I must admit that the cacophony surrounding Stephen Hester’s bonus has taken me aback. In late January, Royal Bank of Scotland decided to award its chief executive a near-£1 million bonus for 2011 in addition to his £1.2 million salary which, under enormous media and political pressure, Hester was forced to decline.
Should he have done so? And should he have been awarded the bonus in the first place?
Hester’s scorecard for his tenure at RBS is frankly not bad. In many ways, it is pretty good. I would give him a B-plus.
In 2011, the RBS share price sank by approximately 48%. This decline was in line with other big European and US banks. The bank’s profitability, however, increased in the first nine months of 2011 (pre-tax profits were £1.2 billion) compared with the same period in 2010 when the firm made a pre-tax loss. RBS narrowly failed to meet its lending targets for small businesses.
But the balance sheet has been reduced substantially: some £600 billion of assets have gone since the fourth quarter of 2008. The investment bank is now being savagely shrunk, with some 4,000 job losses expected as it focuses only on the businesses it is good at. Hester should get brownie points for making these tough decisions; but he should lose them for not taking them sooner. The bank did not have the balance sheet or brand to be an important competitor in investment banking any more.
The hysteria in the UK about Hester’s harvest (or should that be hemlock?) is disturbing. Although I had long expected this year’s bonus round for bank chiefs to be controversial, I find it disturbing that for the last few mornings when I have listened to the Today programme on the BBC, there has always been a politician, a trade unionist or a corporate governance specialist pontificating about the Hester bonus.
"I bet Hester wishes he had never taken the job," a source said, waving a copy of the Daily Mail newspaper at me. There was a double-page article on Hester, his wealth, his homes and his recent divorce. It is unfortunate that Hester’s corpulence brings to mind the two words in the dictionary most dreaded by senior bankers: "fat cat".
The debate has gone viral and most people are desperate to give you their view on the subject.
Here’s mine: I think the bonus was fair. It’s certainly below the going rate for the CEO of a big bank. And if Hester walked out, it would probably cost more to replace him with someone of similar calibre. Whisper it, if you dare, but who in their right mind would want that job?
Nevertheless, Hester has shown limited emotional intelligence in initially accepting the bonus. The post-tax sum would not have changed his life or materially increased his wealth. He was, after all, a senior banker at Credit Suisse in the good years and a well-remunerated chief executive of British Land and senior executive at Abbey National before his RBS tenure. He therefore comes across as petty and greedy and that is certainly the way he will be portrayed in the popular press. Indeed the uproar might make him a less-appealing candidate for his next big job, whatever and wherever that might be.
But there is a winner in all this. Lloyds’ chief executive, António Horta-Osório, declined his 2011 bonus. He took medical leave for the latter part of 2011 so this decision is easy to understand. But nevertheless he must be glad that his bout of insomnia is no longer front-page news. The furore about bank chief executives’ compensation will not end with Hester.
This might be only the warm-up match for a veritable gladiatorial contest over the Barclays bosses’ bonuses. And it has not yet been announced whether RBS’s investment banking chief, John Hourican, will receive the 20 million-odd shares (worth some £4 million) which he was awarded in 2009. Watch this space.
In late January, I had lunch with three former colleagues. We used to work together at a large investment bank 20 years ago. Our clients were the main European sovereign treasuries and we had numerous discussions with them about preparing for the euro and what the brave new world would look like when it dawned in 2002.
During those discussions, there were very few doubters. It was as if one were dealing with a group of religious fanatics. Questions marked one out as an intellectually challenged quibbler who lacked the "V" word where "V" stood not for victory but for vision.
There were certain things that didn’t make sense to me. I didn’t understand why all these different European countries would continue to auction their own debt – effectively in competition with each other. I didn’t understand how the euro could be created without a provision for a country to withdraw. And I didn’t understand how one economic policy would fit all. There’s a large divergence between economic conditions in northern and southern Italy, so how can one interest rate work for both Germany and Greece?
My lunch companions are some of the brightest individuals I know and are still involved in the financial world. Nevertheless, we spent half an hour trying to work out what a Greek default and departure from the euro would look like. And we still couldn’t figure it out. It is fair, though, to say that we agreed with the European bank chief executive who told me: "If Greece leaves the euro, Greece will become Somalia."
If you think about it, most Greeks have mortgages denominated in euros and they will be trying to pay their mortgages off in devalued Greek drachma. Moreover, if Greece leaves the euro, the euro is no longer the euro because part of its value is the Greek component. Pretty quickly your head starts spinning. Regular readers will know that I am a Cassandra in the making – always seeing shadows where others perceive light. I’m not convinced the euro is sustainable and I don’t subscribe to the "We’ll all muddle through" scenario favoured by many commentators and investors.
