The board of taxpayer-owned RBS is set to infuriate unions by confirming a new pay package for chief executive Stephen Hester – which could be worth up to £9.6m if he succeeds in reviving RBS. Since the taxpayer stands to gain if he does manage to boost the bank’s value, you could argue this is a price worth paying. But it’s a rather strange way to convince the general public that the days of excessive rewards for rich bankers are well and truly over. And there’s also a worry that the structure of Hester’s bonus scheme won’t incentivise the right behaviours...
Hester’s deal, which has already been rubber-stamped by the bank’s biggest shareholders (including the Treasury, which owns a 70% stake), is in three parts. On top of a £1.2m base salary, he’ll also be entitled to up to £2m in performance bonuses (to be paid out in debt rather than cash, since RBS is still banned from cash bonus awards). Then there’s up to £6.4m in long-term incentives, half of which will be payable if he succeeds in getting the share price up to 70p – about twice its current level.
Hester played no part in RBS’s demise, of course. But after a year in which it sank to the biggest loss in UK corporate history, forcing it to shed tens of thousands of jobs, this was always going to go down like a lead balloon. ‘Staff and customers are sick of seeing senior bankers earn such huge financial awards, when every week hundreds of hardworking and loyal staff are losing their jobs,’ as Unite’s Graham Goddard put it. It doesn’t help that Hester – who himself told the Treasury Select Committee earlier this year that bankers get paid too much – could end up earning more than any other banker reliant on state funds.
The other question is whether it makes sense to incentivise Hester based on the stock performance. After all, the best way to boost the share price might be to take an aggressive approach to new business and cost-cutting – which isn’t in line with Hester’s supposed priorities of increasing the supply of credit to businesses and consumers, adopting a more cautious strategy, and minimising the impact on front-line staff. So it’s going to be a juggling act for Hester, to say the least.
On the other hand, the RBS board has tried to mitigate this risk by putting some extra conditions on the LTIs – so they can claw back some of the money if the share price rise doesn’t result from sound management decisions. And it’s worth pointing out that if the share price does get to 70p, it would leave the Treasury (having bought our shares for about 50p) sitting on an £8bn profit. So Hester only makes lots of money if the taxpayer does too. Is that really so unreasonable?
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