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RBS hands chief Stephen Hester £1m bonus

Bank heads for political storm with award of 3.6m shares to chief executive despite widespread opposition

Royal Bank of Scotland stoked a political row on Thursday night when it announced it had awarded its chief executive, Stephen Hester, a bonus worth almost £1m.

The bailed-out bank attempted to justify the bonus – which is being paid in shares that Hester will be able to gain access to in 2014 – by saying it needed reward the chief executive for the progress he had made in reducing the size of RBS.

The bank also stressed that a bonus Hester had been awarded when he joined shortly after the £45bn taxpayer bailout in 2008 – worth £6.4m at the time – and which would have paid out this year, was now worthless.

Sir Philip Hampton, the RBS chairman, said: “The board is aware of the difficulties in trying to reconcile the competing objectives of all our stakeholders. This is especially true on the issue of pay.” Hampton will also not receive shares that he was awarded when he joined in 2009 after the bailout.

He said Hester’s bonus – which is 60% of the maximum and will involve the award of 3.6m shares – was being granted as it “reflects progress in the categories agreed with our shareholders as set out in the remuneration report”.

“His pay is strongly geared to the recovery of RBS, which he was recruited to turn around, having played no part in its collapse. The priority is to reshape a business that was far too big and far too risky, reducing legacy losses whilst improving performance in the group’s strong core businesses,” Hampton said, arguing that a “safer and more valuable RBS is in the interests of our customers, shareholders and the UK economy”.

Even though Hampton argued that the bonus recognised “tangible achievement in the business”, the initial reaction from those who have argued that Hester should not be handed a bonus for 2011 was not supportive.

Lord Oakeshott, the Liberal Democrat peer who resigned as a Treasury spokesman for his party a year ago over the lax treatment of the financial sector by the coalition, said that the bank should realise that any bonus for Hester this year was “utterly unacceptable”. Oakeshott is concerned about the slow flow of lending to small businesses, which the major banks, including RBS, committed to last year under the Project Merlin agreement. “The bonus would be a reward for RBS’s failure to lend to small business which was the key target,” Oakeshott said.

Chris Leslie, Labour’s shadow financial secretary to the Treasury, said: “Nobody doubts that Stephen Hester has done some important things at RBS, but what this award shows is David Cameron’s promises about reining in excessive bonuses at state-owned banks or using shareholder power have proved to be utterly worthless.”

UK Financial Investments, which looks after the taxpayers’ stakes in the bailed-out banks, is backing the award.

The bonus is in the form of a so-called “share bank” and based on a share price of 26.75p – which was the RBS closing price on Wednesday. This is still well below the 50p at which the taxpayer bought its 82% stake in RBS, although the bank stressed that the precise value of the shares would not be known until 2014.

In an attempt to demonstrate that Hester’s bonuses were aligned to his and the bank’s performance, it revealed that a share-based bonus he was handed in 2009 – shortly after he joined in October 2008 when the bank was bailed out and valued at £6m at the time – will not now pay out, as it is worth nothing. Hampton, who was also awarded shares when he joined as chairman in 2009 and which were due to be handed him next month, will also receive nothing because the performance criteria have not been met. They would have been worth more than £1m at current share prices if they had been released.

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