RBS bonuses: Royal Bank of Scotland boss Stephen Hester’s decision to follow Barclays’ lead by waiving his bonus for 2009 is sensible. But the gesture is only meaningful if bank chiefs are not able to claim a bigger payout in future years.
Hester’s move was not surprising. He had already offered to forgo some or all of his 1.6 million pounds entitlement for 2009 in an effort to “depoliticise” the expected storm over bonuses when RBS, which is 84 percent owned by the taxpayer, reports annual results this week. Though Hester’s bonus is at the discretion of the bank’s board, the government has the right to veto the bank’s overall bonus pool, expected to be about 1.3 billion pounds.
Last week, Barclays raised the game when it waived bonuses for its top two executives. Unlike RBS, the UK bank has not received any direct government support.
Hester’s sacrifice is less extreme than it might appear.
He had already agreed to defer all his 2009 payout until 2011 and receive it all in shares. So cancelling the payout makes no immediate difference in cash terms.
Nevertheless, the RBS boss – whose parsimony must surely now be echoed by Eric Daniels, chief executive of fellow state-dominated Lloyds Banking Group – has political capital. If properly deployed, this could allow RBS to start rebuilding its battered public image.
But the restraint must be genuine. If Hester manages to turn round RBS this year it would be easy for him to argue that his 2010 bonus should include what he was due in 2009.
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Not only would this go against the spirit of the waiver, it would also constitute a sly way of avoiding the UK’s bonus tax, which affects payouts of more than 25,000 pounds. The levy only applies this year, so it would be cheaper for the bank to pay less this year, with a nod and a wink that next year’s packages will be bigger.
Spotting these changes will be difficult. Although Hester’s bonus is linked to how well he restructures RBS, awards are set at the discretion of the bank’s remuneration committee. But investors should watch for any tweaks to stated bonus policy like hawks. If there are any changes, banks will have to explain why.
