Bonus payments will play an important role in the banks’ recovery from their current crisis – even for those with a large government stake, banking chiefs have warned.
Following talks with the government, the mainly state-owned Royal Bank of Scotland will award staff a much-reduced total of £175 million in immediate bonuses, although there will be more on top of that in the form of deferred bond payments.
With Lloyds Banking Group also set to announce significant bonus pay-outs, public pressure is growing for more severe restrictions on what some have called “rewards for failure”. But Stephen Hester, group chief executive of RBS, told the Treasury select committee that bonuses were “critical” to engaging the bank’s 170,000 employees, who would play a key role in its revival.
He said it was vital to engage RBS staff in “getting us out of this, rebuilding strength, serving 40 million customers and, frankly, protecting the taxpayer against a balance sheet that is more than £2 trillion in size”.
Hester argued that he needed some way of retaining the best employees, as well as attracting new staff “to replace those who got us into this mess”. He confirmed to the committee that no bonuses would be paid at board level this year or for “anyone at all associated with the losses we’ve made”.
He said that many RBS employees had earned money for the bank, adding: “The issue is: how much worse can we treat them, relative to any other bank in the world?”
Eric Daniels, group chief executive of Lloyds Banking Group, told the committee that there was much misunderstanding among the public about bonuses. He said about two-thirds of his staff who received an average annual bonus of £1,000 were on salaries of less than £17,000.
Daniels also revealed that Lloyds had sought legal advice on bonuses after taking over HBOS last month and been told that it was obliged to award them to its acquisition’s former employees. Lloyds is 43 per cent state-owned and RBS is 68 per cent state-owned.
John Varley, group chief executive of Barclays, told the committee that pay and bonus structures were under review at his bank, which has not accepted any government bail-out. He said that it would not be abolishing short-term cash bonuses that were “natural for branch staff”.
Varley said that more long-term incentives were being used for senior staff. “The more senior the executive, the greater the deferral and the more that comes in shares,” he said.
Gordon Brown has called for “clawback” clauses for bonus schemes in the banking industry, telling the Commons liaison committee that bonuses should not be “a one-way bet”. He has recommended that bonuses should be paid largely in shares.
Brown’s plans are likely to be formally announced at about the time of the budget on 22 April. The Financial Services Authority is also conducting its own review. It’s expected to publish guidelines this year.
Royal Bank of Scotland’s bonus structure
RBS’s bonus payments have been hugely controversial. Critics argue that the awards for the year will total £1 billion, despite the Treasury’s claim to have cut them to a “minimum”. The situation is complicated by the fact that rewards counting as “bonuses” fall into the following categories:
- Cash. The £175 million that will be awarded in cash, mainly to investment bankers, has been described as the minimum that RBS must pay to fulfil its legal obligations.
- Shares. Bonuses that were agreed in cash cannot later be given in shares, as this would dilute existing shareholdings. But another £165 million will be paid under an existing profit-share scheme, mainly for front-line staff.
- Bonds. Bankers who expected cash bonuses from 2008 but didn’t have a cast-iron contractual case will be awarded £600 million in deferred bonds, which work like an IOU. These are not redeemable for several years; can be clawed back if an employee quits; and rank as “subordinated debt” at the bottom of the list if the bank were to become insolvent.