British taxpayers are up in arms about the size of the bonuses Royal Bank of Scotland is paying to its senior executives this year, and some of the bank’s former Asian staff share their disdain.
The UK bank said last week that its chief executive, Stephen Hester, had earned a ₤1 million ($1.6 million) bonus during 2011, based on terms approved by shareholders with near unanimity. But according to some critics, that represents a reward for failure. Hester last night gave up his share award after opposition politicians moved to a vote on the issue, although the board insisted it was happy to back him.
It is slightly surprising that Hester became the focus of public anger, while John Hourican, the head of RBS’s investment bank since 2008, has received less attention, despite the fact that his compensation package amounts to more than ₤5 million — in a year when RBS announced that it wais laying off 3,000 investment bank staff at an expected cost of ₤200,000 each, according to analyst reports.
Many of these staff were hired after RBS's bailout by the government as part of an aggressive expansion in investment banking, including the payment of large guaranteed bonuses and other generous sweeteners — a plan that seems to have backfired.
Nomura reckons that the retreat from investment banking could cost ₤1 billion a year in annual revenues. RBS’s board, however, has said that it is impressed with the bank’s achievements during the past year. “The award for 2011 reflects the substantial progress in making RBS safer, rebuilding performance in many businesses and improving customer service and support,” according to the remuneration announcement last week.
It went on to say: “Significant improvements have been made in people management and engagement levels under the leadership team since 2009.”
That probably does not reflect the experience of many people currently working at RBS in Asia, where the bank had been particularly ambitious in its expansion, even as recently as last year. At the start of 2011, it got out its chequebook to sign Sherry Liu from J.P. Morgan to head its China investment banking team and drive a brand new A-share business, but the investment has not helped RBS to win deals.
The British press, easily shocked at the best of times, has had a field day with Hester’s bonus. One newspaper noted that his total compensation package meant that Hester earned in a single day what the average British soldier earned during a whole year in Afghanistan.
Such criticism put the government in a difficult position. It hired Hester from British Land in 2008 and agreed a pay deal that was “geared to the recovery of RBS”. The 20-year Credit Suisse veteran was considered a safe pair of hands and under his leadership the share price has more than tripled, earning him a reward that 99.2% of shareholders voted to support.
The government was leery of squelching on that deal for fear that Hester would walk — while also threatening its chances of finding a good candidate willing to take over from him.
There is no doubt that RBS has faced extreme challenges, first from the legacy of its disastrous ABN Amro acquisition and, second, from the deepening financial crisis in the eurozone. But some former RBS staff complain that the bank has been its own worst enemy.
“In my opinion, and also in the opinion of people I’ve spoken to from all across RBS in Asia, this has nothing to do with the global financial crisis or the ABN acquisition,” said one former RBS banker, who added that the expansion was overdone. “They should have been more humble; the scale of ambition should have been in keeping with their position, but it wasn't.”
The plan to expand in equities had its doubters from the start. To compete in that business, banks need to produce rated research as well as win roles on initial public offerings (IPOs) — but rated analysts are expensive and hard to poach, and critics feared that post-bailout RBS did not have the balance sheet to win significant market share in IPOs.
Meanwhile, it had sold off other assets, such as the Sempra commodities unit and many of the local licences that had been the main strategic reason behind the ABN acquisition. “There go your ambitions of being a global banking player,” said the former RBS banker.
In defence of its senior executives' record, RBS stresses that all of its core businesses (except Ulster Bank) are now profitable, its balance sheet has been reduced by more than £600 billion since 2008, its disposal programme is on track and its funding and liquidity position has strengthened substantially, with less reliance on short-term wholesale funding.
RBS also argues that its share price is significantly higher than it was at the start of the strategic plan in January 2009, which is true — it is now at 27p, up from the 9p it briefly touched at the absolute bottom of the market. That is also the point at which Hester agreed his pay deal, which meant that his performance was benchmarked against the worst low in living memory. The stock first recovered to its current level of 27p way back in mid-April 2009, just three months after the strategic plan started.
Even so, filling the RBS job was always going to be difficult without offering relatively competitive terms, and the government may be shooting itself in the foot if it backs out of its commitments. Hester's voluntary rejection of his bonus has done the government a favour, for now, but Hourican and other executives may soon find themselves in the firing line next.