Should bankers’ pay be subject to government regulation? I am referring to bankers ensconced in the private sector rather than those employed by state-owned banks or even to those temporarily in state hands. Many people of a certain age instinctively balk at the idea—their attitude colored by memories of low, rigid public sector pay scales exorcising motivation and talent. Others, touched by a little schadenfreude, believe that the time is ripe for government involvement in private-sector pay. It fills me with dread. Having been involved in setting investment bankers’ pay, bitter experience has taught me that getting it right is nigh impossible at the best of times. This is before introducing the added dimension of political and national interests.

In the past, I tried to reward exceptional behavior only to have the recipient quit as this was just what he was waiting for to fulfill his dream of opening a wholefood restaurant in Provence. It happens more frequently than you may think. Reward teamwork over individual performance and the end result may be underperformers staying because they would not be as well paid elsewhere and your outperformers demotivated and seeking opportunities to be better appreciated. While bonuses are calculated in absolute terms, much of their effect is based on relativity of expectations to past pay and the remuneration of rivals both within the organization or in the industry. Venturing to play these complex dynamics with one number is treacherous. I recall the reported comment of a senior banker at the end of a bonus day suggesting that never before had so much money been paid to so many disappointed people.

Recent experience of even temporary government ownership, in the case of the Royal Bank of Scotland (RBS) in the UK and AIG in the United States, reveals some of the challenges that come from adding government involvement to the mix. Consider Stephen Hester’s position. He was parachuted in to rescue RBS from the difficulties that had prompted the British government to become the majority shareholder in October 2008. Arguably one of the hardest jobs in British banking, Hester also had his annual compensation publicly broadcast, scrutinized and tirelessly compared to the plight of victims of the financial crisis. His reward for taking on one of the most difficult jobs was less pay and security than other bank CEOs. This is not to say that he was not well paid compared to a nurse or teacher, but that he had easier, more agreeable alternative employment opportunities. than signing up for regular public floggings.

The complexities of having a public owner cannot be underestimated. Governments want to claw back bankers’ bonuses if they made risky decisions in the past and penalize them for not lending enough to small businesses.¹ To this is heaped a host of moral conundrums. Imagine being the government-appointed board member of a troubled bank taken over because of a concentrated exposure to complex derivative contracts gone sour. Do you endure a lasting political roasting for employing and giving bonuses to the very people who developed those contracts so that they unwind them cost-effectively? Or do you instead bask in your allotted fifteen minutes of fame as the person who sent them packing? Of course this leaves you with staff clueless to untangle the mess and even greater losses than otherwise. Financial crashes are best avoided because they offer up an endless supply of ­impossible choices.

Despite these difficulties, the experience of the past 30 years has been that the consequences of leaving bankers’ pay to the marketplace are even greater. As a result, policy makers have reluctantly waded in. Individual compensation is now a natural part of the regulator’s remit. The EU has gone further and placed a statutory limit on the ratio of bank bonuses to basic pay. Bankers have responded with venom and significant individual support for the campaign to take the UK out of the EU.

This chapter begins with a glance at the role of individual incentives in shaping banking. We briefly examine the evolution of compensation in the financial sector, the issues that have arisen as a result, how they were addressed and the unintended consequences that followed. Current proposals and their challenges are scrutinised. After that, I take a clean page and consider the nature of motivation and the implications for bankers’ compensation. In this I am aided by copious empirical research in the field of motivation that bank bosses seem to ignore. From that I lay out what we should be trying to incentivize and how best to do so. My conclusion is surprising—or at least it was to me.

Incentives Matter

Bank behaviour is driven by the incentives on offer. Most would agree that banking regulation should act as a brake on unsustainable bank lending. That brake should limit the ravages of the inevitable subsequent bust. However, by centering bank capital adequacy regulation on market measures of risk that fell as the boom progressed, banks’ risk-adjusted assets rose and returns fell.² This gave banks both the room and the incentive to lend more. They did so making the eventual catastrophe bigger than it would have otherwise been. By focusing on narrowly-defined balance sheets, regulation incentivized banks to seek fees for originating credit risks that they then shifted off their balance sheets.³ Most of what went wrong in the run up to the Global Financial Crisis (GFC) was incentivized by regulation, sometimes inadvertently, though not always. It was not the result of some unpredictably deviant behavior. I discussed some of these unintended incentives in greater detail in Chapters 3, 4 and 5. The point here is that the financial sector responded slavishly to the incentives on offer. Getting the incentives right for appropriate and proper financial behavior lies at the heart of what regulation of the sector is about.

While I write about banks’ behavior and the incentives behind their actions, it is vital to recognize that banks are the sum of decisions taken by individuals or committees of individuals. A bank’s process and procedures might make certain decisions easier, more mindless or even removed any sense of individual responsibility. However, that does not negate the fact that the levers of action were ultimately pulled by individual bank managers, not automatons.⁴ What incentives are given to these managers is therefore critically important. When I say that little happened that was not incentivized to happen, I also mean that little occured which was not in line with individual incentives. If we want to change bank behavior, we cannot ignore the incentives derived from the way individual bankers are paid.

A Brief History of Compensation Arrangements in Banking

As far back as the 1960s and 1970s, there was growing concern among shareholders that managers’ interests were insufficiently aligned with their own.⁵ Managers appeared to pursue size rather than profitability. Size brought bigger salaries, fancier offices, first-class travel and maybe a corporate jet. It also gave individuals greater self-importance and a deepening circularity of political connections, honors, and rewards.⁶ Motivation, as I discuss later, is not only about the paycheck. But the point is that all these benefits came at the expense of shareholder returns. A plethora of studies then and now have shown that the average acquisition or merger increased managers’ pay but reduced profitability and shareholder value.⁷ This gave impetus to the development of employee-share-ownership and stock-option schemes. Shareholders hoped, and business schools and management consultants agreed, that giving senior managers a larger share of their compensation in the form of stock or stock options created a better alignment of their interests with the manager’s. Management would be forced to focus on strategies that bolstered dividends and the stock price rather than their view from the corner office.

Right from the beginning, managers rallied behind this idea. They even promoted it.⁸ Linking pay to stock prices seemed objective and outside of the control of managers. However, the managers understood, better than the average shareholder or business school professor, the power inherent in setting the terms and pricing of stock options. By influencing the accounting of profits and the financial structure of the company, stock options could be a conduit for a substantial shift in wealth from shareholders to senior executives.

Stock prices today reflect future earnings. This encouraged the stock-incentivized managers to adopt bold strategies and plans that were quickly reflected in advancing stock prices. But sustainable performance was less influenced by such plans, perhaps even undermined by them. Consequently, bouts of great optimism and steadily rising share prices were punctuated by inevitable disappointment and stock collapses. CEOs took home more wealth during the triumph of optimism but their tenures got shorter. This only intensified the process. If you are paid in stock options and your tenure is likely to be no more than three years because of the inevitable disappointment in a big plan or something beyond your control, you need the stock price to do a lot in those three years. The dominant post-1980s corporate strategies were all dressed up as a maximizing enterprise. This included greater leverage, one-time charges on the arrival of a new CEO, smoothing earnings through accounting discretion of the intangible assets’ valuation, spinouts of business lines and share buybacks replacing dividends.⁹ However, they also all maximized the returns of stock option holders, especially those able to reset the terms of these options, as most managers were able to do. In the process, banks went from being safe, defensive stocks for investors, to risky “growth” plays. Stock options also became an agent for greater income and wealth inequality.¹⁰

Stock Options Were Also Part of the Zeitgeist of the 1980s and 1990s

There is a tendency for the wider public to blame what seems dark and impenetrable—in this context, stock options—for all that went wrong. However, these instruments were merely part of the zeitgeist of an age where markets were seen as naturally right. Attempts to thwart markets were not only erroneous but certain to fail. Following on the heels of financial deregulation, the dismantling and later repeal of Glass-Steagall’s separation of banking, as well as the UK’s financial regulation in the 1980s, market prices were placed at the center of banking regulation.¹¹ Recall that the Basel II Accord enshrined this approach and while Basle II was not launched before 2004, this approach had emerged earlier and could be seen in the 1995 market risk amendment to Basel 1.¹² Financial deregulation, the process of switching from businesses relying on preferential government license to relying on stock market-raised capital and financial market prices, dovetailed with stock-option touting managers.¹³ They fed upon each other. Indeed, the biggest sponsors of deregulation were these stock option-incentivized managers and the groups sponsored by companies they managed. If stock options had not been invented, something similar would have taken its place.

When the Music Is Playing, You Have to Get Up and Dance

There is a special dimension to the way stock-incentivized bank managers add to systemic risk in a highly connected banking system that is worth considering. Imagine that a bank’s management team believes that the current surge in mortgage lending that is driving property prices higher and generating strong bank revenue growth will come to a sticky end. After all, this has happened in almost every other past episode of rapid lending to the housing market. The team could tighten its lending standards even as the boom continues. It knows that this would lead to market share and revenue losses. The company will also appear underleveraged, overcapitalized, and behind the times. The stock market will penalize it for this action and executive stock options will lose value. The strongest companies at the beginning of the crisis were considered out of touch by the marketplace, such as HSBC and J. P. Morgan. Those that were first to flounder, like Bear Sterns, Lehman Brothers, RBS, and Bank of America, were darlings of the stock market.

Let us assume that this hypothetical conservative bank is proven right. The collapsing property market would weaken other banks considerably. Since banks lend to banks and one bank’s customer deposit is another bank’s loan, this would cause a generalized panic. Liquidity would dry up and as banks tend to be funded with short-term deposits, all banks will quickly run into difficulty. Seeing the banking system under pressure, with the good being brought down alongside the bad, the government and central bank would intervene. In rescuing the banking system they would lift all boats equally. Stock options from the safe bank either go under water along with the stock options of all other banks or perform no better than others. Caution, even when right, is not rewarded by the stock market.¹⁴ Under the spell of the zeitgeist, regulators had a blind spot to this. Instead, during the decade prior to the GFC, they imposed even more stock market discipline on bank behavior.¹⁵ Chuck Prince was dismissed as CEO of Citibank for saying in 2007 that when the music is playing you have to get up and dance. From the perspective of the stock market and a stock option-incentivized bank manager, he was precisely correct.

Stock Options, Trader Bonuses, and Gambling for Redemption

A typical employee stock option is awarded with a strike price of the current share price, a ten-year expiry date, and a vesting period. To the uninitiated, stock options appear to be long-term remuneration. Banks even refer to them as long-term incentive schemes. The accounting cost of issuing this option is relatively cheap. It is struck at the current share price. Income in the future is worth less than income today and the company only pays out if the stock price has risen. Were the employee to exercise the option on receipt, this merely gives the right to purchase the company’s shares at the current price. It is worthless to him and costless to the company except for minor legal and administrative costs. But after the fifth year, for example, the employee could buy the company’s shares at the stock price of five years prior. Assuming shares have risen at an average of perhaps 7 percent per year, the stock option would confer a 40 percent discount on the current share price. The broker in the stock would assist the employee who wants to get hold of the cash value of the option rather than the stock. Should the share price instead fall below the original price, the employee would never cash it in and it would expire worthless.

An important feature of these options, shared by modern traders’ bonuses, is the huge potential upside but absent downside. If a trader is down $1 million on her trades, for instance, she knows that to close them down and realize the loss will mean no bonus for the year. But using the bank’s funds to double up (or more) on the risk creates a tiny chance it would come right. She could move from no bonus to a good bonus. From the trader’s or senior executive’s perspective, when his profit and loss or stock options are under water, there is a 100% likelihood of no bonus if he were to close down his losing trades, or a small probability of a bonus if he takes on more risk. The latter is always better for the trader or stock option holding manager. The regulator or shareholder, concerned with the bank’s sustainability, would naturally take the opposite view prefering that the trader or executive cut their losses rather than doubling down on a failing bet.

The asymmetry of the payout for the trader or executive who is under water mid-year, incentivizes him to gamble for redemption using the bank’s solvency as the betting stake.¹⁶ That sounds colorful but it is sadly real enough. In each of the biggest, single trading losses, previously successful traders¹⁷ used futures or derivative markets, (since the up-front cash for a trade is initially low), to trade their way out of trading losses by establishing increasingly larger positions.¹⁸ This was the narrative behind J. P. Morgan’s $6 billion loss in 2012 from Bruno Iksil’s credit derivative trades; UBS’s $2.3 billion loss in 2011 from Kweku Adoboli’s derivative trades; Société Générale’s $6.8 billion loss in 2008 from Jerome Kerviel’s $60 billion bets on stock futures; Daiwa’s $1.1 billon 1995 loss from Toshihide Iguchi’s bond trades; and Baring’s $1.2 billion 1992 losses from Nick Lesson’s stock futures trades.

The replacement of “gentlemanly capitalism” with “shareholder capitalism” did not create a better alignment of the interests of bank shareholders and managers. Instead, it allowed bankers to pocket astronomical gains in the good times and required shareholders and taxpayers to shoulder the losses when things went sour.¹⁹ Systemic fragility was not the result of bad luck. It was the inevitable consequence of how wealth was transferred through bankers’ bonuses.²⁰ No wonder then that, however distasteful in general, and ­challenging in particular, there is a strong desire to tackle bankers’ pay.

Current Proposals and Their Challenges

Long before the GFC, regulators were conscious that financial misconduct could be systematically incentivized and sought to restrict this possibility. Crucial to consumer protection is the elimination of conflicts of interest where bankers are incentivized through commissions or fees to push clients in a direction that is not necessarily in their best interest. This is discussed in greater detail in chapter 7 but briefly recall that conflicts of interest were first required to be disclosed, then potential conflicts had to be disclosed and increasingly potential conflicts, like some referral arrangements, are simply being barred.

The GFC turned regulators’ attention to executive pay. It is now common practice in the United States, Europe and elsewhere that financial firms above a certain size must disclose compensation arrangements to regulators. They are also prohibited from arrangements that encourage unnecessary or excessive risk taking. I explained in chapters 4 that regulations like these are bound to fail because at the core of the issue is bankers doing things most think are safe, which turn out to be risky. It is usually not about bankers doing things that they and regulators knew all along were risky.

Regulators appreciate that defining what is unnecessary and excessive is open to vast interpretation. Consequently, some regulators have sought to go further than this general nostrum. The EU has agreed a bonus cap that restricts banker bonuses to 100 percent of salaries or 200 percent with shareholder approval. The cap is effective from 2016. It will apply to material risk traders (MRTs) whose total remuneration exceeds €500,000. Up to 25 percent of the bonus pay will receive a discounted valuation for the purposes of calculating the cap if delivered over a long period and can be clawed back. There is no limit on salaries. The cap is on the proportion of remuneration, not the level, that can be paid in bonus—though it is likely to lower total compensation as well as change its composition.

The Prudential Regulation Authority (PRA), the UK bank regulator, has publicly objected to the cap adding to the already fraught relationship between the EU and the UK. It is not that the PRA’s preferred route is laissez-faire. It advocates a long-term, bonus clawback provision. Banks would be able to determine staff bonus levels and proportions but guarantee that bonuses are returnable up to 7 years post-award if activities the employee was involved in goes bad. Bonus clawbacks are fashionable in London and New York and supported by both bankers and regulators. They seem a clever compromise between a cap and doing nothing. However, they will not work in practice.

Suppose a bank sells default insurance on the US auto company, GM, to a shareholder of the company. Much of banking business is similar to selling credit insurance. In the case of the instrument the banker sold, the bank receives a regular premium for five years but has to make a large payout to the shareholder if GM goes bust within those five years. Suppose the banker moves elsewhere within the same bank after year two. The traders left managing the position for the bank could decide whether or not to hedge the rising probability of a default as a result of the failure in year three of the company’s new model, and then a default occurs in year four. Who should be penalized for the default? Should the original banker’s bonus be docked? How should blame be aportioned? It could be placed at the feet of the banker, the traders managing the position, or their managers. And what happens if the original banker is now working elsewhere?

The further the distance from a transaction, the less its subsequent failure is attributable to those involved in the original transaction. It relates more to how exposures were subsequently managed and changing circumstances. In many cases we would be making bankers take on liabilities which they cannot control. It is striking that loan failures are like London buses: either they don’t come at all or arrive in bunches. This reminds us that the timing of loan failures is related to the macrofinancial climate, in turn determined by collective lending and borrowing behavior and largely uncontrollable by the individual banker.

Today, bankers seldom stay in one institution beyond a few years. It is customary for the bank doing the poaching to swap the employee’s long-term stock in the existing bank for long-term stock in the new bank. Consequently, the granting of long-term stock does not create an incentive for bankers to be worried about the long-term impact of their activities in one place. I once had a deferred bonus that replaced the deferred bonus of a previous employer that in turn was replacing the one before that. Long-term clawbacks do not connect an individual’s pay with individual responsibility. Assessing the banker’s role and appropriate level of clawback is fraught with challenges of measurement, legality, equity, and morality.²¹ Bankers’ relative enthusiasm for bonus clawbacks over caps might just reflect their understanding of this reality.

Psychology of Incentives

The crucial problem with the bonus clawback approach, however, is simply this: it is based on an outdated and flawed view of how behavior is incentivized.²² Noneconomists like to criticize the economics profession for making unreal assumptions about human behavior. In reality economics has long embraced the complexity of human decision making. Many experts in this field have won the profession’s highest honors. Daniel McFadden won the 2000 Nobel Prize in Economic Sciences for his work analyzing the choices we make in areas such as personal health. Daniel Kahneman, the psychologist known for his work on decision making and judgment, won the Nobel along with economist Vernon Smith in 2002. Economist Robert Shiller shared the 2013 prize for his contribution to “irrational” behavior in asset markets. Jean Tirole, known for his work on commercial games regulated companies play, won the prestigious prize in 2014. Economists in other fields have grounds for feeling left out. Yet it appears that the pay-consulting firms, bank managers and regulators have failed to keep current with the research.

Psychologists Frederick Herzberg and Abraham Maslow in the 1950s demonstrated that the two principal motivational ideas behind the bonus but clawback approach do not work.²³ Their research found that where individuals are being motivated by the size of a cash payout, they demand more and more in order to do less and less. Work is redirected to focus on what specifically gains financial compensation, letting other aspects of work fall by the wayside. Jealousy and resentment of others who are receiving more becomes rife. Revenge by stealing from the organization or fiddling the books often follows. Where individuals have their wages docked for some failure, this leads to the demotivated employees investing huge efforts to avoid being caught or developing complex schemes to disguise their failures.²⁴ It is odd that despite the very behaviors the researchers predicted in 1950 being commonplace in the financial sector today, the sector persists with the approach. Astronomical pay has produced astronomical risks rather than astronomical results with massive subterfuge to hide the fact. It would be even more curious if regulators connived in the continuation of this practice.

Conclusion

Empirical research on motivation suggests that people are most motivated to do a good job by a sense of achievement, recognition, a sense of responsibility, career advancement, personal growth, enjoyment of their job and a sense of being paid fairly. Financial firms would get more out of their employees and regulators would get a safer financial system if firms were to provide opportunities for employees to show responsibility and then have this rewarded with public promotions, bigger salaries and greater responsibility.

The financial sector is the only place I am familiar with where every employee has a well-developed dream of departing quickly. A culture of “get rich quick” is risky for the employee, the bank, the wider economy, the financial system and the society. If a smaller proportion of compensation were paid in discretionary bonuses, it would tilt banks and employees away from searching for life-changing gambles. They would move toward building long-term customer franchises, taking more responsibility and less risk and investing more in preserving reputation. I am surprised at this conclusion, but my personal experience of both setting and receiving bonuses resonates deeply with the established research on individual motivation.

Both experience and research have convinced me that from a macro and microprudential perspective, a bonus cap is a solid policy and an important idea. Unlimited bonuses, even with the theoretical potential to claw back, has proven to be a dangerous one.

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¹UK banks were threatened with larger taxes if they did not sign on to Project Merlin, effectively a pledge to lend 15 percent more to small- and medium-size enterprises and to regional growth initiatives. The commitments were announced on February 9, 2011, by all of Britain’s biggest banks: Barclays, HSBC, Lloyds Banking Group, RBS and with respect to the lending commitments alone, Santander.

²Falling returns as booms reach their zenith is common and the result of a concentration of cash piling into sectors considered safe. The UK’s buy-to-let boom prior to the GFC occurred alongside a slide in rental yields. A similar decline in returns to real estate investing was observed in countries that subsequently became engulfed in the Asian Financial Crisis of 1997-98.

³Although they shifted their exposure off the balance sheet in SPVs it was still linked to the balance sheet via agreements to buy back assets (the liquidity backstop) and via brand reputation.

⁴David Freud captures the essence of this in his book Freud in the City: At the Sharp End of the Global Finance Revolution (London: Bene Factum, 2006) when he wrote, “Transactions invariably took place at the edge of feasibility, conducted against a competitive background under great time pressure. I found few committees of experts considering all of the available evidence in wise conclave. Much more typical were decisions taken on the fly, by whoever happened to be available, based on a fraction of the full information.”

⁵This is referred to as the “principal agent problem.” For further discussion of principal agent problems, see Lucian Bebchuk and Jesse Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation (Cambridge, MA: Harvard University Press, 2004).

⁶Think of companies such as General Motors, ITT, US Steel, Amoco, Goodyear, United Fruit Company, and the Rio Tinto Group. That age of the large corporation with managers aspiring to bigger offices with little heed to the interests of shareholders is well captured in the 1960 film The Apartment, starring Jack Lemmon and Shirley MacLaine.

⁷Researchers calculate that takeovers by large firms have destroyed $226 billion of shareholder wealth over the past 20 years. See Sarah Moeller, Frederik Schlingemann, and Rene Stulz, “Do Shareholders of Acquiring Firms Gain from Acquisition?” (NBER Working Paper 9523, Cambridge, MA: National Bureau of Economic Research, March 2015).

⁸Critics of the management consultancy firm McKinsey claim that the growth of stock options originated with Arch Patton, a McKinsey consultant. In 1952 Jan Trippe, CEO of Pan American World Airways, asked Mr. Patton to do a study of stock options for his management team. Mr. Patton promoted stock options through a number of articles, many published in the Harvard Business Review and in books, including Men, Money, and Motivation: Executive Compensation As an Instrument of Leadership (1961). While only 18 percent of public companies had stock bonus plans in 1950, by 1960 this had increased to about 60 percent.

⁹In 2014, for instance, share buybacks were 50 percent more than dividends for the S&P 500 (source Bloomberg).

¹⁰See Hogler M. Mueller, Elena Simintzi, and Paige P. Ouimet, “Wage Inequality and Firm Growth,” (LIS Working Paper 632, Luxembourg: LIS Cross-Data National Center, March 2015).

¹¹See Chapter 8 for more history and detail.

¹²See Avinash Persaud, “Sending the Herd off the Cliff Edge: The Disturbing Interaction Between Herding and Market-Sensitive Risk-Management Practices,” (BIS Paper 2, Basel: Bank for International Settlements, 2000); Avinash Persaud, “Banks Put Themselves at Risk in Basle,” Financial Times, October 22, 2003; and Avinash Persaud, “Valuation and Financial Stability,” Financial Stability Review 12, Paris: Banque de France, October 2008).

¹³Prior to a package of deregulation in the city of London, coined the “big bang,” markets were strictly segmented by regulatory dictate. If a customer wanted to buy a share, she would place an order with a broker who would only act as the client’s agent. The broker would place an order with a jobber, a principal buying and selling on his own account and licensed to trade on the London Stock Exchange dealing floor.

¹⁴Bankers’ pay could be seen as a form of the collective action or public choice problem. For further discussion of this long-established field, see Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge, MA: Harvard University Press, 1965).

¹⁵In their interpretation of pillar three of Basel II, concerning bank governance and transparency, supervisors expressed a preference that banks have a public stock listing.

¹⁶A few days before his trading loss of $2 billon was revealed in September 2011, UBS’s derivative trader Kweku Adoboli reportedly wrote on his Facebook page that he “needed a miracle.”

¹⁷Bruno Iksil (aka “the London Whale”), Kweku Adoboli, Toshihide Iguchi, and Yasuo Hamanaka (Mr. Copper) were legendary traders of high repute prior to their last trades. Their reputation probably reduced scrutiny of their activities, prolonging the losses. In the case of Mr. Hamanaka and Mr. Iguchi their activities took place over several years.

¹⁸The same asymmetries have driven large trading losses at hedge funds, including the $6.6 billion 2006 loss run up by Brian Hunter, an energy trader at the hedge fund Amaranth.

¹⁹See Avinash Persaud, “Banks Put Themselves at Risk in Basle,” Financial Times, October 22, 2003, and Philip Augur, The Death of Gentlemanly Capitalism: The Rise and Fall of London’s Investment Banks (London: Penguin, 2008).

²⁰Raghuram G. Rajan makes a different argument but one with some resonance to this—concerning how income inequality and inadequate safety nets in the United States were politically, but not economically, sustainable by giving easy credit to the poor. See Raghuram G. Rajan, Fault Lines (Princeton, NJ: Princeton University Press, 2011).

²¹In my experience individual bonuses will also be driven by current inter and intra-departmental rivalries that will not withstand external scrutiny if a clawback is later tested in the courts.

²²The ideas in this section follow from Rajendra Persaud, “How Rewards Really Reduce Motivation,” in The Motivated Mind: How to Get What You Want from Life (London: Bantam Books, 2005).

²³See Frederick Herzberg, Bernard Mausner, and Barbara B. Snyderman, The Motivation to Work, second edition (New York: John Wiley, 1959) and Abraham Maslow, “A Theory of Human Motivation,” Psychology Review, 50, (4) pp. 370–396, 1943.

²⁴See Rajendra Persaud, “How Rewards Really Reduce Motivation,” in The Motivated Mind: How to Get What You Want from Life (London: Bantam Books, 2005).