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The battle of Hester’s bonus: Labour’s hypocrisy, PIRC’s doubts

January 28th, 2012

Labour is being supremely hypocritical over the £1 million share-based bonus recently awarded to RBS boss Stephen Hester.

It was the government of Gordon Brown, which didn’t leave Downing Street until May 2010, that signed off the original contract and subsequent long-term remuneration policies that made the bonus possible. The ministers who sanctioned the incentive arrangements, via the arm’s length body UK Financial Investments, must have included the former chancellor Alistair Darling, and the former financial services secretary Lord Myners.

The package was constructed to persuade Hester to risk the move across from British Land where he was happy as chief executive. Over and above a basic £1.22 salary, the package included an opaque and complex series of incentive awards, some discretionary, plus a non-discretionary “Golden Hello” of 10.4 million RBS shares then worth £6.5 million.

In view of all this, I thought it worthwhile to revisit a Herald article from March 25, 2009. Published as investors in RBS were being asked to rubber-stamp pay policies that would apply to Hester and its new management team, the article reveals that some organisations including the corporate governance watchdog PIRC had strong reservations about some of this government-sponsored largesse (I have edited the article for the sake of brevity; emphases are mine). [The article was published in The Herald on 25 March 2009 – date on website is wrong]

Corporate governance watchdog Pirc yesterday criticised remuneration awards to the new guard at Royal Bank of Scotland, chairman Sir Philip Hampton and chief executive Stephen Hester …

Pirc, which advises institutional shareholders on which way to vote on company resolutions, is recommending investors oppose RBS’s remuneration report at the bank’s annual meeting in Edinburgh on April 3.

Pirc highlights Sir Fred Goodwin’s pension as just one of three problems it has with Royal’s remuneration practices. The other two relate to the new-broom management.

Both the Association of British Insurers and consultancy RiskMetrics Group are also drawing investors’ attention to share-based awards made to Hampton and Hester.

Spelling out its concerns about remuneration at RBS, in a note published yesterday, Pirc says: “We have a number of concerns regard- ing remuneration practices at RBS. In light of these reservations we recommend shareholders oppose the remuneration report.”

…barring the very unlikely event that the 57.9% government stake in RBS is voted against, the resolution to approve the remuneration report would still seem likely to be passed.

Pirc objects to a conditional share-based award of up to £1.5m to Hampton, who became chairman of RBS on February 3, because the performance criteria attached to this link him too closely with management of the bank.

RiskMetrics Group, which is recommending abstention on the remuneration report, highlights its view that the performance-based share award means “Hampton can no longer be deemed independent”.

It notes “NAPF policy allows the chairman to sit on the remuneration committee if he/she met the independence criteria on appointment and where independence has not been compromised in the interim”.

Hampton is non-executive chairman of Royal, and receives fees of £750,000 per annum for this role. The one-off share award of up to two years’ fees will vest on the third anniversary of the grant, subject to the performance criteria being met.

Pirc says: “We have concerns regarding the per formance-measured share award made to the company’s new chairman, Philip Hampton, of an equivalent potential value of £1.5m. We consider that it is contrary to best practice for a non-executive director to participate in a performance share plan that links him so closely with the management of the company.”

Pirc also takes issue with an award of 10.4 million shares in Royal to Hester, who became chief executive on November 21. This award was made to compensate him for giving up potential share-based rewards at British Land, his former employer, as a result of his decision to lead the Scottish-headquartered bank.

These 10.4 million shares are, at RBS’s closing price of 25.4p last night, worth £2.6m. The bank’s annual report states “the majority of these awards will vest between February 2009 and the third anniversary of his appointment as group chief executive”.

Pirc highlights the fact this “restricted share award” has no performance conditions attached to it. Pirc is also concerned the shares could vest immediately were Royal to terminate Hester’s contract for a reason other than under-performance.

It says: “Mr Hester received a restricted share award of over 10.4 million shares, which have no performance conditions attached other than continued employment, to compensate him for lost awards at his previous employer. PIRC only considers such awards to be appropriate when challenging and transparent performance conditions are applied in order that shareholders are guaranteed a return as a result.

“In addition, Mr Hester has the entitlement under his Continued on Page 29 Continued from Page 30 contract to immediately vest these awards if his contract is terminated by the company and he does not underperform.”

Pirc concludes: “Given that Mr Hester’s restricted share awards are designed to retain him within the company, we do not consider any circumstances for early vesting of awards to be acceptable.” …

UK Financial Investments, which looks after a government stake in Royal which is poised to rise from 57.9% to about 70.4% with the conversion of about £5bn Preference shares issued in last October’s £20bn recapitalisation into Ordinary stock, steered clear of giving a view on the observations on Hampton and Hester.

Picture by Jane Barlow

 

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Posted by on Jan 28 2012. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

1 Comment for “The battle of Hester’s bonus: Labour’s hypocrisy, PIRC’s doubts”

  1. […] RBS shares – was signed off by UKFI and the Labour government in November 2008, it’s rather hypocritical of opposition leader Ed Miliband, who was in Gordon Brown’s cabinet at the time, to argue that […]

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