Bonus blow could hit RBS recovery

The Government’s decision to block RBS from paying bonuses worth twice salaries is a significant blow to its recovery, the bank has said.

The surprise decision by the Treasury, which through UKFI owns 81% of RBS, will — with other factors — mean RBS chief executive Ross McEwan’s potential maximum pay this year falls from £5.4 million to £2.75 million.

RBS said that it had been told last night that UKFI would vote against its plans to allow a 2:1 bonus-to-pay proposal and so the bank has dropped it.

This is a major blow to the RBS board under its chairman Sir Philip Hampton, who is expected to step down this year. By contrast Lloyds, which is now just under 25% taxpayer owned, will be supported by UKFI in raising the bonus cap.

The Treasury made it clear that both decisions were made by Chancellor George Osborne.

A spokesman said: “RBS is heading in the right direction, but it has not yet completed its restructuring and remains a majority publicly-owned bank. So an increase to the bonus cap cannot be justified and the government made clear it would not have supported such a proposal.”

RBS said: “The board believes the best commercial solution for RBS is to have the flexibility on variable to fixed pay ratios that is now emerging as the sector norm. This position was understood during consultation with institutional shareholders.”

The Chancellor’s decision is all the more of a surprise because the Government is battling the European bonus cap in the courts.

Today it said: “The European bonus cap is not a well-thought-out idea and will not support stronger and safer banks, which is why the government is challenging it in the European Court. But while it exists, we will make sure it is applied fairly.” RBS today revealed it paid 77 people more than £1 million last year. That is down from 95 in 2012 and many fewer than Barclays’ 481. It also pointed out that McEwan’s potential pay this year is some 60% lower than his rivals’ at major UK banks.

In withdrawing its proposal RBS said: “The board acknowledges that this outcome creates a commercial and prudential risk which it must try to mitigate within the framework of a 1:1 fixed to variable compensation ratio.”

This is likely to mean hiking fixed allowances paid in shares to top employees. McEwan has already indicated he will not be in this scheme this year and not take an annual bonus.

RBS pointed out that even with 2:1 bonuses it would still have had the lowest pay of any UK bank in 2014.

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