Who Wants to be a (Government-Employed) Millionaire?

Oli Thomas

It is perhaps unfortunate for Stephen Hester, CEO of Royal Bank of Scotland, that the announcement of his £970,000 bonus fell just a week after Blue Monday – the third Monday in January often regarded as the most depressing day of the year.

It is also unfortunate that it emerged at the same time as negative growth in the 4th quarter of 2011 was reported – an indicator of the potential onset of a recession. Yet the most unfortunate issue for Stephen Hester has to be the feckless, vote-hungry nature of politicians in the UK today.  After a weekend of heightened public anger over the announcement, driven by media coverage and political wrangling, the RBS CEO has now confirmed he is waiving the bonus. However, the question of whether he actually deserves the reward has been overshadowed by the size of it.

Let’s be clear, the share price has fallen by nearly 40% over the last year, wiping billions off the value of the taxpayer’s 83% stake. But this is at a time of unprecedented market volatility when many of the banking share prices are undervalued and suppressed by global anxiety. And most analysts would maintain that he hasn’t done too badly – by Q3 in 2011 (the last reporting date) RBS had made £2bn profit, up 15% on the same point in 2010. This was at a time when even the great Goldman Sachs was struggling – profits were down 43% year-on year in the equivalent period.

Of course, there is no argument for vast executive bonus packages, particularly with no clear correlation to performance. Regulation and reform of the banking industry is demanded at a global level to discourage the reckless sort of risk-taking that led to the financial crisis. However, making an example of one man who, relative to his banking peers and other CEOs (Tim Cook of Apple was awarded a bonus of $378m for 2011), is receiving a fairly modest reward, defies logic.

Wrong Symbol 

Unfortunately, this political incompetence is symbolic of the turmoil which has beset the West in the fallout from the 2008 credit crunch. Politicians, largely ineffective in enacting change at a national level amidst a depressed macroeconomic backdrop, are resorting to PR-led decision-making to win the public support (Examples of this include the political brinkmanship from the Republicans and Democrats in the US last August that led the country to within days of default on a loan repayment and the painfully slow progress in the Eurozone due to leaders trying to balance economic demands with the ideological principles of their party and its voters).

How many politicians, the majority of whom I like to think are well-read and intelligent people, actually believe that forcing Stephen Hester to waive what is ultimately a £500,000 bonus (after tax) will solve anything? If we want to galvanise the bank into improved performance, which at least in the long run, will lead to an increased share value and therefore a positive return on the taxpayer investment, then why does it make sense to not reward ‘good’ performance in line with the rest of the industry?

Breaking The Government 

We are in danger of breaching the limitations of Government in a capitalist society. Political intervention is generally required when the free market fails to deliver services. Obvious areas for this include the police force where a competitive market does not arise due to the free-rider problem (people benefit from the investment of others thereby eroding any ability for the provider to charge for the service). So the Government intervenes, establishing the police service to ensure a minimum level of security required for a society to function and for a greater standard of living to emerge.

In becoming a majority shareholder in RBS, the Government has become a player in an already competitive market. Whilst it is right that shareholders should have a greater say in executive remuneration, this is based on the understanding that shareholders, through investing their own funds, behave rationally. The Government is unable to act in this rational capacity as it is accountable to the British public who are rightly intoxicated by anger and emotion at the loss of jobs, rising taxes and poorer living standards imposed on them through the failure of the banking industry. But to allow this red mist to cloud the path to profit and inhibit the competitiveness of the bank is to further endanger the public purse – to take action on executive remuneration without a global level of consensus risks destroying the competitiveness of the industry. High-performing staff will not be attracted to the company, performance will fall, and the share price will tumble, reducing the value of the taxpayer’s share.

Let Steven Gerrard have a go at it?

It might be better to take the debate away from the banking context and apply it to a more popular industry – football. Imagine if the UK Government imposed a cap on footballer’s salaries in the interests of the public on the basis that ticket prices were too high. As this is not done on a global basis, salaries in other countries would continue to rise, eroding the ability of UK clubs to attract top players. Inevitably, stars such as Wayne Rooney would leave the Premier League to play abroad where they can earn much higher wages. The quality of the English League would fall as that of other leagues rises with the influx of former Premiership players. Eventually, clubs such as Manchester United would lose all their quality players, and thus people would stop watching them. The benefit to the country of lower ticket prices through capping salaries has been vastly overshadowed by the detrimental effect on the quality of football on offer and the loss of tax revenues from highly-paid players.

It is a true indictment of the weakness of politicians today that they lack the integrity, as well-informed and reasoned individuals, to at least put forward the logical argument behind rewarding Stephen Hester in line with the industry standard. Worst still, politicians had already agreed to a bonus, provided it was under £1m, but were then quick to hide their support when the public became aware of it. In bowing to the public pressure, they have weakened the position of the bank and endangered the attractiveness of public sector employment as a whole. Bonuses, pay and pensions aside, which high-performing and respected individual will now be attracted to a position in the public sector having seen the level of intimidation and the lack of support afforded to people at that level by the Government?

And worse is still to come.

It is inevitable that the heads of Barclays and HSBC will now also come under pressure to waive their bonuses (which are likely to far exceed that of Stephen Hester). These are wholly private banks that required no Government bail-out in the aftermath of the credit crunch. If the media and the Government jump on this bandwagon too, they then begin to risk the competitiveness of the UK financial services market as a whole. Banking is a truly global industry – there are few barriers to preventing skilled employees from moving abroad and plying their trade in a far more welcoming environment. Equally there are an increasing number of reasons for companies to start looking East for favourable locations in which to move their Headquarters.

It is imperative to tackle the problem of excessive remuneration awarded to Executives across banks and other large multi-national companies. However, to perform small-scale PR stunts simply to placate voters whilst jeopardising the taxpayer-funded investment demonstrates the short-termism that abounds in politics today.