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Hell to pay

30 January 2012 By George Hay

The Royal Bank of Scotland bonus row has become something of a tradition. This time it has become a corporate governance mess with operational, financial, political, and moral dimensions. It has also exposed the terminal weaknesses in the way semi-autonomous public institutions, such as RBS, set executive pay rates.

The outcome leaves none of the parties involved looking very clever. The board of RBS and its chief executive have appeared insensitive to the public and political anger created by such payments. Since we are assured that Chief Executive Stephen Hester met preset performance criteria required for the bonus, question marks hang over the nature and transparency of pre-agreed contractual commitments. The coalition government has appeared indecisive. Ed Miliband, the opposition Labour leader, has scored a coup by pushing Hester into his waiver. But Miliband has also shown himself prepared to destabilise the leadership of a 16 billion pound asset for narrow political gain.

The affair exposes troubling weaknesses in the current RBS governance structure. The UK government might say that the existence of UK Financial Investments, which holds Britain’s stakes in semi-nationalised banks like RBS, relieves it of responsibility. But recent events have shown that politicians are involved – perhaps quite rightly. It also demonstrates that contracts agreed with UKFI can be bounced by wider public opinions.

The task now is to find a sustainable new regime. It ought to balance political imperatives with the need to offer credible incentives to qualified candidates. It must also face the fact that political realities mean successor pay plans could be substantially less lucrative than Hester’s current package, and that could force high profile changes in personnel.

A new regime needs to rebuild confidence among executives who are doubtless now unsure whether their pay regime is secure. It probably requires participation by an array of stakeholders, and some measure of cross-party political support. But it needs to also try to preserve the important principle of variable pay and re-establish the operational independence of the RBS board.

Achieving consensus on executive pay at the UK’s state-owned banks will be tough. But the fuss provides a good opportunity to put the pay regime on a sustainable footing. It is an opportunity that should be grasped.

 

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