Bonus row heats up as RBS says it must pay

Hester launches attack on "politicisation" of bank as shareholders back bailout

Royal Bank of Scotland remains on course for a bruising showdown with the Government over bonuses after Sir Philip Hampton, the chairman, insisted that the bank must be allowed to pay "market rates" to staff in its investment bank and the chief executive, Stephen Hester, railed against "politicisation" of the bank.

Sir Philip denied that there had been a threatened "mass resignation" by the board if the Government interferes with plans to pay out £1.5bn this year, but he pointedly did not mention whether individual directors had offered to quit.

He was speaking at an extraordinary general meeting in Edinburgh to approve the injection of £25bn more in government funds and entry into the Asset Protection Scheme, which will take the taxpayer's stake up to 84 per cent and covers losses from a £282bn pool of assets after the first £60bn.

Sir Philip insisted that despite the taxpayer support and public outrage over bonuses, RBS had to be allowed to pay up. He said: "I would like to reiterate that we understand the need to ensure that our policy on pay meets the highest standards and addresses public concerns appropriately. Having said that, we are also committed to ensuring that we run the group in a commercially viable manner.

"The board does not have the option to take important financial decisions other than on a primarily commercial basis, because under the Companies Act each director must act in the way he considers would be most likely to promote the success of RBS for the benefit of our shareholders as a whole.

"We see our ability to pay competitive rates to our staff as essential to this. This strategy underpins our prospects of recovering value for taxpayers and shareholders alike."

Last year the bank managed to pay £1bn in bonuses, but there was only a small cash element and 1,000 bankers left as a result – something Mr Hester has described as "damaging but not destructive". However, as part of the arrangements for the recapitalisation of RBS and entry into the APS, the Treasury has required RBS to grant it veto power over the size and shape of the 2009 bonus pool. This has put the bank's directors on a collision course with ministers, keen to show they are cracking down on a culture of City excess.

After the statement, Mr Hester added fuel to the fire by railing against what he described as the "politicisation of RBS". He said this was "unhelpful", indicating that it discriminated against the bank. Both Mr Hester and Sir Philip have called for a "level playing field" between RBS and other banks operating in the UK, both British and foreign.

The two have claimed that they are "aware" of the political realities and the public outcry over bank bonuses when the taxpayer has been forced to inject billions into the banking sector and hundreds of thousands of jobs have gone.

But their words are evidence of a mounting City rebellion against government attempts to crack down on its bonus culture in the run-up to the general election.

On Monday, the City money broker Tullett Prebon said it would help its staff to leave the country to avoid Alistair Darling's 50 per cent "super tax" on banks that pay bonuses of more than £25,000 to their staff.

In the end, 99.4 per cent of RBS's minority shareholders approved entry into the Asset Protection Scheme and the issue of non-voting "B" shares to the taxpayer as payment. The Government, as majority owner, was not able to vote on the issue through UK Financial Investments, the body that overseas taxpayers' investments in the banking sector, because it was considered an interested party.

Around 100 shareholders who attended the meeting were told that prospects remain bleak. "Economic recovery is likely to be slow and the necessary economic adjustment will take years to deliver," Sir Philip said. "It will take time for us to manage down the excess exposures in our non-core division, and the profitability of our core businesses will recover fully only when we see more normal levels of interest rates."