RBS bonus row highlights three key issues
Tuesday, 31 January 2012 11:31
By Ben Salisbury
The controversy over the bonus awarded by the Royal Bank of Scotland to its chief executive, Stephen Hester, which he subsequently turned down, raises a series of important questions.
Mr Hester turned down a share bonus that was worth £963,000 in the face of overwhelming public and political pressure. Fury erupted over the fact that a bank mainly owned by the UK taxpayer should pay a bonus to the chief when its performance, in terms of its share price, slipped and the taxpayer is still waiting to be repaid the £45 billion of public money used to bail it out.
In the end both Mr Hester and the group chairman of RBS, Sir Philip Hampton turned down their bonuses. The issue raises three main points.
Should other RBS bankers receive bonuses?
RBS is looking at ways of amending its pay structures to avoid a similar controversy next year. Penny Hughes, head of RBS’s remuneration committee is leading the review into how pay and bonuses are set. One idea is to increase the transparency and objectivity of how bonuses are calculated.
A total change would be to effectively cancel the scheme agreed with the previous Labour government and to formulate a new agreement whereby bonuses are only paid to staff when the bank turns a regular profit and when the share price increases to a level that would facilitate a sale of the business that repays the taxpayer. It is not thought that RBS are considering this option.
Should bankers from privately-owned banks receive bonuses this year?
This question will be analysed closely in the coming weeks as the focus switches from RBS to Barclays. Barclays did not require a bailout from the UK taxpayer. However, anger at the size of bonuses paid to its chief executive Bob Diamond and two other senior executives has still been strong.
It is thought the three of them received close to £100 million between them in 2010. In the past few months senior politicians including the Prime minister David Cameron, the Chancellor, George Osborne, the Business Secretary, Vince Cable and the Labour leader Ed Miliband have called for all banks to show restraint in the payment of bonuses this year at a time when UK households are suffering the biggest squeeze on disposable income for over 50 years and when many people are concerned over rising unemployment.
Should the government be able to intervene in the decisions?
Mr Cameron has previously said that the government would have some influence over the bonuses paid by RBS. However, when it came to it, they may have had a slight influence in getting the bonus level to just below £1 million for Stephen Hester (the value of his share bonus before he waived it was £963,000) but it was the combined anger of the public and politicians on all sides that caused Mr Hester to turn down the bonus.
The serious point here is whether the government should be able to intervene or whether, after appointing a management team to manage a firm that has been brought into the security of the public sector, with the business underwritten by the taxpayer, the management team should be autonomous.
In Brussels yesterday, Mr Cameron said that it would not be right for the government to “micromanage bonuses” but also that the remuneration committee of RBS should “have a proper regard in terms of restraint when they have had so much money from the taxpayer and when they have made so many mistakes in the past.”
There appears to be mixed messages from the government and it seems that like the remuneration committee at RBS, the government needs to review its policy on this issue to avoid the topic of banker bonuses becoming as toxic next year.
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