Warning to MPs: cuts to bonuses will drive out banks' talent

Published on Wednesday 4 November 2009 20:20

THE body holding the UK's stakes in bailed-out lenders Royal Bank of Scotland and Lloyds said it was "walking a tightrope" in attempting to limit bonus payouts while trying to stop talented staff leaving.

The resurgence of "fat-cat" banker bonuses, despite the near-collapse of the banking system last year, has enraged voters but the head of UK Financial Investments (UKFI) said worries over pay should be weighed against the need to pull the banks back to profit.

John Kingman, chief executive of UKFI, told the Treasury select committee: "The public are understandably angry, bewildered about the payment of bonuses at the banks in which we are invested. On the other hand, as shareholders, we have a huge interest in holding these banks together.

"We have to walk this tightrope in which we reform the cultures… but we cannot afford to be in a position where the banks lose so many people that we start to lose serious value."

Kingman said no decision had been made on the amount RBS will pay in bonuses for 2009, but the bank – one of the top recipients of state aid globally – had agreed widespread reform of the structure of payouts.

RBS and Lloyds both agreed on Tuesday to ban cash bonuses in 2009 for staff earning over 39,000 a year, as part of a wider shake-up of the sector that will see the state pouring a further 31 billion into the banks.

RBS chief executive Stephen Hester said the restrictions would make it more difficult to retain staff and Kingman warned the committee: "We have so much money invested in this bank that we need to hold it together."

UKFI was set up last December with the remit of selling down the UK government's stakes in rescued banks, including Northern Rock, one of the first casualties of the crunch.

Kingman said he expects to see a return on UKFI's holding in the banks over time and added there would be "healthy interest" in assets to be sold by RBS, Lloyds and Northern Rock as part of agreements to satisfy EU concerns over state aid.

UKFI officials told the select committee that there should be a "fair number" of potential suitors for Northern Rock, set to be one of the first assets to be sold, but it first needs to complete the lender's split into "good" and "bad" banks.