This is a terrible way. It greatly increases the reward variance for miners thus defeating the purpose of the pool. An attacker who is bent on destroying a pool will not be fazed by a 1% reduction.
It wouldn't greatly increase the reward variance. Even w/ 10% finder's fee only 10% of the reward is subject to variance. What is your definition of "greatly"?
The best way to solve block withholding is oblivious shares.
Care to explain how that can be accomplished?
It payments are delayed 120 blocks this means that an attacker would need to detected and properly respond to multiple validation attempts.
The payments are delayed, but broadcasting the block to the network is not.
Of course a pool could delay broadcasting their own block by a fraction of a second. Long enough to send out the validation check for blocks they solve. This is the simplest but only allows a pool to check their own blocks. If pools were concerned enough they could even privately share block solutions prior to public broadcasting.
1) Pool X solves a block (x)
2) It broadcasts this to pools it shares data with (either for a fee or for as a "common defense" approach)
3) Pool A, B, C send data for block x to some % of their pool members (who at this point are unaware that block x is a known solution)
4) Pool X broadcasts block x to the public network a second later.
5) Miners which fail to solve block x are flagged. Enough flags results in confiscation.
Not saying it is necessary. Obviously there is an opportunity cost. If the cost due to block withholding fraud is low (say 0.5% of gross revenue) then it wouldn't make sense paying 2% of gross revenue to defeat it. Just as the proof of work doesn't prevent a 51% attack it simply makes it uneconomical a combination of a finder fee and block verification can make any such attack uneconomical. The point of mentioning the 120 block window is to indicate a pool has multiple chances to catch an attacker and thus multiple chances to seize all funds (resulting in a 100% economic loss for the attacker).