Here's a statement from February 2009. It's from Stephen Hester, the chief executive of Britain's government-controlled Royal Bank of Scotland Group plc, who had taken the reins three months earlier amid the wreckage of the bank and the British economy.
"I empathize 100% with the public mood," Hester told Parliament's Treasury Select Committee. "It would give me no joy whatsoever to pay any bonuses to anyone, and if that was the responsible thing to do I would recommend that in a heartbeat. ... What I am clear about is that there are no bonuses at board level."
Maybe it is unfair, three years on, to dredge up the man's words from the bank's own press release archive. After intense pressure from the media and his political masters, Hester has been forced (sorry, "has agreed") to give up a 2011 bonus of just under £1 million ($1.57 million), which his fellow board members felt he very much deserved. His action seems to have had more to do with salvaging the reputation of Prime Minister David Cameron, who has regularly called on shareholders to rein in excessive executive pay, than with the reputation of a bank in which Cameron's government is an 83% shareholder.
The government likes to keep up the fiction that Royal Bank can run itself, as if it were an independent institution rather than a government department. Instead, as well as exposing this arm's-length governance as a charade, the row has left Hester, the bank's board and Cameron himself diminished and humiliated. All three parties had felt that paying the bonus (in shares that would not vest until 2014) was indeed the responsible thing to do. And all three had proved 100% out of empathy with the public mood.
The whole episode has been a public relations disaster, and it could easily have been avoided if Hester had followed the example of the bank's chairman, Philip Hampton, who pre-emptively turned down a £1.4 million bonus (a golden hello of more than 5 million shares from his 2009 appointment, which was due to vest this year), without waiting for the media furor.
But there are bigger issues here. The bank's board said Hester had done a good job and the award was made to "recognize tangible achievement in the business and protect the interest of our shareholders." It conceded the bonus was only 60% of the total set aside for him for 2011 because not all his targets had been met. But it nonetheless reflected the "substantial progress in making RBS safer, rebuilding performance in many businesses and improving customer service and support."
Hester has made progress in implementing a five-year plan to cut costs and nurse the bank back to what he described to the Treasury Select Committee in 2009 as "standalone health." He has disposed of a series of assets and businesses -- most recently agreeing to the sale of RBS Aviation Capital to Sumitomo Mitsui Banking Corp. and Sumitomo Corp. for £7.3 billion -- shrunk the bank's balance sheet by more than £600 billion and brought its noncore assets to less than £100 billion.
The Royal Bank CEO has shown firmness in avoiding the kind of fire sale that led to the disposal of wholly state-owned lender Northern Rock plc at a considerable loss to the taxpayer. One of his first acts in office was to take Royal Bank's insurance unit off the block, seeing no chance of getting the £7 billion that his predecessor, the much vilified Fred Goodwin, had hoped to raise. (On Jan. 31, in a rare move, the government stripped Goodwin of his knighthood.) Hester said he would wait until late 2012 or 2013, nearer the deadline that the European Union had stipulated for the sale of the unit, and might opt for a sale or an initial public offering. And he did not force the pace of disposals during the difficult second half of 2011.
But are such achievements more than one should expect from any competent CEO? Should he get a bonus just for doing his job?
One can argue the case either way. The bank's shares are currently languishing at less than 30 pence, better than the stock's low of 9 pence in 2009, but still well shy of the average 50.2 pence a share at which the government acquired its holding. In the public's eye, a bonus now would reward failure.
Hester was lured to Royal Bank by the previous government with a pay package of £1.2 million a year and the prospect of hefty annual and long-term bonuses. But it was clear then that those bonuses would be dependent on performance and subject to political interference. Hester must have realized, even at a time when the bank was still only 60% taxpayer owned, that he was doing very well to be treated like a banker rather than a glorified civil servant with a civil service pay package.
On the other hand, UK Financial Investments Ltd., the government's holding company for the nationalized banks, has not done too well in hanging on to top people at civil service salaries. UKFI's founding CEO, John Kingman, left for the private sector after six months in the job, and the turnover of ex-bankers in the unit has been swift.
But this is no time to be disrupting Royal Bank's asset disposal timetable or damaging investor confidence still further. Perhaps the government is right to fear that curbing Hester's pay midway through Royal Bank's restructuring could lead him to leave in search of better rewards elsewhere. Civil servants can quit, too.