Andreas Whittam Smith: Nobody is going to resign at RBS – nor should they

Bonuses would be acceptable if they rewarded genuine 'value added' only

In the row between the Government and the directors of Royal Bank of Scotland (RBS), which side is behaving unreasonably? The context is this. The Government has been asked to provide substantial extra funds so that the bank can continue to trade. As a result the Government stake in the share capital is set to rise from 70 per cent to 84 per cent. As one of the conditions of its support the Government has said its approval must be sought before staff bonuses for 2009 can be paid out. In particular it wants to know the quantum and shape of the bonus pool.

This is a reasonable request. In the first place, the supplier of new capital has considerable latitude as to what conditions it can impose. The Government has a perfect right to ensure that the terms reflect its preoccupations with public opinion. Moreover, the expected size of the bonus pool – £1.5bn – is significant compared with the £5bn profits that are likely to be made by the investment arm of RBS, where most of the bonuses are paid.

The Government must also have ruefully reflected that the bank's improved profitability – and thus the rise in the size of bonus pool – reflects no special achievements by the bankers concerned but rather the very low cost of money. And in turn the sharp reductions in interest rates that have produced this situation have been necessary steps in reviving an economy brought low by the overtrading of banks such as RBS in the 10 years ending in the late summer of 2007. This then is a further demonstration of the banks' skills in reaping rewards from circumstances in which they should be the losers.

The directors of RBS make two responses. In the first place they say that this requirement (supervision of the bonus pool) may adversely impact RBS's ability to attract and retain senior managers and other key employees and thereby place RBS at a significant competitive disadvantage against its competitors. And this, of course, would adversely affect the value of the bank and its shares and taxpayers' interests.

There is certainly a discussion to be had here, the basis of which would be a thorough examination of individual bonus awards. What are the contractual arrangements? What exactly are market rates telling us? Is the general level of bank profitability likely to be maintained in view of the stricter regulations that are coming along? Does it even matter if the bank exits from certain activities because it declines to pay the going rate? The board's remuneration committee must publish the conclusions of such an analysis with the annual report. The Government as the majority shareholder cannot receive information that isn't available to the minority shareholders.

The second response by the RBS directors is a bit hysterical. It is to claim that they would have to resign if they lost the power to set pay levels. This is true so far as it goes. But both sides have their fingers on triggers. If the Government as an 84 per cent shareholder believed – for whatever reason – that the board was intent on overpaying its staff and wouldn't take no for an answer, then the Government would have to vote the board out of office at a special meeting. Or the directors would resign first. The scene would be set for mutual destruction. Suddenly the directors wouldn't have jobs and the shareholders would have nobody to run their business. So this isn't going to happen. Everything will turn on a report to the annual meeting by the remuneration committee – or some similar procedure. The document would have to be negotiated between major shareholder and board and then set in front of all shareholders for their approval. For its part the Government would have to consider what exactly is acceptable to public opinion if carefully explained.

In my view, "acceptable" means payments should reward only genuine "value added" by the executives concerned and not just the fortunate market movements that no single individual can bring about. And the bonus should be paid only after a sufficient period has elapsed to establish that what seemed like a good deal when it was made has proved worthwhile in the fullness of time.

There is one more consideration. Seeing that many people all over the country have lost their jobs, that economic prospects have been blighted and that taxes will have to rise as a result of the widespread and persistent errors of bankers and the carelessness of financial regulators, both the Government and RBS owe it to the general public to reach a workable agreement. Anything less would not be just silly, careless or regrettable, but immoral.