RBS accepts calls to alter executive bonus scheme

Royal Bank of Scotland was forced into an embarrassing climb-down over its executive remuneration policy yesterday, bowing to shareholder pressure to make bonus targets tougher.

Speaking at the bank's annual general meeting in Edinburgh, its chairman, Sir Philip Hampton, said the board would amend a scheme that allows Stephen Hester, the chief executive, to earn nearly £5m a year, which is partly linked to the performance of RBS shares. The current share price threshold for the scheme is 50p, a level that was passed last week.

"At the time the documents were finalised more than a month ago, the share price was sitting at a much lower level than it is today," Sir Philip said. RBS shares have risen by more than 22 per cent in the last month, and by nearly 70 per cent in the last quarter. Last month, Sir Philip said that the executive remuneration scheme would reward senior members of staff "fairly, appropriately and at market levels for achievement against the targets we have published to make the bank safe, successful and valuable again".

The shares closed at 54.9p last night. The bank's remuneration committee will now reassess the level, which is expected to take a number of weeks.

The taxpayer is now in profit on its 84 per cent stake after the Treasury bought its shares, which are now controlled by UK Financial Investments, at 49.9p when it rescued RBS at the height of the banking crisis in 2008.

Sir Philip also defended the bank's lending record yesterday, saying that increases in business loans will not drag the economy further out of recession. Each of the political parties campaigning in the general election has promised to force RBS to increase lending, but Sir Philip said yesterday the bank was ready to lend, but could only do so if there was sufficient demand for credit. A Bank of England report last week said that the banks were missing lending targets, while the Chancellor, Alistair Darling, said during his Budget statement that RBS and Lloyds, the other state-backed bank, would be forced to lend more than £90bn in the next year.

The issue of bonuses has dogged the bank since it received the state-backed bailout. Mr Hester, who replaced the widely discredited former chief executive Sir Fred Goodwin, has conceded in interviews that even his parents believe he is overpaid. He has, however, also argued that the bank needs to pay competitive bonuses to attract talented individuals. In February, the bank spent £1.3bn on bonuses for its 16,800 investment banking staff, despite reporting a full-year loss of £3.6bn. It paid over £1m to more than 100 employees.

The Taxpayers' Alliance, which has been critical of the RBS's remuneration policy offered guarded support for the move. "It is good news that RBS has bowed to shareholder pressure and is looking again at the conditions for Stephen Hester's bonus, which were clearly not stringent enough," Matthew Sinclair, the group's research director, said. "But the bank needs to recognise that, so long as it is nationalised, taxpayers won't want to see their money used to support bonus payouts to extremely well-paid executives."

Under the pay scheme, which was passed at yesterday's AGM and applies to all executives, Mr Hester could earn as much as £4.8m in share options, a 400 per cent increase on his £1.2m basic salary. Half of payouts will be based on RBS's economic profit, with the rest judged on shareholder returns. The entire bonus will be subject to clawback provisions, allowing the bank to reclaim payments if its performance deteriorates after bonuses are paid.

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