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RBS Tests Cameron Resolve on Pay-Outs

David Cameron’s pledge to curb executive pay and stop “rewards for failure” is set to face its biggest test, as Royal Bank of Scotland prepares to offer a bonus of more than £1 million ($1.54 million) to its chief executive, even though the state-controlled bank’s share price has almost halved in a year.

Sir Philip Hampton, chairman of RBS , and the bank’s board are determined to face down political pressure and will press ahead with a bonus payment to Stephen Hester likely to be in the range of £1.3 million-£1.5 million on top of a salary of £1.2 million. Final figures will be settled next month.

Sir Philip believes Mr. Hester deserves the reward for reducing the bank’s exposure to risk, selling off assets and cutting a bloated balance sheet by £600 billion, in line with a strategy approved by George Osborne, chancellor.

“The board is unequivocal and unanimous that the chancellor does not set the bonus for the chief executive of RBS,” said one senior banker. “Stephen is being urged by a number of people to accept the bonus and I think he will.”

This person defended Mr. Hester as a “highly credible banker”. If the chief executive turned down his bonus it would “demoralize” staff members and would send a signal that they now effectively “worked for an arm of the civil service or a utility, rather than for a bank”.

The bullish stance of RBS—rescued from collapse by the taxpayer in 2008—will infuriate many at Westminster. It could also pose a serious political dilemma for Mr. Cameron and Mr. Osborne, both of whom hold Mr. Hester in high regard and do not want to risk losing him.

The timing is particularly tricky. Vince Cable, business secretary, will next week announce plans to curb executive pay by giving shareholders greater say in rejecting remuneration deals that do not reflect the company’s performance.

With its 83 percent stake in RBS, the British taxpayer now has an opportunity to demonstrate the kind of shareholder activism that Mr. Cameron has been invoking; the bank’s share price has fallen 43 percent in a year, wiping £11 billion off its market value .

Chris Leslie, Labor Treasury spokesman said: “When the share price at RBS has fallen over the last year, bonuses of this size will look to millions of hard-pressed families like a huge reward for failure.”

Lord Oakeshott, a Liberal Democrat peer and ally of Mr. Cable, said: “It is hard to think of a worse example of a reward for failurethan this. This is a real test of whether we are serious about restraining executive pay.”

The Treasury says talks about RBS bonuses are at an “early stage”. The chief executive’s bonus is set against a number of factors, including winding down non-core businesses, restructuring, improving the bank’s liquid funding and lending to small companies. Share prices across the banking sector have fallen in the last year.

Pressure has mounted on Mr. Hester since António Horta-Osório, his opposite number at Lloyds , the other part-nationalized bank, announced he would not take a payout that could have been worth £2.4 million.

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