Bankers still trapped by the bonus backlash

Stephen Hester's pay packet at RBS has provoked predictable outrage, but many in the City believe the deal is fair given the task ahead and what rival bankers receive. Nick Clark reports

So is he worth it? Royal Bank of Scotland will this week unveil the terms of the lucrative pay package offered to chief executive Stephen Hester as he bids to turn the ailing bank around. But details of the £9.6m remuneration package have already prompted a string of lurid headlines and some bitter attacks on RBS and its Government backers – as well as some muted support.

RBS will argue that Mr Hester has to hit a series of targets based on the bank's share price to secure the full £9.6m, which includes only £1.2m of basic pay. The strategy of incentivising Mr Hester has been backed by banking insiders as the "best way to go" and has the support of analysts in the City, although it met with fierce criticism from politicians and trades unions yesterday.

One banking analyst at a City stockbroker said the board and investors were acting wisely. "Hester has one of the hardest jobs in world banking as he tries to untangle the mess at RBS. It is only right that he is incentivised to lift the long-term performance of the bank."

The bank said earlier this year that bad debts could rise to almost £12bn this year, while Mr Hester said next year would be "very tough" with no green shoots on the loan book.

Mr Hester's proposed basic salary will be set at £1.2m for 2009, which is in line with the majority of his peers at the UK's other retail banks. He will also be awarded a non-cash bonus of £2m. Rivals at Lloyds, Barclays and HSBC all gave up bonuses for 2008. Their current packages are under review. The remainder of Mr Hester's pay award will be through a long-term incentive package that will total £6.4m if all targets are hit. This will be handed out through share options , which will be redeemable after at least three years. Mr Hester's performance will be assessed parly on the basis of the bank's share price performance but also on how it does compared to its peer group.

A source close to the group said: "It is important to get this right as RBS had to attract a strong manager. If he hits these targets the taxpayer will also benefit."

The first tranche of options are released when RBS' share price hits 40p. The price will then have to pass 70p for Mr Hester to secure the full package. Experts pointed out that should Mr Hester oversee such a rise in the share price, it would allow the government to cash out at a profit of £8bn. Yesterday, the shares closed at 35.96p down 3.3 per cent.

The banking analyst added: "Hester's incentive package is closely aligned to the taxpayer's interest. In terms of size, the remuneration conforms reasonably with international precedents, and is well off the sums seen during the peak."

The package was cleared by UK Financial Investments (UKFI) and some of the larger investors in RBS last week. UKFI, run by John Kingman, manages the Government's stakes in the banking sector, including its 73 per cent holding in RBS.

Despite the tacit ministerial approval, the package has still sparked criticism.

"Mr Hester is trying to turn around a failed and now nationalised bank," said the Liberal Democrat Treasury spokesman Vince Cable, but he added that the sum was a "reminder of the ludicrous levels of remuneration expected in top jobs in the banking sector".

Peter Montagnon, the director of investment affairs at the Association of British Insurers, said there was "a lot of sympathy" for RBS, but warned of the different priorities of the Government to long-term shareholders. He called on Mr Hester to defer pay awards further to guarantee the bank's performance.

"There would still be some merit in considering whether a proportion of the award should be deferred after the three-year performance period. This would be fully in keeping with the Financial Services Authority's code and would send a clear signal that the new management is focused on restoring the bank to long-term health," he added.

The Unite trade union was not so accepting. Graham Goddard, the deputy general secretary said Mr Hester's pay package "will be met with absolute disbelief by front line staff in the finance industry".

He condemned the move at a time when "thousands of RBS staff have lost their jobs which paid a fraction of the chief executive's award", adding: "Staff and customers are sick of seeing senior bankers earn such huge financial awards, when every week hundreds of hardworking and loyal staff are losing their jobs."

Stephen Hestler
Salary: £1.2m
Bonus: £2m
Maximum long-term incentive package: £6.4m

The former chief executive of British Land has been charged with picking up the pieces of Sir Fred Goodwin's reign. Mr Hester will pick up a package worth almost £10m if he turns RBS around and doubles its share price to 70p within three years.

Eric Daniels
Salary: £1m
Bonus: Waived bonus for last year
Maximum long-term incentive package: £2m

Mr Daniels has survived the fallout of Lloyds TSB's disastrous takeover of HBOS and has the job of integrating the group. He waived his £2m bonus, and was handed a shares package worth £2m in April. But he didn't endear himself to the public, saying his £1m salary was "relatively modest".

John Varley
Salary: £1.1m
Bonus: Under review, no bonus awarded last year
Maximum long-term incentive package: Under review, nothing awarded last year.

John Varley hasn't turned to state aid, instead raising money from Middle Eastern investors, and agreeing to sell BGI instead. Turned down bonus last year, as did Barclays president Bob Diamond, who saw his package fall from £21m to £250,000.

Michael Geoghegan

Salary: £1.1m
Bonus: None last year
Maximum long-term incentive package: £7.5m

HSBC has enjoyed a resurgent first quarter, but Mr Geoghegan remains cautious, saying he sees little sign of an end to the downturn in sight. Senior managers all turned down their bonuses last year including Stuart Gulliver, the head of investment banking, whose bonus was for 2007 was £5.5m.

Credit crunched: Bankers face global pay curbs

*Banking bonuses have become a hugely incendiary subject across the world. Yet some of the banks which have come through the financial crisis relatively unscathed have continued to pay their senior managers well.

Peter Sands, the head of Asia- focused banking group Standard Chartered, picked up a $1.5m salary while the board recommended a $2.6m bonus for the 2008 financial year. With a long-term incentive plan, the package rose to $6m. Spanish group Banco Santander, which owns Abbey, Alliance & Leicester and parts of Bradford & Bingley, has paid Alfredo Saenz handsomely in recent years. With pay, bonus and share awards, he earned a total of €9.2m for the year.

In Germany, Josef Ackermann, the chairman and chief executive of Deutsche Bank, turned down a bonus and long-term incentive plan, as the bank fell to its first annual loss for 50 years. This saw his compensation fall from €13.9m in 2007 to a little over €1m. Deutsche returned to profit in the first quarter and the company has handed him an extended contract.

The French banking chiefs at BNP Paribas and Société Générale both gave up their bonuses, while the overhaul at UBS in Switzerland means new boss Oswald Grubel is yet to reveal if he has been offered an incentive plan. The chief executive at rival Credit Suisse, Brady Dougan, took home a base salary of Sfr1.2m and Sfr1.5m in dividends from stock plans last year.

Nowhere has the bonus culture caused more pain than in the US. Citi chief executive Vikram Pandit is to take a $1 salary this year and no bonus. The hair shirt was picked up by rivals across the industry. JP Morgan's Jamie Dimon, Goldman Sachs's Lloyd Blankfein and Morgan Stanley's John Mack have all turned down bonuses.