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Home > Blogs > Ian Fraser > So does RBS boss Stephen Hester deserve his £1m bonus?

So does RBS boss Stephen Hester deserve his £1m bonus?

So does RBS boss Stephen Hester deserve his £1m bonus? Ian Fraser

The board of RBS and its remuneration committee, led by ex-Coca Cola executive Penny Hughes, must have decided let's just go for it and to hang with the consequences.

The board had earlier seemingly coerced the UK government, which still owns an 83% stake in the bank, into acquiescing to the award to chief executive Hester by threatening to resign en masse if the government stood in their way. According to BBC Business editor Robert Peston:

"they feared Mr Hester and much of the board would have quit, if the payment had been vetoed by the government as the majority shareholder. In the words of my source, the mass resignation of RBS directors would have created 'all sorts of bigger problems'."

The bank, chaired by Sir Philip Hampton, announced on Thursday that Hester, 51, would be getting a £963,000 bonus for 2011, over and above his £1.22m basic salary. The all-stock award of 3.6 million shares, whose value is based on the closing price on January 25, is deferred until 2014. Hester received and accepted a £2m bonus for 2010, his first in three years since he replaced Sir Fred Goodwin.

Hester’s remuneration forms part of a highly opaque but lucrative reward package that was put in place by the Labour government of Gordon Brown in 2008, to entice him across from British Land where he was chief executive. The quantum of the RBS boss’s long-term incentive plan, and bonuses being paid to other directors and surviving investment banking staff have yet to be decided.

Hester's bonus is particularly controversial because RBS had to be bailed out by the UK taxpayer in 2008, when it became the most expensive in the world to bail out, and remains 83% taxpayer owned. In an era of sharply widening inequality, with cuts across the public sector and average workers in the UK struggling to make ends meet on £34,000 a year, and unemployment on the rise, prime minister David Cameron keeps telling Britons that “we’re all in this together.”

It was hardly surprising that news of the award prompted a chorus of condemnation across the UK (although a small minority stood up for RBS and Hester). The  award could not have come at a worse time for Cameron who has been urging bankers to show “restraint” on pay at a time when real incomes are falling and public spending is being squeezed. Cameron and his business secretary Vince Cable have also been promising a crack down on excessive boardroom pay and “rewards for failure”.

On January 27, opposition leader Ed Miliband said:

"It's a disgraceful failure of leadership by the Prime Minister. He's been promising for months action against excessive bonuses, executive pay, and now he's nodded through a million-pound bonus. He's also been lecturing shareholders about how they need to be more active in holding executives to account. He owns, through the British Government, 83% of the Royal Bank of Scotland. He must now explain, not least to the British people, why he has allowed this to happen."

Mayor of London Boris Johnson, usually an ally of Cameron's, said he was "at a loss to justify" the scale of the payment. He told the BBC he had sympathy for Hester and wanted an end to "incessant banker-bashing". However Johnson, who often champions the City of London, added:

"I find it absolutely bewildering because RBS occupies the same status in the economy as Gosbank did in the Soviet Union: it's a state-owned bank. The idea that this is not in the control of the Government seems to me to be far-fetched."

So is the RBS board right in insisting that Hester has "performed well" and deserves to be given a near £1m bonus?

He was hired as a glorified 'bomb disposal expert', just as he was by Abbey National in the 2000s, with the objective of derisking the folies de grandeur and unexploded minefields left behind by Goodwin. Since 2008 Hester has arguably handled this vital task well, shoving the dodgiest assets into the safe haven of the Government Asset Protection Scheme, axing some 30,000 jobs across the RBS and NatWest empire, exiting countries and markets where RBS was subscale and/or inadequate, as well as responding to political pressure in announcing RBS would sell or shut down its parts of its investment bank (including cash equities , corporate broking, equity capital markets, and mergers and acquisitions).

In a statement RBS chairman Hampton said:

"Stephen Hester’s pay is strongly geared to the recovery of  which he was recruited to turn around, having played no part in its collapse. The priority is to re-shape a business that was far too big and far too risky, reducing legacy losses whilst improving performance in the Group’s strong core businesses."

Hester is poised to sell brokerage Hoare Govett to the US-based investment bank Jefferies, he also sold RBS's aviation leasing business to Sumitomo Mitsui Banking Corporation for $7.3bn and various parcels of toxic commercial property debt are also being hawked around. The bank is aiming to carve up its £37bn commercial property portfolio into 15 separate joint-venture funds in the hope of selling these off to external investors who are prepared to take a long-term view of the portfolio.

Commenting on a recent FT piece ,a commenter named 'Goldsack' praised Hester's efforts in this regard. He wrote:

"I am glad that we have someone who seems as experienced, robust, and self-aware as Hester running this critical risk in the British economy. I can understand the condemnation of Goodwin, who enriched himself while getting us into this mess; but to vilify the man who is skilfully unwinding it, simply because he is being paid at the market rate for his services, shows how priggish, diseased, nasty and destructive Britain's public culture has become."

But there have also been some  failures at RBS over the past 12 months. These include a 48% slump in the bank's share price between January 1 2011 and December 31 2011, which implies UK taxpayers' stake has lost £17bn of its value (according to The Motley Fool).

Other failures include missing lending targets agreed with the UK government under project Merlin, being sued for circa $6bn by the US Federal government; and an £850m provision for the mis-selling of payment protection insurance, and various bizarre shenanigans which have included the forging signatures and amending documents in the complaints side of its insurance division, which resulted in a £2.17m FSA fine in January. There is also shabby customer service and poor handling of complaints, for which RBS was fined £2.8m by the FSA in January 2011. Far from treating customers fairly the bank is treating many of its small business customers with contempt.

Personally I am finding it hard to judge whether these failures outweigh Hester's achievements. But ultimately the problem of excessive pay in the financial sector goes way beyond Stephen Hester and RBS. It is part of s systemic problem in the finance sector that has been brewing for decades and was superbly analysed by the Bank of England's Andy Haldane in a recent speech.

Dr Ruth Bender of the Cranfield School of Management believes Stephen Hester's bonus is a red herring that diverts people's attention away from the need for wider reform of the banking and financial sectors. As the leading author and ex-investment banker Philip Augar has also said, she points out that excessive pay and bonuses are only a symptom of the disease, not the disease itself.  Bender said:

"This forensic focus on the remuneration package of Hester, who is, at the end of the day, just one person, risks acting as a distraction from deep systemic, structural problems. Both EU and UK regulation have so far failed to addressed these deeper issues, preferring to focus on the symptoms rather than the causes."

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Tags: banking , banks , bonuses , british banks , David Cameron , Gordon Brown , Penny Hughes , RBS , RBS bailout , regulation , Royal Bank of Scotland (RBS) , stephen Hester , transparency , UK , UK Equity
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