Eliminating bonuses is highly unlikely to make them perform better.

The House’s decision to effectively ban bonuses at any firm that’s received government bailout money wasn’t quite what I had in mind when I wrote a couple of days ago that clawing back some of the one hundred and sixty-five million dollars paid in bonuses to A.I.G. employees would be a relatively low-cost way of dealing with the populist outrage over the current financial crisis. If the A.I.G. bonuses looked were the quintessential example of Wall Street self-dealing, the House’s bill looks like a quintessential example of blunt and ill-considered political policymaking. While clawing back the A.I.G. money would have been targeted at a specific group of people who were literally responsible for losing their company tens of billions of dollars, the new bill essentially treats everyone who works for a big bank (since they’ve all received TARP money) as guilty of incompetence. But even at institutions that are struggling, there are divisions that are (and have been) doing exceptionally well. Does it really make sense to prevent banks from rewarding good performance, especially when that makes it likely that the good performers will move elsewhere? We now own almost forty per cent of Citigroup, and are significant stakeholders in many other banks. That means that we have a vested stake in these banks performing better, not worse. Eliminating bonuses is highly unlikely to make them perform better.

http://www.newyorker.com/online/blogs/jamessurowiecki/2009/03/all-bonuses-rea.html

 

..........one logical consequence of this bill would be that companies will simply pay people much higher base salaries, which takes us in the wrong direction. One of the biggest problems in corporate America generally is the fact that pay for high-performers is often disconnected from performance. Bonuses, though poorly administered in practice, are at least theoretically a useful tool for connecting pay and performance. Getting rid of them simply makes it more likely that people are going to get paid well even when they do badly.
http://www.newyorker.com/online/blogs/jamessurowiecki/2009/03/all-bonuses-rea.html