July 16 (Bloomberg) -- If your plumber failed to fix a leaky faucet, you would probably want your money back. The same rule should apply to executive pay.

JPMorgan Chase & Co. said today that it will recover two years of compensation paid to the bankers involved in the trading blunder that lost $5.8 billion so far, damaged the bank’s brand and tarnished Chief Executive Officer Jamie Dimon’s reputation.

It’s only right that millions of dollars should be clawed back from the traders and managers directly involved. And shouldn’t Dimon’s bonuses, which amounted to $43.5 million in 2010 and 2011, be on the line, too?

The bank hopes that, by recovering the traders’ compensation, it can close an embarrassing and costly chapter. Traders in the chief investment office, attempting to hedge the bank’s portfolio of loans and other assets, became enmeshed in huge, high-risk credit derivatives that looked more like speculation than hedging. Dimon at first denied reports that the positions were taking on water, calling the talk a “tempest in a teapot.” Weeks later, he admitted he was dead wrong.

The episode exposed weaknesses in the bank’s risk management and controls, for which Dimon is ultimately responsible. Shareholders, too, have suffered: The bank’s market value has shrunk by about $26 billion since April 5, when JPMorgan’s troubled trades were first reported.

Flawed Oversight

The bank’s explanations also revealed flaws in the oversight of traders, whose positions grew so complex that managers in the chief investment office couldn’t understand them.

Reclaiming some of Dimon’s bonuses could be done through the 2002 Sarbanes-Oxley Act, which gave the Securities and Exchange Commission the right to claw back pay from executives when a company has had to restate its financial results. The law allows recovery of bonuses, including profits from stock sales, within 12 months of the release of financial information, but only if there was a restatement because the company cooked the books or was involved in misconduct -- even if the executives themselves weren’t accused of wrongdoing. Since JPMorgan today said it would restate first-quarter results, the SEC could sue Dimon to recover compensation paid out over the next year.

The faster and easier route would be for JPMorgan’s board to invoke its own bylaws, which since 2010 have allowed clawbacks if an executive’s conduct results in large losses or harms the bank’s reputation. It seems reasonable to say that Dimon’s failure to make sure his managers were doing their jobs fits the bill.

Clawbacks are rarely exercised. Perhaps they should be used more often. They seem to be one of the few meaningful forms of punishment and deterrence that we have.

With so much of the culture of Wall Street revolving around the size of bonuses, which in turn drives much of the misconduct that has resulted in investor, consumer and taxpayer losses, the best way to change behavior is to go after bonuses. JPMorgan again provides the illustration: It was forced to restate first-quarter earnings after concluding that its now-dismissed traders misstated positions in an effort to hide losses -- and protect bonuses -- on their giant derivatives bets.

Board compensation committees could take the lead by making it clear that when performance goals are missed, or when results turn out to have been overstated years later, bonuses must be returned. Boards should require executives to agree to give back some of their compensation as long as three years later if the numbers upon which pay was calculated turn out to be incorrect, whether because of a trading blooper or improper accounting. Some companies such as Goldman Sachs Group Inc., Fannie Mae and UBS AG already have such clauses; it should be standard operating procedure everywhere.

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Today’s highlights: the editors on how bad the Libor scandal could get and on Hillary Clinton’s visit to Egypt; Jonathan Alter on Republicans’ stop-the-vote plan in Pennsylvania; Stephen L. Carter on our national Lincoln obsession; William Pesek on North Korea’s opening to the West; Jonathan Weil on the Barclays Libor scandal; John H. Cochrane on fixing health care; Frederic Block on how he sentences federal criminals.

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