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Bonus buck stops with Brown

Robert Peston | 00:00 UK time, Friday, 6 February 2009

When Gordon Brown entered Parliament more than 25 years ago, did he ever in his wildest dreams believe he would have to decide on the bonuses of 177,000 bankers?

Because that's what the prime minister - in partnership with the Chancellor, Alistair Darling - will have to do in the next few weeks.

How so?

Threadneedle Street, London / Dominic Lipinski/PA WireWell, Royal Bank of Scotland, owner of NatWest, has to announce in March what bonuses it will be paying its 177,000 employees in respect of their performance for 2008.

And although the government has said that it wants RBS to operate in a commercial fashion, the rescue of the bank last autumn means that it is 70% owned by the state, by taxpayers, by us.

Which means that - whether he likes it or not - the buck for any of RBS's actions stops with the prime minister, with Gordon Brown.

And decisions don't come any more fraught than whether RBS should pay bonuses.

For the avoidance of doubt, although the Royal Bank board will take a view about how much bonus to pay, it will look to Darling and to Brown for their approval.

"But surely," you may say, "this is a no-brainer: RBS shouldn't pay a penny of bonus."

Just last month, Royal Bank announced that it made a record-breaking, eye-watering loss of up to £8bn in 2008 and its share price plunged. In those dire circumstances, how could it pay a bean of bonus to any of its bankers?

Well, Royal Bank's board believes it would be mad, bad and dangerous to pay no bonuses at all.

Here's why.

That colossal loss of up to £8bn stemmed from the crazy lending and investment decisions of perhaps 500 people - many of whom have either left the group or won't be paid a penny of bonus.

That leaves more than 176,000 staff across the world who've worked hard and generated valuable profits.

They feel they've earned a bonus, because they identify with their own bits of the bank, not the entire gargantuan sprawling entity.

What's more, even in this time of nasty recession in the financial services industry, the best of RBS's staff could still move elsewhere.

So the fear of the bank's board is that if it were to pay no bonuses, tens of thousands of its employees would be demotivated and all its best bankers would quit to go to rivals.

You may shout "who cares?" - and you may argue that the Royal Bank would be better off without the clever-clogs who didn't prevent the stupid loans and investments in the first place.

But we shouldn't forget that RBS is a complicated global business with more than £2000bn of assets.

And if the staff were staffed only by dunderheads and mediocrities - well, the bank could spiral into disastrous, irreversible decline.

Which would be a big and expensive headache for all of us, since - to repeat - we own 70% of the group.

It would be in our interest, presumably, to sell our 70% stake back to the private sector for a profit one day - and that would be impossible unless RBS were perceived to be a commercial success.

So RBS's board believes it still has to pay bonuses. Although it acknowledges that bonuses have to be slashed, probably by more than 50% on average.

Also, it concedes that it can't pay much in the way of cash bonuses. The rewards would therefore be in the form of bits of paper, funny money, proxies for shares - which promise a return in years to come.

But there would nonetheless be a valuable bonus - perhaps equivalent to 10% of salary for branch staff and many times that for the top advisers and traders.

And even with a 50% cut in the overall value of bonuses, the aggregate cost of bonuses would be several hundred million pounds, possibly not far off £1bn (this is my estimate).

So will Gordon Brown wish to be seen to be sanctioning bonuses running to several hundred million pounds at a bank taken to the brink of collapse by its crazy loans and investments?

It's the kind of dilemma that would make even the toughest prime minister weep.

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