So, bankers’ bonuses are too high. Something must be done to change this. That something possibly being:
The most promising scheme to circumvent this bonus ban is to replace it with vast base salaries and subject to strict clawback provisions. A rather smug sounding fictional letter in Lex puts it so:
Your fixed, cash salary will be increased from €500,000 to €10m per year…to be paid monthly into an escrow account. At year-end, you are entitled to the balance of your cash salary in the escrow account subject to strict clawback provisions detailed in this contract…
Theoretically this should produce precisely the same ex post payments and ex ante incentives that bankers currently enjoy (and we endure). The escrow account will be an accounting reality but an economic fiction. Meet the new system, same as the old system bankers will be told.
But, this misses a lot of the vital psychological differences between bonuses and fines. A bird in the hand is worth two in the bush is just folk psychology justification of endowment effects. This is how airlines get people to pay extra charge after charge while their booking. Once you have that plane ticket in your basket its “yours” and there is a psychological cost to giving it up.
The money in bankers’ escrow account is this plane ticket and this set up will produce a different set of incentives. Will this incentive structure improve the operations of the banking system? I would suggest it will. Chris Dillow pointed to research two years ago from the University of Nottingham which suggested that fines provide better incentives than bonuses.
And this is threfore good because fines produce better incentives than bonuses.
Which is sadly where the logic falls down. For what is the incentive that we abhor among bankers? That they are willing to take too much risk with other peoples’ money in order to gain their bonuses. But we’ve just said that fines are better incentives than bonuses: thus we have increased the incentive for bankers to take too many risks with other peoples’ money.
Which is, I’m pretty sure, not what Left Outside desires.