RBS bonus scandal - the new one!
If share options given when Royal Bank of Scotland’s shares were flying high were generous, options granted now that the shares are lying low are munificent. New chairman Sir Philip Hampton is in line for a bonus that could make Sir Fred Goodwin’s pension look like peanuts.
It’s not often someone quits chairing the parent company to chair one of its subsidiaries but you can see why Hampton jumped shop from chairing UK Financial Investments after just one month to chair RBS instead. The public agency created to hold the state’s shares in banks has no options to issue.
It’s not usual for a chairman to be part of the option scheme anyway. Corporate governance argues that the pay of a part-time independent chairman should not be linked to performance. Sir Tom McKillop, the ousted RBS chairman who, received the same £750,000 pay his successor enjoys but had no options.
Hampton – who also chairs J Sainsbury – has a three-year option on 5.1m RBS shares exercisable at 29p. That’s nearly 30 per cent above the market price, but that is a bombed out market price. The shares were 700p just two years ago.
Last November the government paid 65.5p a share to buy control of RBS. In January it converted its preference shares at 31.25p a share. If the Treasury is to get out of RBS at a profit it has to match those prices and that means Hampton makes a profit on his options.
Assuming the government price paid last November, the RBS chairman will have shares worth £3.3m, even if he is not offered more options over the next three years.
If the government can exit RBS at a profit, Hampton, one hopes will be part of the reason, along with his chief executive Stephen Hester. But if the government’s wider efforts to unfreeze credit markets works, then the change in sentiment should make RBS’s shares rose from their current 21p to above 29p irrespective of Hampton’s efforts.
However, if the shares rise to, say, 40p, Hampton makes a profit while the taxpayer is still suffering a huge loss.
The Hampton options illustrate why incentives are so difficult at present in the banking world. But having castigated guaranteed bonuses and up-front cash payments, share options work only if the price is set intelligently. And that applies to bonuses for workers at the bottom of the ladder as well as in the boardroom.
UKFI and RBS need to explain why the bank chairman is part of an incentive scheme at all, and why the exercise price has been set so low. Are they telling us the government stands no chance or recovering the taxpayers’ investment?
