Blackfriar: No room for popularity contests in the world of business

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David Cameron took the wind out of Labour’s sails yesterday saying he will block any attempts by Royal Bank of Scotland to increase bonuses.

Following reports that RBS is cooking up schemes to pay top staff bonuses worth twice their salaries, Labour called on the Government to oppose the plans.

When Labour’s Chris Leslie, shadow financial secretary to the Treasury, argued that the Government should not allow the heavily loss-making bank to seek shareholder approval to bypass the bonus cap imposed by the European Union at a time when ordinary families face a cost-of-living crisis, he probably didn’t expect the Prime Minister to take him at his word and agree.

RBS, 81-per cent owned by the state following a £45bn Government bailout during the 2008 financial crisis, had been expected to join rivals such as Barclays and HSBC and seek shareholder approval to pay bonuses twice the size of salaries.

The EU bonus cap allows banks to double bonuses if they win shareholder backing – something the Government can veto as the major shareholder Unlike Lloyds, the other state bailed out bank, RBS’s return to health is still a long way off.

Efforts by RBS’s new boss Ross McEwan to rejuvenate the bank have been kiboshed by accusations of bad treatment to small businesses, technology problems which hit millions of customers during one of the busiest pre-Christmas trading periods, and an investigation into the possible manipulation of foreign exchange rates.

RBS has shrunk its investment bank since 2008, which means it has fewer staff in line for big bonuses.

However, it still paid out more than £600m in bonuses last year, including payouts of more than £1m to 93 employees.

Bear in mind that RBS made a pre-tax loss of £634m in the third quarter alone and a bonus pool of £600m looks obscene.

Mr McEwan waived his annual payout following public anger over the pay of his predecessor Stephen Hester, but what will happen if RBS’s investment bankers are also forced to waive their bonuses?

The answer is very simple. They will leave.

Shares in RBS plunged last month on the news that finance director Nathan Bostock was leaving to take up a role with Santander UK, just two months after he took the job.

At the time, Shore Capital analyst Gary Greenwood described Mr Bostock’s departure as “surprising and disappointing”.

Investment bankers are there to make money, not win popularity contests.

As a nation we have to decide whether we want RBS restored to health and the private sector or whether we want the people who are making the money to up sticks and go where the pay is better.

It’s not often Blackfriar agrees with Chancellor of the Exchequer George Osborne, but bonus curbs will force up fixed salaries and drive important staff to rival banks that are not bound by the same rules.

As Mr Hester said, Government and business “should hold hands at a distance”.

“Governments are not good owners of business in the long term and I think it has been everyone’s intention that the banks that were temporarily nationalised should be privatised as soon as possible,” he said at the Yorkshire Post Excellence in Business Awards.

In the world of politics, popularity means everything, but when this seeps into business, it can be very dangerous.

RBS needs to get back into profit and it will only be able to do this if it can attract top flight bankers – people who earn the bank money which in the long run will fill the UK’s coffers via corporation tax.

If curbs are imposed, the banks can easily find a way round them.

Barclays and HSBC are already considering monthly or quarterly payments and many are looking at salary increases.

It appears that in the fall-out of the banking crisis we want our financial institutions to become likeable, cuddly institutions that don’t look at nasty things like profit and staff incentivisation.

But let’s face it no-one works at RBS for the kudos – it’s hardly an easy dinner party introduction: “Hi, I’m an investment banker at RBS.”

Politicians need to get real. RBS needs to get back to profit and the least likely way for it to achieve this is for it to haemorrhage more top staff.

Banks will never be loveable. We should settle for profitable and get RBS back in private hands.