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Let Stephen Hester have his bonus

RBS chief is damned if he takes his bonus, and damned if he walks away from his very tough job. We forget how crocked RBS was when he took over, writes guest blogger Rob Taylor

I have this feeling I am probably the only person who feels sorry for the Royal Bank of Scotland chief executive, Stephen Hester.

Sure, the guy earns a base salary of £1.2m a year and he has to fund a lifestyle that includes a large 140-hectare estate in Oxfordshire. And yes, such earnings and lifestyle are way beyond the means of the average person in this country and so every envious bone is shattered when told that he is eligible for another sum of money on top of this when he is running a state-owned institution.

But Hester is also in charge of perhaps the country’s single biggest marketable asset and pretty much all politicians and every media outlet have now pushed him into a corner and if he takes a bonus of £955,000 of shares he will become public enemy No1.

And boy is everyone’s memory short. So let’s try to remember what happened.

After overpaying for the purchase of ABM Amro in 2007, RBS found itself defending its capital base and writing down credit crunch-related losses. In order to be able to continue to operate and not bring the economy down, the British government had to step in and buy a stake that represents about 83% of the group company’s equity. The bank lost £24.1bn in 2008, the biggest loss in UK corporate history. The bank’s former chief executive, Fred Goodwin, resigned and the RBS, under the guidance of the then Labour government, went into a search, and sought a new chief executive from the corporate sector who would take responsibility for returning the RBS back to profitability and to stability.

It is important to remember the search was not for a public servant, but for a businessman who had senior corporate experience. They found the former head of Land Securities and previous finance director of Abbey, who had been credited with turning that bank around by 2004. Hester was also involved for a short time as deputy chairman of the Northern Rock after that had been nationalised.

The board of RBS and the government of the day agreed to contract Hester for £7.7m including bonus and pension arrangements. Yes, an outcry did occur, but the government at the time made it clear they backed the package and that they intended to sell their shares in the bank as soon as the market conditions would allow them to recoup their investment.

In normal circumstances, the chief executive takes his directions from the board of directors and that board should take into account shareholders’ wishes.

In Hester’s case, he has had to be very mindful of the government’s policies and work to the government of the day’s agenda as well. He has sold off several non-core businesses, de-risked the bank’s business lines so that the RBS capital base is less stressed, and he has made some profit for the Bank too.

The result: in 2009 the bank had an operating loss of £6.1bn. In 2010, the bank had an operating profit of £2.1bn. And, while we don’t know the bank’s results for 2011 yet, we do know that the investment banking revenue was slipping and the bank reported £2.1bn of operating profit by September.

With regard to the share price, the bank stood at about 50 pence a share for most of the previous two years and this year has dropped to as low as 17 pence a share. It’s a tough business to be in and I suspect it is even tougher for Hester to feel motivated to continue to run. He probably thinks he has done a pretty good job in very tough circumstances and would like some reward for steering the ship to more stable waters. While the share price has dropped, he will undoubtedly point out that all bank shares have tumbled with the continuing eurozone crisis still impacting the banking industry’s performance.

The question I would suspect he is asking himself is: what options does he have?

If he takes the bonus, he will be vilified and if he quits, he will be vilified. If he doesn’t get some recognition and understand what that form of recognition should look like, Hester will probably feel directionless and uncertain about how to motivate himself.

This is a very dangerous position in which the press and politicians have placed the chief executive of Britain’s largest marketable asset. © 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