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The End of Big Bonuses?

On January 30th, it was announced that Stephen Hester, CEO of the Royal Bank of Scotland, had rejected his £963,000 bonus he was to receive for successfully meeting his targets at the top of RBS. Just one day later, news spread of Fred Goodwin, former head of RBS, having his knighthood removed upon the advice of Whitehall MPs.

Such difficulties at RBS date back to the height of the financial boom years in 2007. As head of RBS, Fred Goodwin oversaw the £49 billion takeover of ABN Amro, a state-owned Dutch bank which political analysts and MPs alike have identified as a catalyst for the UK recession. The takeover was described by the Financial Services Authority as a “gamble” and was blamed for “making the situation much worse” for RBS.

Following the onset of the global recession, and specifically the RBS-ABN Amro crisis, Hester was appointed CEO of RBS in November 2008. As a result, in the last year alone, RBS’ share price (remember, RBS is now 82% state-owned since the recession) has plummeted 36%, therefore reducing the value of government-owned assets at a crucial point, as GDP growth in the last quarter of 2011 was -0.2%.

What’s worse, Hester has overseen the cutting of 3,500 jobs from RBS’ global banking division, with a total of 11,000 jobs being cut since 2007.

So, is it fair that Hester was even considering accepting a £963,000 bonus, ignoring the fact that he later rejected it? It definitely isn’t fair when you consider the fact that he is already paid a whopping £1.2 million wage and is in line to receive a total of £4.5 million by 2015 from what is called a ‘Long Term Incentive Plan’.

It definitely isn’t fair when youth unemployment has surpassed 1 million and overall unemployment levels are at their highest in 17 years.

Yet, some have suggested that Stephen Hester deserved to receive a £963,000 bonus. Robert Peston, Business Editor at the BBC, argues Mr. Hester deserved the bonus for making RBS “a less risky organisation”. This argument seems fairly flawed when taking into account the fact that RBS has had to cut nearly half of all its jobs simply to keep the business afloat.

Additionally, both Iain Duncan Smith and Danny Alexander from the coalition have admitted they do not see a problem with RBS giving Hester such large bonus payouts. This kind of view is worrying when coming from such important government officials.

In contrast to Robert Peston at the BBC and figures in the coalition, I believe Ed Miliband’s argument is spot on. In an interview to the BBC, Miliband called for more transparency in the boardroom, and accused the government of having a “completely tin ear when it comes to what people are feeling”.

Ed Miliband is right in the sense that the case of Hester’s £963,000 bonus is not an isolated one. Bankers’ bonuses remain high, despite there being a slow global recovery following the 2008 recession. Hester was right to reject such a large bonus and the Labour party should be congratulated for speaking out on these issues.

Yet, I do not think we have seen the last of big bonuses. With more soon to be paid out at Barclays and numerous other banks, it remains to be seen whether those at the top of the banking industry will follow the trend and reject a bonus, or whether greed will prevail over national economic wellbeing.

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