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More than anything, argue the bankers, pay should motivate: huge bonus cheques are to ensure superior performance from superior talent.

On this point, the bankers are wrong. We've recently gathered evidence suggesting that dangling exorbitant sums of money in front of workers doesn't improve performance. If anything, it negatively affects it.

It could be true that the spectre of windfalls will increase activity. If I offered you a £1 million bonus for exceptional performance, you might work more hours and check Facebook less. But would your input be more thoughtful? More creative? Would you be more likely to tap your full-brain potential? Doing more doesn't equal doing better.

To see the effect of bonuses on performance, Nina Mazar (assistant professor of marketing, Toronto University), Uri Gneezy (professor of economics and strategy, University of California, San Diego), George Loewenstein (professor of economics, Carnegie Mellon, Pennsylvania) and I conducted three experiments. In one we gave subjects tasks that demanded attention, memory, concentration and creativity. We asked them, for example, to assemble puzzles and to play memory games while throwing tennis balls at a target. We promised about a third of them one day's pay if they performed well. Another third were promised two weeks' pay. The last third could earn a full five months' pay. (Before you ask where you can participate in our experiments, I should tell you that we ran this study in India, where the cost of living is relatively low.)

What happened? The low-and medium-bonus groups performed the same. The big-bonus group performed worst of all.

We replicated these results at Massachusetts Institute of Technology, where under graduate students were offered the chance to earn either $600 or $60 by performing one four-minute task. Some participants were asked to use cognitive skills (adding numbers); others performed only a mechanical task (tapping a key as fast as possible). On the latter, higher bonuses worked. But when tasks included rudimentary cognitive skills, results mirrored the Indian study. Dangling a very big carrot led to poorer performance.

We later looked at another motivator: public scrutiny. We asked participants in a University of Chicago study to solve anagrams, sometimes privately in a cubicle and sometimes in front of the others. We found that the subjects wanted to perform better when they worked in front of others and performed much worse alone. Like money, social pressure motivates people, especially when the tasks require only effort and not skill or thinking. But at some point, too much of it overwhelms the motivating influence.

If our tests mimic the real world, then massive bonuses clearly don't work. They may not only cost employers more but also discourage executives from working to the best of their abilities. The financial crisis, perhaps, didn't happen in spite of the bonuses, but because of them.

I presented our results to a group of banking executives. They listened politely, and then they assured me that their employees' work would not follow this pattern. I said to them that with the right research budget and their participation, we could examine this assertion. They weren't interested.

These experiments were carried out in India and in the US, so obviously there is no question that the British people - and British bankers - would act much more rationally...

Good performance should be rewarded with raises.

Bonuses should be just for specific actions that go above and beyond the call of duty.

Every December, our condo board tries to figure the optimum formula for Christmas bonuses - considering current wages/salary, seniority, and performance. Every year we come up with a different formula.

If our tests mimic the real world, then massive bonuses clearly don't work. They may not only cost employers more but also discourage executives from working to the best of their abilities [...and in the banking & finance world, to the best interests of their customers. ~ed.]. The financial crisis, perhaps, didn't happen in spite of the bonuses, but because of them.

I've had this theory for many years now. Perpetual bonus patterns become entitlement patterns (I have seen it in action)...hence this specious argument that they must be paid to retain the "talent."

The same "talent" that figured, well, if we bundle 100 or so bad probability mortgages or other improbable debts, then we ameliorate the risk...no, fool, you assure the failure (now go retake Stats & Prob 101), but don't mind taking your piece off the front end.

The final exam came in 2008, and the finance sector failed miserably.

Not to worry, though, as big bonus payments are back, so we'll "retain" all this magnificient talent, and John (let's redecorate in the midddle of a crisis) Thain is now CEO of CIT Group. Nothing succeeds like a fuck up. Pshaw you say...he's only getting a half $ million in salary and $5 milion in stocks (current Market value), only half encumbered and then only for one year.

Good ole Bill Agee proved yers ago now that if you can bankrupt and/or wreck one company (Bendix), why by lawd gawd you will be soon hired to do so repeatedly and paid well to do so....just get your "parachute" in order and vested.

Fuck all these guys with a history of malfeaseance and fiscal idiocy in the breakdown in every available orifice.

But you dasn't dare not pay one do you? I notice "performance" is last on the list of criteria...by iteself revealing.

Question vis a vis "performance"...when you are hired to do a job, are you not paid to perform? Or is the salary for only half performence?