Insiders call it "the legacy", the bonus guarantees and expectations left over from Royal Bank of Scotland's expansion into booming credit markets whose implosion forced the once-swaggering Scottish lender into virtual nationalisation.
The bank's new management is trying to manage massive political pressure to limit the size of bonuses to investment bankers when the taxpayer has forked out £20bn to prop up the bank, and banks are being paid for the economic crisis that threatens to cost millions of jobs. At the same time, if RBS were to pay no bonuses to investment bankers, many of the people still generating millions for the company could walk out. RBS's Global Banking and Markets business paid a total of £1.83bn to about 20,000 employees in 2007, an average payment of £91,500.
The bank does not give a split for salaries and bonuses, which would vary wildly between different grades and divisions but the bonus pool is said to be down by about 60 per cent this year. The bank is also planning far smaller cash payments and instead link payouts to a recovery in RBS's battered share price.
City recruiters say the rule of thumb is that an investment banker's bonus is usually about 10 per cent of the profit they make for the company. A star foreign exchange trader might be expected to generate £10m in profit, reaping a £1m bonus on top of a relatively small salary of £150,000.
Most of RBS's 170,000 "bankers" are not Masters of the Universe but instead work in branches and call centres or in IT and other support functions. Fewer than 500 investment bankers would have been directly responsible for last year's disastrous losses, one City recruiter estimates.
Staff in branches, where full-time UK counter staff earn about £15,000, are traditionally paid a 10 per cent bonus. Trade unions have fiercely defended payments to ordinary workers after Northern Rock's bonus plan caused uproar last month.
Stephen Hester, the bank's new chief executive, is said to have told the Chancellor that there will be no bonuses for bankers whose activities caused last year's £8bn of losses from risky debt assets. It will be difficult to keep that promise because some senior bankers will have watertight contracts guaranteeing them payouts. Those contracts became more prevalent across the financial world during the debt boom as banks competed for top "talent" who were able to name their price.
RBS's massive expansion started when it bought NatWest in 2000 just as the debt bubble was inflating. The bank went from being a small player in those markets to a debt powerhouse that was able to lure bankers from top US outfits such as Goldman Sachs. Sources say RBS was prepared to pay big money, often guaranteed, to hire star names as it grew profit by packaging and trading complex debt securities.
That strategy blew up in its face in the credit crunch, forcing RBS to accept 70 per cent government ownership. The bank is expected to report a loss of up to £28bn for 2008 this month as it writes down the value of risky assets and past acquisitions. Shaun Springer, chief executive at City recruiters Napier Scott, said: "RBS were aggressively hiring in the market area that had the potential to create the most profit but tragically this becamethe area that ignited this crisis." The bank has also made guarantees to bankers hired from the Dutch bank ABN Amro in 2007 in the acquisition that helped bring RBS to its knees. RBS did little to reassure ABN investment bankers after the deal, assuming there were few jobs for them to go to, but was stunned when the star Asian mergers team defected to Barclays. RBS's bosses then agreed to guarantees linked to revenue generation for 2008.
Sir Fred Goodwin, the former RBS chief executive who drove the bank's aggressive expansion, will face questions from the Commons Treasury Committee today about the bonus culture at RBS. Sir Fred's eight years at the helm of RBS made him a rich man: he earned more than £4m in 2007, including a £2.9m bonus.