AP) _ Salomon Brothers, reeling from huge losses this year, announced a change in employee pay Thursday that would sharply cut compensation during times of weak earnings.

Starting next year, the Wall Street investment bank will pay the 188 managing directors in its client-driven businesses 35 percent of 1994 pay, plus a percentage of the unit's profits. Client operations include stocks, fixed-income, sales and other departments that handle business for customers.

Previously, Salomon employees were not penalized as heavily during times of losses. If the new rules had been in effect amid this year's losses, managers probably would have earned only about 35 percent of their current annual compensation.

The new rules also require employees in proprietary trading - trading for Salomon's own profits - to set aside part of their pay each year. If they lose money in subsequent years, they would forfeit the deferred compensation.

Other Salomon employees whose jobs do not directly contribute to Salomon's earnings - including lawyers, accountants and administrative staff - will continue to get compensated under old rules.

Among Wall Street firms, Salomon has been hit particularly hard by the financial market downturn that began in February. In the nine months ended Sept. 30, Salomon has lost $238 million, compared to a profit of $351 million in the first nine months of 1993.

Salomon said in a statement that the change will help forge a partnership between between managers of the business and the owners. Salomon Brothers is a unit of Salomon Inc.

Investors cheered the news. Salomon stock rose $1 a share to $39.37 on the New York Stock Exchange Thursday.