Tuesday, 31 January 2012

Does forgoing bonuses really serve taxpayers' interests?

I can't help thinking that the furore over the bonus awarded to Stephen Hester, Royal Bank of Scotland chief executive, rather misses the point. Bowing to mounting pressure from many sectors of society, he finally agreed on Sunday night that he would not pick up the almost £1m of shares to which his contract entitled him. His chairman, Sir Philip Hampton, had previously waived his own bonus, no doubt adding to the pressure on Mr Hester.

It's clear that the bonus culture in the banking sector has spiralled out of control, leading to remuneration schemes that are ludicrously high. But that is the state of the industry, and one token gesture won't change it. Singling out RBS as an institution largely under state ownership only risks damaging its ability to compete for the brightest and best business brains to steer it back to prosperity and repay the investment UK taxpayers made to bail it out.

Mr Hester's bonus - like Sir Philip's - is payable in shares, whose value will be directly affected by the way  they manage the business. With the bonus in place, top executives would benefit directly and personally from rebuilding the share price so that the return to taxpayers is maximised. How then are the taxpayers served by declining the bonus? And if he's tempted away by the riches offered by non-government backed institutions, how will RBS attract a talented replacement?

Such ad hoc measures won't achieve the fundamental change required to rebalance the way we reward our bankers and they could seriously endanger the recovery of RBS.

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