March 19 (Bloomberg) -- Josef Ackermann, the chief executive officer of Deutsche Bank AG, recently managed to lift the Institute of International Finance out of relative obscurity with a proposal that is both timely and provocative.

The big idea: a pay code for bankers.

So what would it actually say? The banking industry has to accept that its remuneration system has created a culture of excessive risk-taking. The main point of any code would be to force bankers into making more-sober judgments.

``It is necessary to consider ways in which compensation can be best geared to shareholder interests and long-term performance,'' Ackermann, who is chairman of the Washington-based lobby group, said at a meeting in Rio de Janeiro this month.

Nothing will be decided in a hurry, though Frank Vogl, the institute's spokesman, said in an e-mailed statement that an interim report may be published within a month.

Of course, we could all have some knockabout fun with the idea of a pay code for bankers.

Rule 1: Bonuses should be wildly exaggerated in the office.

Rule 2: Tell your wife you got half what you really did, but double it for your mistress.

Rule 3: The guy in the red braces should get nothing, no matter how much money he made for the bank.

Lopsided Risks

But, more seriously, there is growing concern that banker pay packets have contributed to the credit crunch because the risks for staff in the financial markets are so lopsided. If you bet big and win big, you collect a massive bonus. If you bet big and lose big, you just try again next year. It would be hard to design a better system for encouraging risk-taking.

That doesn't mean a code is simple to devise.

For example, the word ``banker'' covers lots of different jobs. A code for traders is going to look very different from a code for mergers-and-acquisitions advisers: One is putting the bank's capital at risk, while the other is merely advising other people on how to risk their money.

That isn't to let M&A advisers off the hook. Plenty of them have cajoled companies into stupid mergers, and collected a fortune for themselves while costing shareholders dearly. But it will be tough to come up with a sensible code that covers all the work being done within banks.

Here are four principles that could start discussions on a code for the banking industry.

Smaller Bonuses

One, bonuses shouldn't be guaranteed. Anything else is nonsensical. If it is guaranteed, how is it a bonus? Banks should be paying higher base salaries and smaller bonuses because that is the only way employees will make their highly paid jobs look less like playing roulette.

Two, rewards should be earned over longer periods. One year isn't long enough to say whether a strategy has worked. Even if a position has been closed, and the profits banked, who is to say the same trader, making similar judgments, won't lose it all again next year? Bonuses should be earned over five years at least. That is the only way to get people to think over longer time frames.

Three, team effort should be rewarded. The banks have developed a star system, heaping riches on their top performers, some of whom get paid even after they have left their jobs. That may motivate people, yet it also encourages them to take risks at the expense of the whole company.

Calibrated Rewards

Bonuses need to be calibrated more carefully so that you get something for your contributions, something for how your division has done, and something for the way the whole bank has performed. It doesn't make sense for financiers to get massive bonuses even though the business they work for has lost money.

Four, when it goes wrong, you need to pay something back. Bankers are good at rewarding themselves for getting it right. They aren't so good at punishing themselves for getting it wrong. They need to start fixing that. Nobody thinks traders should be boiled in oil for calling the direction of the yen wrong. But bonus money should be paid into a fund, and some of it would be reclaimed if a deal loses money.

No doubt there will be other ideas. Change is certainly needed, if for no better reason than to counter the impression that the credit crunch has been created by greedy bankers. After all, if they don't reconsider their own pay, someone else may do it for them -- and they won't like that much.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net.

Last Updated: March 18, 2008 20:20 EDT