26 January 2012 Last updated at 15:40 ET

Article written by Robert Peston Business editor

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Treasury feared Hester and board would quit

 

The Treasury is convinced that the board of Royal Bank of Scotland has taken its views into account, in paying a reduced bonus to Stephen Hester, chief executive of Royal Bank of Scotland.

But it is pretty difficult right now to judge whether that is true. Here is why.

Mr Hester is receiving 60% of his maximum bonus entitlement.

Now RBS, under enormous political and media pressure, is the first bank to award a bonus for the boss.

So we simply don't know whether receiving 60% of the maximum will turn out to be more or less than other bank chief executives will pocket.

It has been a difficult year for banks, so 60% could turn out to be par for the course - in which case it would be difficult for the Treasury to claim that RBS is paying less than the norm.

At the current RBS share price, Mr Hester's all-share bonus is currently worth £963,000.

If RBS's share price recovers from its current nadir, that bonus will be worth considerably more. But as taxpayers we should, of course, fervently hope the price does recover, since we own 82% of the bank.

There is already huge criticism of the payment to Mr Hester.

Brendan Barber, general secretary of the TUC, has just popped in to the BBC's spartan office here in Davos to describe the payment as a "huge mistake", at a time when "other" servants of the state are enduring pay freezes and cuts to their pension entitlements.

So why did the chancellor and prime minister allow RBS to pay any bonus at all?

Well I am reliably told that they feared Mr Hester and much of the board would have quit, if the payment had been vetoed by the government as the majority shareholder.

In the words of my source, the mass resignation of RBS directors would have created "all sorts of bigger problems".

However even if the government rides out the criticism of Mr Hester's bonus, it will not be the end of the story.

RBS tells me it has not yet decided how much it will award Mr Hester in respect of his Long Term Incentive Plan or LTIP. And this will inevitably be worth considerably more than the bonus.