Bonuses slashed at RBS

The Royal Bank of Scotland has set a new floor for bankers' compensation, announcing the most stringent curtailment of bonus payouts seen to date.

The UK bank announced on February 17 some details of an agreement it has reached with the UK government, which is now its majority shareholder, about compensation for employees.

Some of what RBS released may sound like the bank is stating the obvious: no bonuses or pay increases will be made to staff associated with the major losses suffered in 2008 and executive directors will receive no bonus. Directors and executives at RBS have also received no annual increase in salary while other staff will receive below inflation pay rises.

But RBS will pay no discretionary cash bonuses for 2008 performance. Legally binding guaranteed bonuses will be paid, with cash bonus payments totalling £175 million ($248.6 million), down 90% from the previous year. The legally binding bonuses are likely to relate either to employees that RBS poached from other firms for capabilities that it was looking to build, or ABN AMRO employees the firm wanted to retain post acquisition.

RBS also said employees deemed "essential to the bank's recovery" will receive a deferred award for 2008, released in three equal annual instalments, beginning June 2010, and payable in subordinated debt of RBS.

It is not clear how the mechanics of this will work as the administration involved in paying subordinated debt over three years for amounts below a certain minimum will be complex. It is possible that in its next announcement RBS will release a certain floor payout amount, above which this provision will apply. But the spirit of the announcement is clearly that cash payouts will be restricted as much as possible.

Some sources say that the subordinated debt will be quasi-cash, meaning it can be cashed on receipt.

RBS is also introducing the possibility of incentive compensation clawbacks, or the practice of recovering bonuses paid if losses emerge subsequently. This is intended to ensure employees take a long-term perspective, rather than being driven by short-term gains. In select cases, 100% of the bonus paid will be subject to a clawback.

The decisions RBS announced with respect to compensation are the most stringent seen at any bank thus far. Indeed, they are far worse than for the US banks, which have all paid cash (although in percentage terms, the payments are much lower than in 2007) and also worse than UBS, which has capped cash payments.

Even so, this week's announcements are expected to pale in comparison to what is expected with RBS's final 2008 results on February 26.

When announcing preliminary results on January 19, at which time RBS projected a loss (before goodwill write-downs) of between £7 billion and £8 billion -- the largest ever by a UK corporate -- Stephen Hester, RBS's group chief executive, alluded to "the prospect of further asset and liquidity measures".

In mid-January RBS raised around $2.4 billion by selling its Bank of China shares and it has already attempted to sell its insurance business. "Theoretically almost anything is for sale but who can buy in this environment is the question," says a specialist.

Media has speculated that in addition to a further 10,000 to 20,000 job cuts, RBS is exploring options to exit some emerging market businesses. Specifically, RBS is said to be in discussions with the Dutch government about selling back some of the ABN AMRO businesses it acquired in 2007. RBS has not confirmed any of these rumours.

RBS's share price fell 8% in London trading yesterday to close at 19 pence.