Baccardax: Sir Fred's Pension Red-Herring

Let's start off with a bit of honesty: if given the chance, who among us would turn down the chance to draw a £650,000 annual pension at the age of 50?

I wouldn't say I'm motivated by money (all things being equal, however, I'd rather have more than less) but financial security for me and my family into my dotage would be hard to turn down. Especially if I felt I'd not done anything illegal, immoral or unethical.

I haven't met Sir Fred Goodwin, the former Chief Executive of the now-government owned Royal Bank of Scotland who's currently drawing a defined benefit pension equal to the amount stated above, but I would wager a safe bet that he feels pretty much the same.

And you know what? Fair enough. Negotiation remains at the very temporal core of the global financial markets and Sir Fred executed his perfect right to haggle for as much cash as he could from his paymasters when he took the helm of the giant Scottish bank in 2000.

The fact that his acquisition-crazy performance since then has been abysmal is beside the point.

The deal was cut, the contract was signed and we all have to eat the costs now that the long-suffering British taxpayer is left holding the rusk of a bank that was once Europe's biggest with £1.7 trillion in assets.

The sad, simple fact of the matter is that we can't go around tearing-up contracts we don't like, or seizing assets we wish to own, simply to placate short-term populism.

Chancellor of the Exchequer Alistair Darling hinted as much at this when he suggested Sir Fred give back this "excess" payment.

But the government has dealt with RBS for years as a primary dealer in the Gilt market, a cash lifeline and ultimately the majority shareholder. And the issue about Sir Fred's remuneration is only arising *now*? I think you'll agree that the timing seems a little convenient.

But that's politics. We're used to that.

What bothers me is the supine nature of the both board compensation committees (and not only at RBS) and the large institutional shareholders who created, approved and signed-off on Sir Fred's packet. The National Association of Pension funds had been raising a stink about excessive bonus pay at the bank since Sir Fred took home £2.1 million in 2000 following the takeover of Natwest. That made him the highest-paid banker in the country.

But while Sir Iain Vallance, the former BT Chairman, and financier Sir Angus Gossart (clearly there's quite a lot of Knights of the Realm involved in this story) quietly moved off the bank's executive pay committee in 2002 (no connection to the bonus row, according to RBS press flacks at the time), they stayed on the Board as non-executive directors for at least two more years.


And the bank's major shareholders, including Standard Life Investments, Scottish Widows, Barclays and Banco Santander Central Hispano, weren't seemingly moved by the NAPF's concerns to vote them out or, indeed, instigate a pay-packet coup.

So perhaps this is why I'm constantly skeptical of the equity market over-focus that seems to occupy too many company CEOs. Yes, they're cutting and scrapping dividends at a record pace these days, but too many will move heaven and earth to maintain dividends and promise risky growth strategies to keep relatively small equity owners on-side (to wit, The Children's Investment Fund ignited the whole ABN-AMRO takeover debacle with a single letter to bank bosses demanding action, despite owning less than 5 percent of the Dutch bank).

Why? Equity capital is more expensive, dividends are paid with taxed income and shareholders are grumpy short-termists (ref. TCI, et al) who are constantly pushing management and demanding ever-greater returns and ever-frequent strategy dialogues with time-poor managers.

Debt capital, by contrast, is cheaper, it's serviced by pre-tax cash and the holders are generally possessed of milder, long-term time horizon (they don't push for growth because they don't care: bonds mature at par, no matter how fast the company grows, and the asymmetric – capped upside, zero return potential - risk profile means all they care about is cash flow, probity, consistency and discipline).

Exactly the kind of characteristics you'd think corporate executives would wish to embrace.

But, of course, they don't vote on compensation.

So blame Sir Fred if you like (I don't), blame the government (okay, well, maybe) or blame the fat-cat culture of executive greed (morality is not my thing) that led to a £16 million pension for the man who steered RBS to the biggest corporate loss in British history.

Just don't let the big shareholders off the hook at the same time.