RBS chief Stephen Hester set to walk out over bonus row

Published on 02/12/2009 21:51

ROYAL Bank of Scotland chief executive Stephen Hester and the entire board would be forced to stand down if Chancellor Alistair Darling insists on blocking the payment of competitive bonuses to staff, it has emerged.

• Group chief executive: Stephen Hester. Picture: Getty

In a remarkable act of brinkmanship, senior directors have told The Scotsman they would be legally required to resign if the Treasury blocks bonus payments they regard as essential to maintain the competitiveness of the business.

The directors say they would be under a legal obligation to quit – because they would have been prevented from taking actions they perceive to be in the interests of shareholders. In effect, the bank believes that failing to pay competitive bonuses will make it more difficult to recruit and retain key staff, which, ultimately, could weaken the business.

Mr Hester is walking a tightrope between growing public anger over bank bonuses and strong feelings among other directors including, it is believed, chairman Sir Philip Hampton, that the bank must pay internationally competitive salaries and bonuses to keep key staff.

Bonus payments are hugely controversial, given RBS still exists only because of the hundreds of billions of pounds in loans, guarantees, insurance and investment provided to it by taxpayers.

RBS paid out 900 million in bonuses last year, but it expects this year's figure to be about 50 per cent higher as a result of current profit forecasts.

As part of the terms of a new deal to insure RBS's bad debts, the government wants to dictate the scope of bonuses in the coming year.

RBS, which will be 84 per cent state-owned under the terms of the Asset Protection Scheme (APS), will now have to agree the size of this year's payouts with UK Financial Investments (UKFI), the body set up to manage the public stakes in the banks.

In a circular to shareholders concerning the scheme, RBS said some of the terms were "in several respects very restrictive".

It said it had agreed to the requirement "solely on the basis that it is an essential part of the overall agreements for the refinancing of the group".

However, independent investors, who have the backing of shareholder group the Association of British Insurers (ABI), are growing increasingly concerned that the government will bow to public and political pressure, and launch a major clampdown on big payouts.

RBS refused to comment last night on the legal advice.

It said: "Our agreed business plan requires us to operate commercially in competitive markets, and this plan underpins the prospects of recovering value for taxpayers and other shareholders alike. UKFI, as with our other shareholders, has to date engaged with us positively in reiterating this goal and we expect that to continue.

"At the same time, we understand and embrace the need to ensure pay meets the new G20 and FSA (Financial Services Authority] requirements and will continue to advocate this and other ways to address public concerns relating to banks and always pay on the principle of no reward for failure."

However, a source close to the situation told The Scotsman: "The board will have to resign if they give priority to one shareholder's interests – in this case, the Treasury – over the commercial interests of all shareholders. They should not allow that to happen."

The entire RBS board would not be allowed to resign at the same time – the FSA would not permit the bank to be rudderless. But the directors could state a collective intention to step down, so that replacements could be found in an orderly fashion.

Treasury insiders say it would be political suicide for the government to approve such a colossal sum in RBS bonuses ahead of next year's general election, particularly given that the economy is still in recession.

The Treasury would not comment officially last night, but one insider said: "It's important that we ensure the bonus pool doesn't put RBS at risk."

Speaking in parliament yesterday, City minister Lord Myners gave a strong insight into the government's probable stance on bonuses at taxpayer-backed institutions.

He warned that at least 5,000 UK bankers would earn more than 1m this year unless major shareholders took action. He said there was "precious little evidence" that people at the top of banks appreciated "the concern about these extraordinary levels of income".

The public is unlikely to sympathise with the concerns of independent RBS shareholders over the handing out of commercially competitive rewards, but City bankers warn talented staff will "simply go elsewhere" if RBS is unable to keep pace with the rest of the market.

Ronnie Fox, a specialist in employment law at legal firm Fox, said: "If total compensation (including bonuses] paid to profit-generating executives at RBS is significantly lower than competitive organisations are paying their senior staff, RBS will simply lose its best people."

One banker said: "It's real short-termism on behalf of the government. RBS will never get anyone of any worth to stay if they're paying way below the going rate."

The ABI will tomorrow warn Royal Bank shareholders to make a "careful, considered judgment" before rubber-stamping the terms of the APS.

Peter Montagnon, director of investment affairs at the ABI, said: "Everyone involved in this has to make some difficult decisions.

"Mindful of their fiduciary obligations to their beneficiaries, shareholders will look for an approach which protects the long-term value of their investments. This means the bank must not overpay, but it must also be able to pay commercial rates.

"ABI members call on the board to continue to act firmly and conscientiously in the interests of all shareholders. It would not be acceptable to yield to the short-term wishes of one shareholder if this means sacrificing value for all."