It cannot be an unusual evening at Stringfellows, the West End lap-dancing club, that finds an investment banker, drunk, sitting on his hands, beholding a half-naked woman gyrating before him with a wad of what were until recently his £20 notes festooning her garter belt and asking himself the pressing question of the day: “Do we bankers earn too much?”

It is difficult to pursue a line of rational thought under such circumstances. That is their purpose. Which is a shame, because the answer to the question of bankers’ pay can be found by a close examination of lap dancers — or, at least, of the way they are paid.

Lap dancers receive performance-related pay. Miserly and overenthusiastic customers aside, they get £20 a lap dance and £200 a half-hour of what I will call “dedicated time”. The more beautiful, charming and determined the dancer, the more lap dances and “time” she will sell, and the more she will earn. By allowing a woman with these qualities to work in his club, Peter Stringfellow puts her in the way of potentially large cashflows.

The same goes for investment bankers. Their roles vary, of course, but they can all earn bonuses for their performance. A foreign currency trader, for example, typically is paid a bonus equal to about 15 per cent of the revenue he generates for the bank. The leader of a mergers and acquisition team will make some percentage of the bank’s fee for a successful deal, which can be astronomical. By giving someone a job at an investment bank, its owners are putting him in the way of potentially large cashflows.

But here is one of the many differences between lap dancers and bankers: whereas Mr Stringfellow makes his lap dancers pay for the privilege of being put in the way of their bonuses, with a “house fee” of about £100 a night, investment bankers are actually paid to have the chance of earning bonuses in the millions, with base salaries ranging from roughly £50,000 to £200,000.

This is silly. Investment bankers, like lap dancers, should have to pay to go to work. This would settle the issue with which Messrs Brown, Sarkozy and Obama have been struggling, by ensuring that bankers are paid just the right amount and not a penny more (or less).

To see why, consider the lap dancers at Stringfellows and the question — not yet a political issue — of how much they should earn. Like all employers of skilled labour, Mr Stringfellow faces a trade-off. The more he pays, the higher-quality staff he attracts and the greater his revenues. But, of course, the greater his costs and, potentially, the less his profits. The optimal level of pay is reached when any increase would cost more than it adds to revenue (and any decrease would save less than it removes from revenue).

The “house fee” gives Mr Stringfellow a simple device for determining this optimum. He can simply push it up (and so reduce dancers’ pay) to the point where any further increase would do more damage to revenue than it saves him in staff costs. Although it can be difficult to know exactly when that point has been reached, attending auditions and tracking the club’s door receipts should provide some clues.

Changes in a base salary could be used in the same way, you may think. But increasing a house fee is better than reducing a base salary, because it causes the worst performers to quit first; their earnings from the dances they sell no longer cover the cost of coming to work. Lowering base salaries, by contrast, causes the worst employees to leave last, since they are least able to find better employment elsewhere.

In short, a house fee allows the employer to discover how little can be paid to those who are best able to generate revenues. Which is precisely what investment banks need to know to avoid paying their staff too much. If investment banks held an auction in which prospective employees bid for jobs by offering an annual house fee, the bank could be confident that they were not overpaying. Any excess pay would be competed away in the auction.

And, as with lap dancers at Stringfellows, it would be the best bankers who got the jobs, because the best bankers, being able to generate the biggest bonuses, would be willing to pay the most for the job. No one could any longer complain about what bankers earn. If someone thinks it is too much, he is welcome to bid for the job.

A call option gives its owner the right, but not the obligation, to buy something at a specified price (the “strike price”). If the going price (the “spot price”) is higher than the strike price, the option can be exercised at a profit (the difference between the strike and spot prices). If the spot price is lower, then the option-holder need not exercise it and his loss is only what the option cost to buy.

An investment banker effectively holds a call option on his own performance. If a foreign currency trader does well, be it from skill or luck, and earns his bank £10 million, he will receive a £1.5 million bonus. If he does badly and loses the bank £10 million, he does not have to cough up £1.5 million. This is the notorious “trader’s option”.

As investment bankers know, options are valuable. There is no reason why someone should obtain one without paying for it, and certainly no reason why he should be paid to have one. The trader’s option should not be regulated out of existence. It should be priced in an open market.

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