The board of Royal Bank of Scotland could hardly have choreographed it better if it had tried. Just as it argues that it needs to pay big bonuses to its investment bankers to stay competitive, along come Barclays and Lloyds to show just how competitive it is out there in the new banking boom.
Barclays is boosting salaries in its investment bank by 150 per cent, and backdating them to boot, while Lloyds has offered its top executives big bonuses linked to the successful integration of its disastrous rescue of Halifax Bank of Scotland.
No wonder RBS is worried. It fears losing key staff unless it can pay out a large chunk of the record £6 billion profit that it will make from its investment bank this year. And the board is furious that it has been forced to agree a formal Treasury veto over the bonuses that it pays this year as a condition of government insurance against losses on its dodgiest loans.
Lord Mandelson sought to defuse the row yesterday by saying that he understood the argument about the need to be competitive. That was why it was important that all banks were “equally restrained” and that RBS was not “singled out”, he said.
But, of course, it is inevitable that RBS will be singled out because it is 70 per cent owned by the taxpayer. The Government is under pressure to curb all bonuses, but RBS bonuses in particular.
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Stephen Hester, the RBS chief executive, does not deny that bonuses are outrageously high. Like all bank bosses, he wishes they were lower. It would be rational for all banks to cut their bonuses. But it would be risky for any bank to opt out of the pay race on its own.
The parallel with football players is far from exact. But a Premier League club that suddenly cut wages to £100,000 a year would not stay in the Premier League for long.
Ministers are in an uncomfortable position. They recognise that RBS’s investment bank is very profitable — thanks in large part to the public money being pumped into the system — but that it won’t stay so profitable if its top bankers are lured away by rivals. A chunk of the profit needs to be given away to staff or a much bigger sum will be lost from the long-term value of the taxpayer’s 70 per cent stake. The question is, how big a chunk?
RBS believes that it should be about £1.5 billion of the £6 billion profit. The Treasury line was that it should not be significantly more than the £900 million paid out last year. And most of the public think that it should be nothing at all.
By making clear that it has a veto over RBS bonuses — rather than exerting influence behind the scenes — the Government has ensured that it will be blamed whatever figure is arrived at. It as good as signs the cheques.