“The highest bonuses usually go to ‘stars’, who may feel compelled to justify their status by taking greater risks in the hope of making higher and higher profits,” Daniel Davies, a senior economist at the Bank wrote .
“Employees’ contracts almost always involve limited liability; they may share profits from favourable trading outcomes but it is difficult or impossible to make them compensate their employers for losses,” he added. That same year, Howard Davies, then the Bank’s deputy governor, threatened to set more stringent capital requirements for banks that paid big bonuses. [...]
Daniel Davies recommended that banks consider introducing deferred bonus schemes, where bonuses would be allocated for a trading period but not paid until some time later. “This gives firms the opportunity to pay negative bonuses by removing money from the deferred bonus if performance deteriorates,” the economist wrote.
The Bank wanted bonus schemes to put greater emphasis on traders’ long-term performance. But City institutions defended their pay practices and said that attempts to regulate would be counter-productive.
Sure glad we didn’t do anything counterproductive!