As bonus season in the City of London gets underway in earnest next week the first of the UK’s major banks, Royal Bank of Scotland (RBS), announced the bonus package for its chief executive Stephen Hester on Thursday evening and immediately came in for criticism.
Under pressure from the coalition government, state-owned RBS announced last night that Hester would be awarded an annual bonus of just under 1 million pounds ($1.5 million).
The board of RBS said it had decided to give Hester an annual performance award of 3.6 million shares (or 60 per cent) from the share bank award set aside for him in 2011.
The award represents 963,000 pounds based on the closing share price of the bank on January 25 when the decision was taken. It will be paid entirely in shares, the board added, and subject to holding conditions so that their value will be deferred until 2014.
RBS said the award for 2011 reflected the “substantial progress” Hester had made in making RBS safer, rebuilding performance in many businesses and improving customer service and support. Performance was judged against objectives agreed at the start of the year, the bank added. The reduction from the initial share bank award reflects those areas where financial and business objectives have not been fully met, it added.
But the pay award was immediately criticized on Thursday night and Hester was called upon the reject it.
Speaking on the BBC’s topical political program Question Time, Foreign Office minister and Liberal Democrat MP, Jeremy Browne said: "There's a question of honour. Even if there's a contractual opportunity for him to have a bonus it doesn't mean he has to accept it."
“He is effectively a public servant in a bank which is almost completely owned by us the taxpayers," he added.
"He needs to think like a public servant who has a duty to his country, not just his own wealth."
David Fleming, national officer at the UK’s biggest trade union Unite said: "What planet do Stephen Hester and his banking chums live on? Reports that the Royal Bank of Scotland CEO is to take 1million pounds from taxpayers’ pockets as a bonus are utterly disgusting and offensive to every working person across the country. How can a RBS senior banker who is responsible for sacking over 21,000 workers be rewarded in this way?
“His staff haven’t received a fraction of his bonus. Last year over 6,000 cashiers and call centre staff received in real terms a pay cut, if they were fortunate enough to keep their jobs.
“Shame on Stephen Hester if he accepts any bonus this year. It is time he comes back down to earth and waves any contractual bonus he may be legally entitled to.”
The pay award puts the British Prime Minister in an uncomfortable position both with voters and within his own coalition government. Asked by journalists after he gave a speech on “moral capitalism” earlier this week, whether he would act to stop the bosses of state-owned banks receiving 1 million pound bonus packages, David Cameron said: “The short answer is yes”.
Cameron was reported to have personally insisted that Hester receive a bonus of no more than 1 million pounds – half of what he received last year. His coalition partners in the Liberal Democrat party have spent the past week applying pressure over bank bonuses and also on raising the personal income tax threshold for low earners in the forthcoming budget in March.
The issue of bank bonuses remains one of the most difficult and divisive for the government given the taxpayer’s 83 percent stake in RBS and the current size and extent of public sector spending cuts being implemented by the government to combat the structural deficit.
The issue has become so challenging that even the governor of the Bank of England, Mervyn King, who traditionally shies away from commenting on government policy, said on Tuesday that: “the legitimacy of Britain’s market economy would inevitably be challenged if rewards go disproportionately to a small elite, especially one which benefited from the support of taxpayers.”
“Those taking decisions on remuneration, in the financial sector and elsewhere, need to understand that a market economy rests not just on incentives, but on the acceptance that the distribution of rewards is fair. That sense of fairness underpins the commitment to a market economy. An even bigger tragedy would be to deny the prosperity that flows from a market economy to those who need it most, King added.
RBS group chairman, Sir Philip Hampton, said the bank’s board of directors was aware of the difficulties in trying to reconcile the competing objective of all its stakeholder, especially when it came to pay. But he added Hester’s pay award reflected “progress in the categories agreed with our shareholders as set out in the remuneration report”, adding his pay was “strongly geared to the recovery of RBS”.