Why it is time for Stephen Hester to give up his bonus

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Stephen Hester, chief executive of Royal Bank of Scotland, has yet to declare whether or not he will accept the bonus, shares worth about £960,000, offered to him in addition to last year's salary of £1.2 million.

The government say that Hester's contract was drawn up by the last government and changing things would be more costly than to go on. The value of the bonus was not specified in that contract. But David Cameron reportedly made pronouncements that Hester’s bonus should be no more than £1 million. One day later, the bank’s remuneration committee has given the go-ahead for the near one million pound bonus.

The remuneration committee point out that Hester has met his targets for the year, including helping to stabilise the bank. Various non-core assets have been sold off and a new risk appetite framework has been embedded, whatever that means. But the share price has continued to fall and small and medium-sized businesses are still finding it difficult to gain access to funding from the bank.

It must be remembered that Stephen Hester is not Fred Goodwin, the former chief executive at RBS, who presided over the bank during its near collapse. Hester was brought in to sort out the mess. Many are arguing for Sir Fred to be stripped of his knighthood. This would seem appropriate, given that he single-handedly, through an over-inflated sense of his own importance and infallibility, and a shameless desire to line his own pockets, destroyed a 300 year old bank and helped bring down the British economy in the process. There has been surprisingly little talk of criminal proceedings. Instead, Goodwin is retired, on a 6 figure pension.

RBS is currently 83% owned by the British government, which makes it, to a good approximation, a state-owned business. People who work for state-owned organisations - civil servants - do not usually reap these kinds of rewards. There is a good argument that the bank's staff should be on civil service pay scales, and as for bonuses, well, the very concept is alien to most of those working in the public sector.

What about the bankers’ favourite old line, that this is the market rate, that banking executives could get the same elsewhere, and you have to pay big money to get the right people? Well, perhaps it is time to test this theory. If Hester and the board staged a walkout because of reduced remuneration, would the functioning of the bank be jeopardised? Would the banking system come grinding to a halt? No and no. We should call their bluff on this one. An excellent board could be hired at a fraction of the cost. The Guardian points out that the Bank of England’s top executives are paid roughly one fifth of RBS’s board. With an 83% majority shareholding, there is no better opportunity for the government.

All of this augurs very badly for the future of banking in the UK in general. If the banks are still offering extraordinary bonuses for people doing no more than they should be doing, or worse, if stupendous rewards are still being offered for the taking of vast risks, as they still are elsewhere in the world of investment banking, then it seems we have learnt nothing from the financial crisis. In the depths of one crisis, we are laying the foundations for the next one.

Finally, a point about the RBS remuneration committee. Why does this elite club of city financiers have the power to set the level of pay and bonus for the board? In the case of RBS and in the case of every other financial institution, shareholders are not getting enough say in matters of boardroom pay and bonus levels. In this case it is the British government; in other cases it is pension funds, fund managers and millions of small shareholders who nominally own these companies, but appear to have absolutely no rights on this crucial issue. And it is crucial. It is not just a matter of prudent financial management, it is an issue for society as a whole. An unequal society is an unhappy society.

The best solution would have been for this bonus not to have been offered. But Stephen Hester should recognise the sensitive nature of the problem; he should bring about the second best solution by returning it.