The state-backed Royal Bank of Scotland (RBS) will no longer pay annual bonuses to top executives as it seeks to defuse what has become a yearly political battle over the remuneration of its most senior staff.
Sky News understands that City shareholders have given a mixed reaction to RBS’ plans to scrap annual bonuses and pay all variable rewards in shares which vest over four and five years.
Previously, top executives were eligible for both annual bonuses and long-term incentive awards.
The new policy at the bank, which is 80%-owned by taxpayers, applies to Ross McEwan, RBS’ chief executive and eight members of his senior management committee.
In last year’s annual report, RBS said that “executive directors will no longer be eligible to receive annual bonuses”, while Mr McEwan said in a speech last autumn that “short-term bonuses will no longer be paid to me or any member of my executive committee”.
Both of these remarks appear to have been interpreted by RBS’ non-Government shareholders and the media as referring only to rewards for 2014, a year in which the bank was fined £400m for its role in an industry-wide foreign exchange-trading scandal.
However, sources at the bank confirmed that the decision to scrap annual bonuses is in fact a “permanent” decision, with the taxpayer now seen as a likely investor in RBS for at least another five years.
Mr McEwan’s predecessor, Stephen Hester, was the subject of yearly political rows over his annual bonus despite his success at rescuing the bank from the brink of collapse.
The picture has been complicated by the introduction by RBS – and most other global banks operating in the UK – of fixed allowances for senior risk-taking executives following the introduction of new European remuneration rules.
These mean that the most senior bank employees can be paid variable amounts worth up to twice as much as their fixed pay each year if they have shareholder approval.
A number of RBS executives have been handed these allowances, but the bank has lost a battle with the Treasury over whether it could seek investors’ backing to be able to pay more than 100% of fixed pay in bonuses.
That does not spell an end to big pay packages at RBS, but is likely to mean a significant fall in the number of millionaires created each year at the bank, sources said.
In RBS’ case, ten employees were given allowances worth a total of nearly £5.5m last year to help sidestep the impact of Europe’s bonus cap.
But City reaction to RBS’ plans has been mixed, with one leading institutional investor warning that the policy of scrapping annual bonuses will make it harder to retain members of Mr McEwan’s management team.
“There is still a lot of work to do to make RBS an attractive investment proposition, and to do so it needs to be able to pay people competitively,” the shareholder said.
RBS’ overall bonus pool is expected to fall from last year’s figure of almost £580m because of a combination of fines and the performance of its shrinking investment banking division.
George Osborne, the Chancellor, is likely to apply additional pressure to Sir Philip Hampton, RBS’ chairman, to reduce bonuses as far as possible because of the possible political fallout when the bank’s results are published around ten weeks before the General Election.