By Sharlene Goff and Patrick Jenkins
Attempts by the government to rein in executive pay have reached into all corners of the corporate world. But it is the banks that remain the real flashpoint in the bonus dispute – and none more so than the 83 per cent state-owned Royal Bank of Scotland.
RBS has been the clear target of the chancellor?s repeated calls for restraint when the banks announce their bonus awards next month. After Ant?nio Horta-Os?rio, the chief executive of Lloyds Banking Group, waived his 2011 bonuslast week, George Osborne may have hoped it was only a matter of time before Stephen Hester, head of RBS, followed suit.
However, despite mounting political pressure for smaller pay packages – and the fact that the bank?s share price fell by almost half last year – RBS?s board is pressing ahead with plans to pay big bonuses to its top executives.
Mr Hester is in line for a maximum pay-out of 6m shares for 2011 – worth about ?1.5m on yesterday?s closing price. That is 25 per cent less than the ?2.04m bonus he accepted last year and the shares would be deferred for at least three years. But, given the sharp drop in RBS?s share price, its minimal profitability and the broader economic hardships afflicting much of Britain, critics say Mr Hester will have a tough time convincing the public that a pay-out of that size is deserved.
Executive pay at RBS has already attracted criticism this year when it emerged that John Hourican, head of its investment banking business, is about to receive a ?5m share bonus that was awarded in 2009.
The latest bonus round comes as RBS makes thousands more job cuts after deciding to close large parts of its investment banking business. And it reflects on a year in which the bank set aside ?850m to reimburse customers for mis-sold payment insurance.
RBS points out that bonuses are not designed to mirror either profit or share price growth, but take account of a range of factors including reducing the bank?s balance sheet, remodelling its funding position and lending more to small businesses.
People involved in the process of negotiating Mr Hester?s bonus package say there was broad agreement – even within government circles – that the chief executive deserved a reasonable pay-out for 2011. They expect to make a formal decision on the size of Mr Hester?s bonus in the coming weeks. For 2010 he received 85 per cent of his maximum entitlement in shares.
?He?s passed some important milestones,? says one person involved in the RBS bonus talks, citing the ?600bn shrinkage of its balance sheet and the stabilisation of its funding.
People close to the bank are keen to play down the precedent set by the chief executive of Lloyds, saying Mr Horta-Os?rio?s decision to waive his bonus entitlement was influenced by his two-month absence at the end of last year, when he was suffering from severe exhaustion.
Also, the government recognises that, should Mr Hester leave the bank, the setback could make it even harder to drive up the share price to a level that would trigger a decent return on its stake.
Bankers believe some politicians are stoking suggestions of a row between the RBS board and senior ministers without any foundation. Responding to speculation that the prime minister or chancellor would formally ask Mr Hester to waive his bonus, one banker close to the chief executive said: ?The chance of [David] Cameron or [George] Osborne picking up the phone to Stephen on something like this is close to zero.?
? The Financial Times Limited 2012
