In the search for lessons from the credit market crisis, one issue that deserves more debate is the system of bonuses in investment banking. It also attracted attention this week when Jérôme Kerviel, the 31-year-old at the centre of the Société Générale scandal, told prosecutors he wanted to seem like an exceptional trader and get a higher bonus.

The textbook version of a bonus system is fairly simple. The compensation of an employee consists of two parts: a stable base salary and a variable incentive. The size of the bonus varies from year to year and is supposed to reflect the effort and success of an employee. To a large extent, the bonus is typically paid out in cash. A smaller fraction is distributed as equity and options. Bonuses have gone up considerably during past years when profits have been high. Frequently, the sum of the bonus contributions in investment banking has exceeded the dividends paid to the shareholders.