Royal Bank of Scotland (RBS) has warned that Treasury control over its bonus payments could place it at a “significant competitive disadvantage”, it has emerged.
As part of the terms of its deal to insure bad debts, the Government wants to dictate both the “quantum and shape” of the payouts at the bank, which owns Ulster Bank, for 2009.
The arrangement is part of state efforts to assuage public anger over bonuses in the bailed-out banking sector.
RBS, which will be 84% state-owned under the terms of the Asset Protection Scheme (APS), will now have to agree the size of this year’s payouts with UK Financial Investments (UKFI), the body set up to manage the public stakes in banks.
In a circular to shareholders concerning the scheme, RBS said some of the terms were “in several respects very restrictive”.
It said it had agreed to the requirement “solely on the basis that it is an essential part of the overall agreements for the refinancing of the group”. The bank added: “Depending on UKFI’s approach to recommendations made by the board in respect of that bonus pool, this requirement may adversely impact RBS’s ability to attract and retain senior managers and other key employees and thereby place RBS at a significant competitive disadvantage against its competitors as well as increasing the risks facing RBS and weakening management’s ability to deal with them.”
The bonus clampdown provides a challenge for RBS, as remuneration is key in the banking sector to attracting and retaining top staff.
RBS has already agreed to limit cash bonuses to those paid under £39,000 a year, with higher earners paid in shares over three years.
Stephen Hester, chief executive of RBS, has previously referred to payment restrictions as “additional obstacles that make our job of recovering money for the taxpayer more difficult”, but said he understood why it was being done. But a spokesman for UKFI looked to reassure that it would take the bank’s concerns into account: “UKFI’s remit is to protect and create value for the taxpayer and will approach this issue with that in mind.”
RBS shares fell around 6% yesterday. It has already put aside £1.79 billion in the first half of this year to cover staff expenses, including salaries and bonuses.
But it is feared the measure could endanger the bank’s global banking and markets division, which employs around 20,000 people and is a key profit-driver.
The division is looking set for a record year and there are fears that staff, who would normally expect to be handsomely rewarded, may fall into the arms of the competition if they feel their bonus has been scrimped.
A rebound in stock markets has led to bumper investment banking hauls across the board so far this year and the sector is estimated to be preparing to fork out a 50% hike in annual windfalls to £6bn.