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Wanless could net pounds 1m in a NatWest takeover

The chief executive of National Westminster, Derek Wanless, would qualify for a pounds 1m payoff in the event of a takeover of the bank, it has emerged. He would benefit from a clause in his service agreement that replaces his one-year notice period with one of three years if there is a change in control of the bank.

The terms of Mr Wanless's service agreement, which appear to present the bank's head with a conflict of interest, are likely to face criticism from NatWest's institutional investors if they are viewed as being a reward for failure.

Internal controls at NatWest have come under scrutiny this year following a pounds 90m loss in the derivatives trading arm of the investment bank, NatWest Markets. The losses led to the resignation of NWM's chief executive, Martin Owen, but there have also been calls for more senior executives to take responsibility.

Some institutional investors say the problems within NatWest Markets are actually a distraction from the real problem, which is the dramatic underperformance of NatWest's core retail banking operation.

One senior investor pointed out yesterday that if the retail bank had performed in line with the banking sector then the market value of NatWest since the appointment of Lord Alexander as chairman in 1989 would be pounds 12bn higher than its current figure. The "lost value" is pounds 8bn taken from the time Derek Wanless was appointed chief executive in 1992.

On the issue of contracts, the investor said: "Clearly it would be obscene if [Derek Wanless] were to get three years' money. If the business had performed well it would be different but it would be quite ridiculous in the current circumstances."

Although NatWest denies it is in play, the bank is widely understood to have held preliminary merger discussions with both Abbey National and the Prudential. Analysts say any deal would need to clear large regulatory hurdles but rumours of a takeover have seen the previously underperforming shares rise sharply in the past three months.

According to NatWest's most recent report and accounts, Mr Wanless was paid pounds 369,000 in basic salary before a pounds 225,000 bonus and other benefits took his total remuneration for the year to pounds 639,000. Any takeover which resulted in him losing his job would put him in line for a compensation package worth pounds 1.1m.

Other directors in line to benefit from the generous service terms include chief financial officer Richard Delbridge, Martin Gray, chief executive of NatWest UK, and Bernard Horn, chief executive of group operations.

Not included are two of the bank's highest paid managers, chairman Lord Alexander and former Foreign Secretary Douglas Hurd, who is deputy chairman of NatWest Markets and earned pounds 250,000 last year. Neither are executive directors and are employed on one year contracts.

NatWest's senior executives also sit on valuable share options, which would be triggered by a takeover bid.