(Updates with Osborne comments in second paragraph, Miliband in ninth.)
Jan. 27 (Bloomberg) -- Prime Minister David Cameron was concerned that Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester might leave Britain’s biggest state-owned lender if he was refused a bonus, a person familiar with the government’s thinking said.
“The alternatives would have been worse for the taxpayer,” Chancellor of the Exchequer George Osborne told reporters today in Davos, Switzerland. “Either there would have been a much larger bonus of the kind that he would have got a few years ago, or the British government would have had to take over complete ownership of RBS and overruled the board, and I think that would have cost the taxpayer more as well.”
Cameron was criticized by the opposition Labour Party, as well as by coalition allies in the Liberal Democrats and members of his own Conservative Party, for approving the 963,000-pound ($1.5 million) bonus days after urging shareholders to hold down executive pay. Business Secretary Vince Cable said this week ministers were in “an uncomfortable halfway house position between meddling and being hands-off” when dealing with RBS.
“Stephen Hester has done a good job, but that’s what most of us are paid to do in our usual jobs -- when we receive a salary, we are paid to do a good job,” Chuka Umunna, the opposition Labour Party’s business spokesman, told the British Broadcasting Corp. “You receive a bonus if you’ve done something out of the ordinary, you’ve done something that bit extra. And let’s not forget, he’s receiving a base salary of 1.2 million pounds.”
Payment of the all-stock award of 3.6 million shares, whose value was based on the closing price on Jan. 25, will be deferred until 2014, Edinburgh-based RBS said in a statement yesterday. Hester, 51, took a 2 million-pound bonus for 2010, his first since replacing Fred Goodwin in 2008. This year’s just meets a Cameron pledge last week that it would be below 1 million pounds.
RBS shares fell by 48 percent last year as Europe’s sovereign debt crisis eroded revenue from its securities unit. The bank fell 0.5 percent to 27.54 pence at 2:53 p.m. in London.
The lender announced about 4,800 job cuts earlier this month and said it plans to sell or close its cash equities, mergers advisory, corporate broking and equity capital markets operations. John Hourican, who leads RBS’s securities unit, is in line for a payout of as much as 5.8 million pounds this year as part of his deferred 2009 share award that pays out in April.
‘Less than Half’
“There was a process and the process has resulted in a bonus that’s less than half the bonus that Stephen Hester received last year,” Steve Field, Cameron’s spokesman, told journalists today. Asked whether the RBS chief should accept the award, Field said: “That’s ultimately up to Mr. Hester.”
Labour leader Ed Miliband called the bonus “a disgraceful failure of leadership” by the premier. “He’s spent weeks saying that shareholders should play a more active role in reining in excess where they see it, but at the first chance to act for a bank the public own the prime minister has just nodded it through.”
The bonus decision came a week after a speech in which the prime minister said “reward and success have become disconnected” for senior executives. Cable said on Jan. 23 that greater transparency over pay and more shareholder power would hold down remuneration. An RBS spokesman declined to comment on what Hester’s response would have been if the bonus was refused. The story was reported earlier by the BBC.
‘Whacking Great Bonus’
“People will not understand how someone can get a whacking great bonus like that when they’re running a state-owned bank,” London’s Conservative Mayor Boris Johnson, a former schoolmate of Cameron’s, told BBC television from the World Economic Forum in Davos, Switzerland.
“I think a state-owned bank should be run on public- service lines,” the mayor said when asked what he would have done as prime minister. Johnson has made promoting London’s financial industry a central theme of his mayoral term.
The bonus drew criticism in newspapers this morning, with the Conservative-supporting Daily Mail headlining its front-page story “1 Million-Pound Reward for Failure.” The Daily Mirror, which backs Labour, said the award underlined “the gulf between a rich few and the increasingly impoverished many.”
‘Missed Lending Targets’
Labor unions also attacked the award, with Karen Jennings, assistant general secretary of Unison, saying that it contradicted the prime minister’s appeal for moral capitalism. “A 1-million pound reward -- on top of a salary of more than a million -- is unjustifiable given the job cuts at RBS, the missed lending targets and the dip in the company’s share price,” she said in an e-mailed statement.
Foreign Office minister Jeremy Browne, a Liberal Democrat, said last night that Hester should refuse the award. “He gets paid in three days what a soldier in Afghanistan gets paid in a whole year,” he told the BBC’s “Question Time” show. “He is effectively a public servant. I think he needs to think like a public servant.”
“The Chancellor and the Treasury have explained the frustrating reality of this, if we ripped up the contract the last government signed, taxpayers would probably end up paying even more money,” the Liberal Democrat Deputy Prime Minister Nick Clegg told Sky News. “I understand people’s sense of dismay when they see these figures from another planet.”
Bank executives have been urged by the government to show restraint on pay at a time when British real household incomes are falling and public spending is being squeezed the most since World War II.
Cameron said Jan. 25 the Honours Forfeiture Committee, which protects the reputation of the U.K. honors system, would meet this week to discuss whether to revoke the knighthood awarded to Goodwin. The Cabinet Office refused to comment on the timing or the result of the meeting.
Lloyds Banking Group Plc CEO Antonio Horta-Osorio said on Jan. 13 he won’t take a 2011 bonus following his nine-week absence for exhaustion at the 41 percent government-owned lender. The payment could have been as much as 2.39 million pounds, according to company filings.
Morgan Stanley CEO James Gorman’s 2011 pay was cut by 25 percent to $10.5 million from the previous year while JPMorgan Chase & Co. held CEO Jamie Dimon’s pay steady at $23 million, two people familiar with the plans said earlier this month.
Britain has an 82 percent stake in RBS after bailing out the bank with 45.5 billion pounds of capital during the banking crisis in 2008 and 2009.
--With assistance from Thomas Penny in London. Editors: Francis Harris, Eddie Buckle
To contact the reporters on this story: Robert Hutton in London at email@example.com; Gavin Finch in London at firstname.lastname@example.org
To contact the editors responsible for this story: James Hertling at email@example.com; Edward Evans at firstname.lastname@example.org