From the TUC

Royal Bank of Scotland – a nice little earner

23 Jun 2009, by in Economics

There has been understandable and predictable outrage at the size of Stephen Hester’s pay packet at the Royal Bank of Scotland. But, while I share the anger, it is not entirely a straightforward issue. The government can at least claim that he will only get top whack if he helps the tax-payer make a profit of the sums used to rescue RBS – a useful reminder that the  bank bail-outs were not simple hand-outs of public cash.

There are at least four issues raised by the size of his pay-packet.

  • The high rewards that all top bankers expect
  • Why some people need incentives to do their job
  • What exactly has he been incentivised to do
  • Whether RBS top-dogs should be treated differently because it is now largely state-owned

Public outrage is undoubtedly a reflection of wider anger at boardroom excess, mixed up with the sense that this is  public money because RBS is quasi-nationalised. Richard Murphy points out the make-up of UKFI’s board who approved this.

I hope that there is also some discussion of the other two. There’s a tantalising snippet on PA about some new research that shows incentives can be counter-productive.  While some systems are better than others – eg incentives that rewards teams, rather than pitting individuals against each other – I’ve never been convinced that performance related pay achieves very much. Inevitably winners take it granted, and the losers take it personally.

But the big issue that does not seem to have received much comment is exactly what Mr Hester has been told to do to get his dosh. Frankly public ownership is such anathema to any red-blooded banker that they hardly need incentivising for getting back into the private sector.

Yet from the government’s perspective  getting the finance system working should take priority over early pay back. Because many foreign banks have stopped lending in the UK, British based banks need to lend more than they did before the recession to get credit functioning properly again. However this is not necessarily the way to boost RBS’s share price.  And if that produces more growth, then there will be more benefit to the tax payer than a simple return on privatising RBS sooner rather than later.

If we have to have incentives in public stake banks, then at least they should serve public policy objectives.