So, RBS chief executive Stephen Hester has bowed down to the onslaught of media and political pressure over his £1 million bonus. And today Citi said it would cut 2011 bonuses in its investment banking division by about 30% on average amid slumping revenue, according to a person briefed on the matter (according to Bloomberg).
On January 27, RBS decided to release the details of the bonus structure:
The board has decided to allocate Stephen Hester a 2011 annual performance award of 3.6 million shares (or 60%) from the Share Bank award set aside for him in 2011. This represents £963,000 based on the closing price on Wednesday January 25, 2012 (26.75p) when the decision was taken.
The award will be made entirely in shares that are deferred and subject to holding conditions that mean that their full value cannot be received until late 2014. Only then can their tangible value be established. This ensures complete alignment of the chief executive's interests with those of our shareholders.
The award for 2011 reflects the substantial progress in making RBS safer, rebuilding performance in many businesses and improving customer service and support. Performance was judged against objectives agreed at the start of the year. The reduction from the initial Share Bank award reflects those areas where financial and business objectives have not been fully met. The value of the Share Bank award has also reduced in 2011 reflecting share price decline.
Stephen Hester's salary and related benefits remain unchanged from those put in place when he joined RBS in 2008.
The board do not expect his Long Term Incentive Plan (LTIP) award maturing in 2012 to meet its performance conditions based on the current share price. This would mean a zero value.
For performance year 2012, Share Bank and LTIP arrangements will continue in line with the policy set out in the 2010 Remuneration Report, which received overwhelming support from shareholders.
Well, the situation has garnered a PR disaster for RBS and Hester personally.
In the UK, the news that Hester was still in line for a £963,000 bonus, despite the bank being 83% owned by the taxpayer – and that RBS share prices have, by many standards, performed terribly – cultivated mass opposition and uproar from the public and all the main political parties in the UK.
But late on Sunday night, the media reported that Hester had agreed to relinquish the sizeable extra pay packet:
Mr Hester had been urged by the RBS board to defy his critics, but he finally buckled after Ed Miliband, Labour leader, announced his party would stage a Commons vote denouncing the bonus. “It was the final straw,” admitted one ally of the bank chief.
The vote threatened to be a harrowing occasion for Mr Hester, with MPs from all sides expected to line up to criticise him and to demand that he give up the £963,000 bonus, awarded in spite of RBS’s share price almost halving last year.
Mr Hester’s allies feared David Cameron would not have whipped Tory MPs to support the bank chief and that the debate would have left him swinging in the wind. “George Osborne is about the only person who gave him some support,” said one.
Well, it was surprising he didn't bow down earlier.
Executive pay, or bankers bonuses, is one of the key topics that politicians have been trying to fight against, after the baying public seeks a solution for what is seen as a "reward for failure".
In addition, as previously mentioned, the share price has almost halved last year, plus data showed that total fees paid to the investment bank in 2011 were pretty depressing.
Bankers who dispute that we’re now in an era of lower fees – the new normal you keep hearing about – are in denial. According to data released by Thomson Reuters, the following banks, including RBS, suffered some huge declines in fees.
Goldman Sachs falls one place to fourth but its fees declined by more than 11%
UBS dropped 15%
RBS declined 16%
Nomura’s fees plummeted a shocking 34%.
Moreover, only a couple of weeks ago, RBS was forced to massively pare back its operations, after it failed to perform. RBS slashed another 3,500 jobs after shedding around 30,000 employees during the past two years, with 22,000 of these in the UK.
In another big shake-up to RBS, the bank's statement read that most of the cuts and changes "will begin immediately, but might take up to three years to implement. RBS will provide final detail with its full-year 2011 results on February 23". It continues:
The changes will see the reorganisation of RBS wholesale businesses into "markets" and "international banking", and the exit and downsizing of selected existing activities.
Only on January 5, Euromoney reported that RBS could see as many as 10,000 bankers lose their jobs as it prepared for paring back its investment-banking operations to skeletal levels.
It was predictable this would happen if it hit tougher times, considering taxpayers own more than 80% of the institution.
In a statement to the press, Hester said:
This strategy has succeeded in making RBS stronger and placing us on the road to long-term success.
We have reduced our balance sheet by some £600 billion and have rebuilt capital ratios that place us among our strongest international peers. Our core retail and commercial businesses outside Ireland now operate with an attractive return on equity overall.
Our investment bank has produced an average return on equity of 19% and delivered over £10 billion in profits since 2009. Our non-core assets have fallen below £100 billion, ahead of schedule. Profits from our core businesses have been essential to pay for the clean-up losses of RBS legacy.
But for our strategy to be effective, it must adjust to fresh challenges.
And it is clear that, particularly in the wholesale banking arena, significant new pressures have emerged. The changes we are announcing today seek to ensure that RBS is at the front of the pack in pursuing a strategy that reflects the environment we expect to operate in.
Our goal from these changes is to be more focused for customers, more conservatively funded, more efficient and with better, more stable returns for shareholders overall.
The changes will include an exit from cash equities, corporate broking, equity capital markets, and mergers and acquisitions businesses.
Significant reductions in balance sheet, funding requirements and cost base in the remaining wholesale businesses will be implemented.
Also unsurprising is the UK bank's move to pare down and restructure the division, despite its success in foreign exchange, as our colleagues at EuromoneyFXNews recently reported:
Foreign exchange provides the best return on equity of any capital markets business. To drive more volume through their franchises, banks need a successful prime brokerage business. For RBS, it holds the key to making up lost ground in foreign exchange.
The bellwether on this will be what happens to the rates business. RBS was a top rates house before the crisis and has largely remained so, ranking in the top five overall for euro rates and top 10 for dollar rates in Euromoney’s benchmark survey last year. [Click here though to vote for the FX Survey 2012]
Rightly, RBS has recognised this and Hester confirmed that:
We will continue to invest in our existing fixed income and currencies business and focus on delivering world-class customer service, risk management, IT systems and solutions.
We will, however, reduce the usage of balance sheet and of unsecured wholesale funding within these businesses and also reduce areas where capital intensity is high, evolving our business model to support these activities but in a less balance-sheet-intensive manner.
UK banks are also under pressure to restructure investment and retail banking under new regulations outlined in the Independent Commission on Banking’s report by Sir John Vickers – dubbed the Vickers report.
The ICB published a number of proposed reforms on the UK banking system on September 11 to:
“ ... create a more stable and competitive basis for UK banking in the longer term and provide more than greater resilience against future financial crises and removing risks from banks to the public finances”.
The Vickers report says banks would need to ring-fence their retail banking businesses from their investment banking operations by 2019, which it is hoped will lead to a:
“banking system that is effective and efficient at providing the basic banking services of safeguarding retail deposits, operating secure-payments systems, efficiently channelling savings to productive investments, and managing financial risk”.
Hester reiterated that:
Moreover, other more detailed steps include:
[restructuring] our existing GBM and GTS Divisions.
The "markets" business will maintain its focus on fixed income, with strong positions in debt capital raising, securitisation, risk management, foreign exchange and rates. It will serve the corporate and institutional clients of all group businesses.
GBM's corporate banking business will combine with the international businesses of our Global Transaction Services arm into a new "international banking" unit and provide clients with 'one-stop shop' access to our debt financing, risk management and payments services. This international corporate business will be self-funded through its stable corporate deposit base.
The domestic small- and mid-size corporates currently served within GTS will be managed within RBS's domestic corporate banking businesses in the UK, Ireland (Ulster Bank) and the US (Citizens).
We are considering sale or closure options for our cash equities, corporate broking, equity capital markets, and mergers and acquisitions businesses which had income of £220 million in the nine months to September 2011 and are currently unprofitable.
We are in discussions with a number of potential buyers though there is no assurance of a sale concluding.
We took this decision because we want to prioritise our resources on those businesses where we are best with customers and can operate most profitably for shareholders. We intend to retain our leading investor products business internationally in equity and fixed income derivatives.
This business is both profitable and provides valuable funding for RBS.
So, in this time of great turmoil, under-performance, and redundancies at the bank – which, as we have stressed, is mainly owned by the public – Hester receiving a bonus would surely be the most unadvisable thing to do.
The UK tabloids wasted no time, and in-depth profiles on his personal life, property and investment portfolios were garishly displayed alongside pictures of him in horse-riding gear and any picture that could convey an air of pomp.
It also doesn't help that Hester's counterparts, such as the chief executive of the 41% government-owned Lloyds Banking Group, Antonio Horta-Osório, announced in mid January that he will waive his 2011 bonus. Again, though, media attention after the Financial Times broke the story that he was on a two-month leave of absence for "exhaustion" must have aided his decision.
There is no doubt, though, that RBS is not out of the woods yet.
Hester is in the spotlight now, but RBS is set to award senior executive sizeable bonuses that are much larger than Hester's waivered bonus.
RBS's investment banking CEO John Hourican is to receive a £4 million bonus, which flies in the face of the UK government's crackdown on executive pay, and Bruce van Saun, finance director, is set to receive an undisclosed large sum.
However, according to the Financial Times:
Mr Hourican, an RBS veteran who received nearly 29 million deferred shares and options in 2009 shortly after taking up his role as head of the global banking and markets division, has not yet had any communications from the board over whether he is still entitled to the full award, which vests in April, according to senior bank executives.
However, according to one person close to Mr Hourican, he believes he has met all the targets associated with the scheme and would find any attempt by the board to claw it back “pretty offensive”.
The share portion of his deferred 2009 bonus, linked at the time to a restructuring of the investment bank, is worth just under £6 million at Friday’s closing share price of 27.7 pence. The option portion, with an exercise price of 28 pence, is currently valueless.
Source: Financial Times
*All boxed information is Euromoney emphasis
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