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Labour pressure made £1m bonus too hot to handle

As row over his financial rewards package grew, calls from the opposition for a Commons vote forced Stephen Hester’s hand

It is probably a painful thought for Stephen Hester in his Swiss hideaway, but the fate of his £963,000 bonus was decided days ago, elsewhere, thousands of feet up in the Swiss Alps among the masters of world capitalism.

As he flitted between a series of meetings in Davos on Friday, Ed Miliband developed a plan to call a parliamentary vote to force the UK Financial Investments to vote against the bonus.

The plan, forged in a series of emails with the shadow business secretary, Chuka Umunna, and the chief whip, Rosie Winterton, was launched early on Sunday evening. Within hours, as ministers made clear in private they would find it difficult to support the bonus, Hester threw in the towel.

Miliband believes Hester’s move ranks with the decision last summer by News Corp to shelve its bid to take full control of BSkyB shortly before a Commons vote, called by Labour, to block the bid. The Labour leader also regards the Hester decision as a key moment in his campaign to shape what he is calling responsible capitalism. It is, Miliband hopes, a dreadful moment for David Cameron, who appears to be out of touch with public sentiment weeks after he outlined his vision to create a form of popular capitalism.

In welcoming Hester’s announcement, Miliband turned his fire on the prime minister. “Stephen Hester has done the right thing,” the Labour leader said. “It is a shame that a feeble, out of touch David Cameron did not realise he should do the right thing and stand up for the interests of the British people.

“Labour was right to seek a parliamentary vote on this so that the people’s voice could be heard. But the debate about fair executive pay and responsible capitalism is only just beginning. We need a government that will tax bankers’ bonuses and bring responsibility to the boardroom.”

The announcement by Hester capped a difficult 72 hours for Cameron and George Osborne, who appear to have underestimated the strength of public feeling. Downing Street, which clocked weeks ago that Hester’s bonus would have to be reduced, had confidently predicted that he would receive less than £1m.

Sources felt keeping the Hester bonus below the symbolically significant figure of £1m would be tricky to sell but just about manageable on two grounds. These were that the RBS chief executive had increased business lending over the past year and had reduced the RBS balance sheet by £0.5tn, thereby reducing the taxpayers’ liability.

But the timing of the bonus was unfortunate. Just a week before the announcement, Cameron outlined his ideas on how to create what he called popular capitalism. He said this fitted in a Tory tradition, dating back to Edmund Burke and Benjamin Disraeli, unlike Labour, which veered between promoting economic socialism or championing the super-rich.

The prime minister’s key phrase came back to haunt him last week, when his description of New Labour’s approach to the rich appeared to describe today’s state-controlled banks. Cameron said of New Labour’s time in office: “The City, which should have been a powerhouse of competition and creativity, became instead a byword for a sort of financial wizardry that left the taxpayer with all the risk, and a fortunate few with all of the rewards. So instead of popular capitalism we ended up with unpopular capitalism.”

Downing Street and the Treasury embarked on an aggressive operation when it became clear that the Hester bonus was deeply unpopular. On Thursday and Friday last week Downing Street said that ministers were bound by a contract negotiated by the last Labour government.

Miliband’s office moved quickly to quash that argument. Officials contacted Lord Myners, the Treasury minister in the last government who negotiated the Hester contract. Myners confirmed that the bonus was discretionary.

“There is nothing in the employment contract of Stephen Hester or any director of Royal Bank of Scotland which binds the company or its remuneration committee to pay a mandatory bonus,” Myners said. “All matters relating to bonuses are at the full discretion of the board of directors and the shareholders, including UKFI, who have elected them.”

Within hours the government embarked on a different tack. As Miliband was drawing up his plans in Davos, a short distance away in the Alpine resort Osborne hinted the government had been forced to act after a threat of resignations by the RBS board if the bonus was not approved. Government sources said Sir Philip Hampton, the RBS chairman who turned down a £1.4m bonus, was particularly vociferous on behalf of Hester. Cameron came close to acknowledging that the government could have faced resignations on Saturday afternoon at Chequers. He said: “We do have to bear in mind that the alternatives to what’s happening now could be even more expensive – if you had a whole new team coming into RBS.”

But Osborne welcomed Hester’s announcement. He said: “This is a sensible and welcome decision that enables Stephen Hester to focus on the very important job he has got to do, namely to get back billions of pounds of taxpayers’ money that was put into RBS.”

The moves are unlikely to oil the wheels of coalition relations. Tory ministers were annoyed when Vince Cable, the business secretary, responded to questions last week about the Hester bonus by saying it was above his pay grade. Tory sources pointed out that Lib Dems acknowledged the pressures facing the government: RBS has to be run by an effective leader.

But Cable’s team say that the handling of the Hester bonus highlighted a central contradiction raised by Miliband. The business secretary outlined plans to give shareholders a greater say over the remuneration of senior executives. Days after he made his announcement, Downing Street said that UKFI was declining to step in even though it represents RBS’s largest shareholder – the UK taxpayer.

Miliband believes he has placed the coalition in a perfect position. He believes the Lib Dems are seen as largely irrelevant because they appeared powerless to stop the bonus. As for Cameron, he appeared not to be bothered about the bonus until the headlines started to scream, according to the Labour leader.

One senior Labour source said: “Cameron’s problem is not that he was born with a silver spoon in his mouth but that he has too much tin in his ears. On this issue he is out of touch verging on a different planet.” © 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