Recipients of wrongful bonuses must be made to SUFFER

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A dangerous-looking idea has escaped from the more Marxist margins of the media: persons in receipt of bonuses which transpire to have been awarded wrongfully, must not only return them but pay extra penance for their bad behaviour.

The latest exponent of this view is Paul Collier, director of the Centre for the Study of African Economies at Oxford University. Writing in the Guardian last week, he advocated a new law of ‘bankslaughter,’ under which bankers could be punished for their actions ten or more years after they took place.

With bankslaughter, when the bank blows up – even if it is a decade later – a criminal investigation traces back to determine whether crucial decisions were reckless. If a reasonable banker faced with the information available at the time would not have taken those risks, the person responsible is dragged off the golf course and jailed.

Collier’s view is a corollary to calls for banks to revert to partnerships in which partners share in the liabilities as well the profits.

Writing in the Financial Times today, John Kay says this kind of disincentive is the only thing that can seriously be expected to reduce bankers' risky behaviour.

Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

Deferred cash bonuses coming soon

Fortunately (or unfortunately), the UK Treasury doesn’t appear to see things the same way.

Despite much crowing over expected changes to pay announced by Alistair Darling this morning, the reality is that the British government is recommending only that bonuses are linked to banks' long term profits rather than their share prices.

This is likely to lead to a higher proportion of deferred cash bonuses, but it would be foolish to assume it will really make much difference.

“You can manipulate accounting profits in many ways,” says Peter Hahn of Cass Business School.

Witness, for example, Goldman's decision to push losses into the stub month of December when it reported Q1 results, or BofA's Q1 markup on Merrill assets.