Royal Bank of Scotland will bow to shareholder demands to make it tougher for executives to receive their full bonus entitlements. On Wednesday Sir Philip Hampton will tell shareholders at the bank's annual meeting that its remuneration committee is working on a revised package for executives. However, they will not be given any details and will be asked to back the RBS remuneration report and trust that directors will come up with a significantly tougher set of performance targets.
It is understood that the bank is also seeking to avoid a repeat of the storm that engulfed it at last year's event, when chief executive Stephen Hester railed against what he called the "politicisation" of the bank, which is 84 per cent owned by the taxpayer. This time Mr Hester, who has since expressed regret for the remarks, will avoid making controversial comments after the meeting has closed.
Mr Hester's package – worth a maximum of £10m were he to hit all his targets – created huge controversy when he was appointed to lead a turnaround of the institution following its multi-billion bailout by the taxpayer, caused by a string of risky loans together with the disastrous acquisition of parts of the Dutch bank ABN Amro.
The company had been planning to set the lowest "trigger point" for the first 5 per cent of the shares vesting under its "long-term incentive plan" (LTIP) at 50p. Shares in the bank, which have rallied recently, closed at 55.8p on Friday. Critics have long argued that the plan is based too much on the share price and does not call for sufficient evidence of long-term concrete improvement in the loss-making bank's finances. They argue that the focus on share price targets could motivate executives to take undue risks with the aim of boosting the short-term stock price at the expense of long-term improvements. The Government paid an average of 50.5p for its stake in Royal Bank, and is therefore theoretically in profit. However, it has warned that a sell-off of the shares will take some time and will likely be completed by a series of one-off placings with institutions, although opposition parties have suggested alternatives which could involve the public.
The focus on share price has raised shareholders ire and led Keith Skeoch, the vocal investment chief at Standard Life Investments, to write to City minister Lord Myners calling for changes in the scheme. Half the awards from the current LTIP are linked to the bank's economic profit, with 25 per cent based on total shareholder return, including a consideration of rivals' performance, and the final 25 per cent solely linked to share price. Mr Hester waived his bonus this year.
PIRC, the corporate governance watchdog, has also urged investors to vote against the bank's remuneration report. UK Financial Investments, which manages state investments in banking, is likely to vote in favour but a significant vote against RBS by other holders would come as an embarrassment to the Government. Their support will be crucial if the state is to achieve a successful disposal of its holdings in RBS.
RBS is not the only company likely to face a debate over its pay-plans. PIRC has also urged investors to vote down Barclays' remuneration report on the grounds that performance targets are "insufficient stretching". Lloyds, also part state-owned, has received an "amber top" warning notice from the Association of British Insurers while HSBC's plans to hike chief executive Michael Geoghegan's pay have also generated controversy.