JPMorgan’s board — after some heated discussion and soul-searching (the New York Times says some JPMorgan board members paced the 50th-floor corridors of the company’s New York headquarters) — decided to up Dimon’s pay to $20 million. Last year, the board slashed the chief executive’s pay to around $11.5 million.

This will cause some controversy. JPMorgan (JPM) paid $22 billion in penalties this year, including the largest single corporate fine in U.S. history. Some people think Dimon should be fired, which is different than being given a raise.

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As I have written before, it’s very hard to determine what’s fair when it comes to CEO pay. That’s why CEOs get away with such huge payouts. It’s going to be a lot, but justifying any specific number is hard. So most boards just go with a lot. In a sense, JPMorgan’s board had an easier choice than usual: They could go the PR-friendly route or pay him based on the same compensation model that three years ago deemed Dimon worth $23 million a year.

I bet at some point in the debate, someone said something like this: “Well, we went the PR-friendly route last year, and what did it get us? Answer: $22 billion in fines and tons of negative press. Might as well see how option No. 2 works out.” That argument seems to have won out. Although the board didn’t say that. Instead, their statement, along with the announcement of the pay increase, said Dimon has “fortified [JPMorgan’s] control infrastructure” and credited the CEO with “strengthening the Company’s leadership capabilities across all levels,” which is probably the better PR move.

So, once you are going with choice No. 2, the question then becomes, “What does Dimon deserve?” There are a few ways to determine that. Back in 2011, JPMorgan made $19 billion. That year, the bank paid Dimon $23 million in cash and restricted stock. As I have written, Dimon and JPMorgan actually had a pretty good 2013. Even with the fine, the company’s bottom line was nearly $17.9 billion, down only 6% from what the bank earned back in 2011. That means Dimon is getting underpaid. Using the same ratio from 2011, he should be getting $21.6 million. (Although if you go by last year’s pay and profits, Dimon should only be getting $9.7 million.)

Another way to determine Dimon’s pay is to look at how JPMorgan’s stock price has performed, because that’s what really matters to shareholders, which are technically Dimon’s true bosses. Back in 2011, JPMorgan’s stock price fell 22%. In 2013, the bank’s shares rose by 20%. How much does that mean he should get paid? I don’t know, but a lot more than $23 million.

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That’s not the way compensation consultants do it, though. They look at what competitors pay their CEOs. Last year, the CEOs of JPMorgan’s closest rivals — Bank of America (BAC), Goldman Sachs (GS), Morgan Stanley (MS), Wells Fargo (WFC), Citigroup (C) — were paid an average of $12.6 million. So, then, Dimon is getting paid too much. Then again, Blackrock’s (BLK) Larry Fink got $21.5 million.

Most studies show that CEOs are paid based on what investors think their company is worth, or market capitalization, not actual earnings or stock price movement. Back in the end of 2011, JPMorgan had a market cap of $136 billion. The company now has a market cap of $212 billion. Based on the 2011 ratio (market cap to salary), Dimon should get paid $35 million this year. Perhaps that’s why the board felt he should only get $20 million. Take that, Dimon.

But I think it would have been smart if JPMorgan had followed the lead of Credit Suisse (CS), which was following a recommendation from European bank regulators. Credit Suisse is reportedly paying bonuses this year in so-called bail-inable bonds. What’s interesting about the bonds is that they become worthless if Credit Suisse’s common capital ratio falls below 7% at any time in the next three years.

JPMorgan’s board could have done the same with Dimon’s pay. In that way, they could have upped Dimon’s pay, but still still say they were penalizing him by paying him a bonus, or a portion of his bonus, tied to whether he was able to keep regulators happy. Can you think of a better punishment for getting in so much trouble with regulators?

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Of course, it’s all a bit of a PR move. Credit Suisse already has a common capital ratio of around 10%. So it’s unlikely that the bonds would expire worthless. JPMorgan could set a similarly low threshold. In the meantime, the bonds pay the bankers interest, which ironically is based on Libor (more reason to manipulate). So bankers would end up making a bit more than if they were just paid in cash. And it’s actually less risky than getting paid in stock. What’s more, you can structure the bonds as a form of contingency capital, so they actually end up boosting the company’s capital ratios all on their own.

The downside is that by paying bankers based on levels of regulatory capital, you are basically saying that bankers are working for the regulators. Of course, last year, JPMorgan paid regulators fines of about $22 billion. Shareholders got $18 billion in earnings. So, in a way, Dimon is already working for the regulators.