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Even Stephens

23 February 2012 By George Hay

Stephen Hester has just about squared the circle. Royal Bank of Scotland’s chief executive had to find a way to slash investment bank bonuses with sufficient savagery to assuage angry British politicians, while preventing morale at the state-backed lender falling any further. He has had a decent stab.

On the face of it, RBS investment bankers look like they are paying the price for an underwhelming 2011 in which income in the Global Banking and Markets unit fell by a quarter. The bonus pool at GBM was down 58 percent, compared to 32 percent at UK peer Barclays Capital. In investment banking, that’s pretty hair-shirt.

Yet throw in salaries and the headline ratio of total compensation to GBM income has actually gone up, from 34 to 41 percent. That’s still shy of BarCap’s 47 percent, but it makes RBS look more like a competitive payer in the marketplace and less of a basket case for current and prospective employees.

But scratch at the numbers and the reality is somewhere in the middle. RBS’s comp ratio for 2011 was artificially inflated by higher contract-worker costs associated with the ABN Amro acquisition, while RBS also chose to book more of its deferred compensation for previous years. Adjust for these, and the compensation ratio was roughly the same as 2010, and salaries went up only marginally.

Hester’s balancing act won’t stop public outrage at the paying of any bonuses at all, given RBS’s overall 2 billion pounds loss for the year, worse than last year. But one-offs like payment protection insurance provisions and Greek sovereign impairments caused the red ink. And while the investment bank’s 7.7 percent return on equity was way below its cost of capital, at least the unit was profitable. GBM has lost 9 percent of its workforce and the average total pay of its remaining 17,000 staff fell 26 percent to 112,000 pounds ($176,000).

Hester’s main job is to cut RBS’s bad bank, and grow its good one. Genuine progress is visible here. Still, he will need the UK economy to not get any worse in 2012. Otherwise the balancing act will be even tougher next year.


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