BREAKINGVIEWS-RBS should pay no cash bonuses for 2010

Tue Dec 21, 2010 9:47am GMT

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-- The author is a Reuters Breakingviews columnist. The opinions -- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By George Hay

LONDON, Dec 21 (Reuters Breakingviews) - Royal Bank of Scotland (RBS.L) should scrap cash bonuses for 2010. Last year, the board of the all-but-nationalised lender nearly quit following a clash with the UK government over how much to pay its investment bankers. Something big is needed to avoid a similar drama this time around.

The bank is talking to UK Financial Investments, the arm's-length manager of the UK's bank stakes, about capping the cash component of each bonus. The likely ceiling would be 50,000 pounds, according to reports. With recent European Union rule changes allowing bankers to take 20 percent of their bonus in cash up front, RBS bankers with awards exceeding 250,000 pounds would suffer.

But such a gesture might not be enough to avert a damaging public backlash. UK austerity measures are leading to significant public sector job losses. Because RBS took 46 billion pounds of state bailout cash, it needs to show restraint.

Paying no bonuses at all would be counter-productive. So long as RBS retains an investment bank, it needs to pay competitively. The better way to act responsibly would be to pay bonuses entirely in restricted shares, or bonds that convert into equity in a crisis. This would hurt, as bankers would have to wait to cash out. At the same time, RBS could try to prevent an exodus of rainmakers by increasing the overall value of bonuses so that it was paying above average for the banker job market.

Everyone else would benefit. As the Bank of England points out, banks would have more cash to lend and more capital to bolster reserves. The example might shame other banks into moderation.

Some will say that paying staff in a manner that could make them leave goes against shareholder value. But the definition of value here is unconventional. The UK taxpayer owns 84 percent of RBS; its interests would be best served by encouraging bonus restraint. Moreover, no RBS staffer across the group received upfront cash last year if they were earning over 39,000 pounds. That has not led to a fall in investment banking revenues any more severe than at RBS's middle-ranking peers.

RBS was the last big bank to cease the boom-time folly of paying bonuses entirely in cash. It would be a mark of how far it has come if it was the first to pay its bankers entirely in something else.

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CONTEXT NEWS

-- Royal Bank of Scotland is in talks to cap the cash component of its 2010 bonuses, according to a person familiar with the situation. The lender is negotiating on the matter with UK Financial Investments (UKFI), which manages the government's 84 percent stake in the bank. The cap could be in the region of 50,000 pounds, according to reports.

-- Any settlement is likely to go beyond new bonus guidelines agreed for European banks that cap upfront cash payments at 20 to 30 percent of the total bonus, depending on seniority.

-- Introducing a cash cap would still be more generous than RBS's 2009 bonus round, which required 100 percent of bonuses to be deferred if the recipient earned more than 39,000 pounds per year.

-- UK Chancellor George Osborne is due to meet representatives of the UK's major banks on Dec. 21 to discuss financial sector pay. The meeting was to have taken place on Dec. 20 but was postponed due to bad weather.

-- Reuters story: British banks brace for more bonus scrutiny [ID:nLDE6AH0ID]

-- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Chris Hughes and David Evans)

((george.hay@thomsonreuters.com)) Keywords: BREAKINGVIEWS RBS/