RBS cuts bonuses to legal minimum

Government insists on end to 'rewards for failure'

Royal Bank of Scotland has cut its payout of cash bonuses by 90 per cent from £1bn to the legal minimum after the Government attempted to defuse the political row over pay.

The bank, which is now 70 per cent owned by the Government, said that no bonuses or pay increases would be paid to staff linked to major losses in 2008. Cash bonuses will total £175m and will only cover staff with legally binding guarantees.

RBS will pay each year’s bonuses in bonds, or IOUs, in three installments. The IOUs will not pay out fully for 10 years. To pay in shares would dilute the stakes of existing shareholders – including the Government.

RBS also unveiled a longer-term pay formula yesterday that is expected to form the basis of Government demands if other banks take advantage of state support. Staff “essential to the bank’s recovery and who might otherwise be at serious risk of leaving” will receive a deferred bonus paid over three years in the form of debt, not cash.

The bank said the amount in delayed payments would be well below previous years and could be withheld, or “clawed back”, at the bank’s discretion. It was reported that the total amount put aside will be around £600m.

Chancellor Alistair Darling said the arrangement was a “cultural change” and he expected it to be “replicated”.

Former Labour deputy leader John Prescott, who organised a petition to pressure RBS into dropping a £1bn bonus plan, said the deal was a “93 per cent victory for people power, common sense and government intervention.”

The Government was caught off-guard by the scale of the backlash when it was announced that RBS, rescued by the state in October, intended to pay out hundreds of millions to its bankers.

The bank is expected to declare an annual loss of up to £8bn next week inflicted by risky loans and trading positions at its investment banking business. Yesterday’s package tries to balance the Government’s wish to punish reckless behaviour with its need to stop RBS from falling apart.

Downing Street also dismissed suggestions of disagreements within the Government on how to rein in bonuses, arguing that Gordon Brown and Alistair Darling have been consistent in their desire to ensure no rewards for failure in the banking system.

One source said: “The conditions are stringent, with no cash bonuses and deferral... We wanted to have a very stringent and very robust package which makes it clear there are no rewards for failure.”

The Government is still waiting to receive proposals on pay from Lloyds Banking Group, in which it holds a 43 per cent stake, but the RBS deal is said to represent the principles the Chancellor wants to underpin bank pay in future. The package will also put pressure on Barclays, which wants to take advantage of the Government’s guarantees against loan losses.

The Conservatives accused ministers of doing “too little, too late”. George Osborne, the shadow Chancellor, said: “The Government has finally been dragged into acting on bonuses but once again it is too little too late.

“David Cameron said at the weekend that all cash bonuses over £2,000 should be stopped in the banks that have been bailed out. If need be, the Government should be prepared to defend that decision in court.”

Staff in branches and call centres will not get their standard 10 per cent “bonus”, which will be scrapped, and will instead receive an equivalent pay increase costing about £165m.

Derek Simpson, joint general secretary of the Unite union, said rank and file staff should not be punished. He said: “Unite welcomes the acknowledgement that staff at RBS, and across the financial services sector, are not the culprits of the financial crisis.”