At last the Government has come clean on bankers’ bonuses. Size does matter. For months, ministers have been insisting it is not the amount of bankers’ bonuses that they want to control, just the structure. Bonuses must not encourage excessive risk-taking. The Government strenuously resisted pressure from other G20 countries for a cap on banks’ bonus pools. But as the public outcry over bonuses has mounted, the Government seems to have shifted its position, at least when it comes to Royal Bank of Scotland.
The demand that the “quantum” of RBS’s bonus pool for 2009 be agreed by the Treasury appears to go against everything the Government has been saying about the way it will manage its 70 per cent stake in RBS.
The Government has been transparent about using its shareholding to pursue certain public policy objectives. For example, it forced RBS to agree to lend an additional £25 billion.
But the Treasury “has stated that it intends to respect the commercial decisions of the group”, according to the document detailing RBS’s entry into the asset protection scheme.
Surely, the quantum of bonuses RBS pays out is a commercial decision. For a bank such as this, with a large capital markets business, it is a key commercial decision. RBS says that it has already lost a large number of senior employees because of their concerns about its ability to pay competitive bonuses.
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RBS will make record profits of about £6 billion from capital markets this year and if it cannot pay its big profit-makers competitively — and that means pretty big bonuses — they will go elsewhere.
RBS will obviously comply with Financial Services Authority rules on bonuses. These were introduced to meet the public policy concerns related to financial stability and the encouragement of excessive risk.
But the size of bonuses has no bearing on these issues. It is surely the RBS board’s job to decide how to balance the need to retain and incentivise staff with the cost to shareholders. As a shareholder, the Government clearly has an interest in ensuring that the company does not overpay. But no more than any other shareholder. The only other interest it has is the pure politics.
To prevent the banks in which it holds big stakes being influenced by short-term political considerations, the Government set up UK Financial Investments to act as its arm’s-length manager of the stakes. It installed as its first chairman Sir Philip Hampton, who is now the chairman of RBS. UKFI’s overarching objectives were stated to be creating value for the taxpayer as shareholder, with due regard to financial stability.
So it is ironic that UKFI will be the vehicle through which the Treasury will tell Sir Philip how much RBS can pay its staff.
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The Association of British Insurers is rightly calling on Sir Philip to act firmly in the interests of all shareholders. If the Government’s demands are not in the interests of other shareholders, he should threaten to resign.
? The RBS document also reveals that the Treasury has forced RBS to contribute up to £100 million to fund the Government’s proposed national investment corporation. Let’s just hope that reducing RBS’s ability to lend does somehow help to fill the funding gap for medium-sized companies.