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RBS: Across the board(room) cuts

Stephen Hester is doing fairly well at Royal Bank of Scotland. But if £500,000 is too small a bonus on top of his £1.2m pay, maybe he should look elsewhere

The government’s tactics over Stephen Hester’s bonus are miserable. We’ve had leaks: it is said David Cameron would tolerate £1m, but no more, for the chief executive of Royal Bank of Scotland. We’ve heard excuses that are plainly nonsense: the government’s hands are not tied by contracts signed by the last government since annual bonuses are always at the board’s discretion. And we’ve been distracted: it is surely not a coincidence that a row about stripping Sir Fred Goodwin of his knighthood has exploded just as bonus season arrives.

Enough of these games. The government is not allowing UK Financial Investments, the body that it is laughably described as operating at arm’s length from the Treasury, a free hand to lobby RBS on bonuses. So it should heed its own call for engaged shareholders to speak their minds. Here’s what it should do:

First, ask the rest of the RBS board to show some solidarity by cutting their own salaries. The focus on Hester is not helpful. If the government is serious about reining in excessive boardroom pay, reform at the 83% state-owned bank should go wider than Hester.

Sir Philip Hampton, RBS chairman, is paid an annual salary of £750,000. That might have been the going rate for big-bank chairmen in 2009, but times change. If Hampton doesn’t feel able to rub by on, say, £600,000, perhaps it’s time to find a chairman who does. After all, Hampton could soon be collecting about £1m from the flowering of a 2009 scheme, which is not a bad return for an equity-based award given the soggy state of RBS’s share price. And £150,000 apiece for senior non-executives, such as Sir Sandy Crombie? In today’s climate, that looks more than generous for a part-time role.

Trimming salaries across the board would make it easier for the government to make a second request of Penny Hughes, the bank pay committee’s £130,000-a-year chair: if Hester wishes to be considered for a bonus, give him a take-it-or-leave-it offer.

The RBS chief’s negotiating position, as it were, is not as powerful as it might seem. He is paid a basic salary of £1.2m a year. That’s a handsome sum and he might struggle to find another employer willing to match it if he were to quit the bank on bad terms with the government. In that circumstance, most FTSE-100 companies would regard him as a dangerous appointment.

On the other hand, it would be foolish not to acknowledge that Hester is doing a tricky job pretty well. The de-risking of the bank, shedding assets such as aeroplane leases and pubs, is on track. Success on that front was one of the central elements of an incentive scheme that offered Hester a theoretical annual bonus jackpot of £2.4m. Yes, the share price has halved over the past year but there have been headwinds outside Edinburgh – there’s a crisis in euroland and the government’s decision to adopt the Vickers proposals on ringfencing retail banking directly affected RBS.

What’s a reasonable compromise? Purists would give Hester no bonus, on the grounds that RBS’s profits are still too thin. That’s not going to happen. But £500,000 – half the sum suggested in the leaks and a quarter of last year’s award – would make it hard for Hester to sulk, especially if his boardroom colleagues had led the way in accepting less than they had expected. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds