RBS boss defuses row by agreeing to give up £1.6m bonus

The cold wind of public disapproval appeared to have touched the hearts of Britain's wealthiest bankers yesterday when the chairman of the Royal Bank of Scotland agreed to go without his £1.6m bonus.

Stephen Hester's friends were quick to say that the RBS chief executive had every right to expect to be rewarded for his work in turning the bank around, after being hired in November 2008 to sort out the mess left behind by the previous board. He had renounced his bonus only to avoid the risk of the bank being embroiled in political controversy again.

"This is all about de-politicisation," one said. "He is aware of the public's feelings about banks and felt that to increase the hostility towards RBS would be counter-productive."

A series of treasury interventions which saved RBS from bankruptcy means that the Government now owns about 84 per cent of the bank, which is still making heavy losses. Its next set of results, which will be posted on Thursday, are expected to show a shortfall of about £5bn.

Even without the bonus, Mr Hester, his wife, and two children, who live on a 350-acre estate in Oxfordshire and have a Swiss chalet, will not be short of readies. Mr Hester had already made what most people would regard as a hefty fortune before he moved to RBS from Abbey National.

He has said that he asked only for the "going rate" to take on the new job. That turned out to be a basic pay of £1.2m a year, and a deal which will earn him £9.7m in three years if he can push up the bank's share price sufficiently.

Mr Hester is the son of academics whose combined salary is about a tenth of what he now receives without the bonus. His father is a chemistry professor and his mother a former doctor of psychology. Appearing before a Commons committee last month, Mr Hester admitted: "If you ask my mother and father about my pay they'd say it was too high."

The announcement that he was excluding himself from the bonus pot yesterday came just hours after a public warning from the Business Secretary, Lord Mandelson, that it would go down badly with the Government if he awarded himself one.

Lord Mandelson said on BBC1's Andrew Marr Show: "I would say to RBS ... and to their chief executive, Stephen Hester, who is a rather strong and rather able man but whose performance and delivery has not yet been tested: 'if further down the line in years to come he has done well and he has turned round RBS, he deserves something back for it, and I would be the first to say so, but not now.'

"What we have said to them is that their priority is repairing their balance sheets and getting their capital back in place and lending again fully. The bonus pool they have indicated is very much at the lower end of the banks."

Mr Hester's sacrifice follows a similar decision last week, when Barclays' chief executive, John Varley, and president, Bob Diamond, announced they were forgoing their bonuses for the second year in a row in an attempt to pacify clients and shareholders hit by the recession.