Liar's Poker, here we go again. This is the exact sentiment that plagued the finance industry in the 80's and lead to the bonus fiasco that exists today on the Street.
The question is what do we do about and is it the same? (I don't have an answer, just curious)
A couple of interesting notes:
1. In Raghuram Rajan's HAS FINANCIAL DEVELOPMENT MADE THE WORLD RISKIER? he notes:
Therefore, the incentive structure of investment managers today differs from the incentive
structure of bank managers of the past in two important ways. First, the way compensation
relates to returns implies there is typically less downside and more upside from generating
investment returns. Managers therefore have greater incentive to take risk.
2. Daniel Pink talks about the Candle problem and two main points on his thesis:
- As long as a task requires only mechanical skill, bonuses work as they would be expected – the higher the pay, the better the performance.
- Once a task calls for even a rudimentary amount of cognitive skill, a larger reward often leads to poorer performance.
 - http://www.amazon.com/Liars-Poker-Hodder-Great-Reads-ebook/d...
 - http://www.nber.org/papers/w11728
 - http://www.spencertom.com/2009/10/25/daniel-pink-on-the-surp...