Royal Bank's bonuses: What's the least it can pay?
Royal Bank of Scotland has written to its biggest shareholders saying that:
"it plans to make a downwards adjustment to the bonus pool that would otherwise have been awarded, to take into account the prevailing climate of opinion on bonuses, including that exemplified by the new UK tax on discretionary bonuses".
In other words, Royal Bank of Scotland will be paying smaller bonuses for its performance in 2009, in response to widespread concerns that bankers are being paid too much.
But how much less exactly?
Well the shareholders to whom I've spoken say they agree with another part of RBS's letter to them, which says that "the goal remains to pay the minimum consistent with long-term shareholder value".
And protecting shareholder value, according to the letter, requires "retention and motivation of employees and inevitably with regard to competitor practice".
Or to put it another way - and this is something that RBS's chief executive has said to MPs - the bank should pay the minimum it can get away with.
I'll come back to what that may mean, in a minute or two.
But first it is probably worth pointing out that this process of consulting shareholders is somewhat artificial. Because the biggest shareholder is the great collective of British people: the government's voting stake in RBS is 70% and its "economic" interest is higher, at 84%.
In other words, the only shareholders who really matter are all of us, as represented, by the chancellor of the exchequer, who - in turn - has delegated most of his responsibilities for the shares to UK Financial Investments.
Against that backdrop we had the slightly surreal prospect yesterday of the Treasury's City minister writing to shareholders urging them to put pressure on the big banks to limit bonuses: some would say that, in view of the Treasury's controlling holding in RBS, he was writing to himself.
Now if Lord Myners had asked you what bonuses should be paid to bankers anywhere (and not just at RBS), you would probably come up with a very small number indeed, one that's adjacent to zero.
And, as it happens, that's what Vince Cable, the Liberal Democrat's Treasury spokesman, thinks should be awarded to Royal Bank's executives and traders.
But Cable's conviction that nil is the right quantity for bonuses stems from another of his convictions, which is that the state should retain ownership of RBS for 10 years - and use the bank as an instrument of economic policy (by, for example, forcing it to lend more) rather than grooming it for privatisation as quickly as possible.
So it would be no great concern to him if Royal Bank's investment banking and trading businesses were damaged by a policy of paying their people considerably less than the market rate.
If Royal Bank were hurt by the wholesale resignation of bankers sore at what they perceived as their low pay, well Cable would argue that another bunch of masters of the universe could be rounded up and hired over the coming years.
The chancellor, however, doesn't want to wait 10 years to sell Royal Bank back to the private sector. Which is why he has instructed UKFI to manage our stake in the bank to maximise its value and facilitate its disposal over the coming few years.
Alistair Darling's policy is therefore - on the face of it - not that far from Royal Bank's board: he'll hold his nose and sanction what he thinks is the least Royal Bank can pay to protect the interests of taxpayers.
But that will be devilishly difficult to put into practice - because let's not forget that although Royal Bank's rivals are showing what they call restraint, they are still paying millions of dollars each to their executives.
For example, Goldman has implied that it is paying 20% less remuneration to staff than it would have done had it followed normal practice. But it is still shelling out $16.2bn in total or about $500,000 on average per head.
So it is utterly conceivable that what Royal Bank's board thinks is the right number will be more than the chancellor feels will be tolerated by British citizens: and, for the avoidance of doubt, there has not yet been an agreement between Royal Bank's board and the chancellor on the so-called bonus pool for 2009.
By the way, there is a systemic issue here, in that many bankers would agree there is no great logic to the disproportionate share of investment banks' revenues that go to staff rather than to shareholders or to customers (in the form of cheaper products).
And some might say in that context that it is no accident that most of the world's big universal banks - those which combine investment banking and retail banking - are run by former investment bankers (which was not the case 20 years ago): of course they'll oversee a remuneration system that suits their ilk.
But let's return to Royal Bank's dilemma.
First it should be pointed out that it is doing what regulators (and the Treasury) would say is the correct and prudent thing, of paying all its big bonuses 100% in shares and in staggered tranches. None of its direct competitors have gone as far in that direction.
But for most of us, what matters is not how the bonuses are paid, but how big they are.
Well Royal Bank will pay some lucky bankers many millions of pounds each. As for the total sum, well back in early December I said the board was planning to pay bonuses worth around £1.5bn in total.
I am sure it will now pay less than that, because of what it calls the "prevailing climate of opinion".
But the logic of preserving the integrity of its business in an industry where big pay is the norm - where some would say there is systematic over-payment - means that it will pay a quantity that will shock the many and delight only the few.
If Royal Bank pays less than £1bn, you'd be able to knock me over with a 50-quid note.
UPDATE 1320:By the way, if you buy Royal Bank's argument that it needs to pay the minimum possible bonuses commensurate with keeping its investment bank intact, how would we know whether that is what it has in fact done?
Well one way would be to calculate the ratio of the aggregated sum of what it pays its investment bankers to the net revenues of its investment bank, and then compare this so-called compensation ratio with the equivalent ratios of other banks.
Now in the good years, investment banks tended to pay out around 50% of revenues to staff.
But chastened banks have been distributing a smaller proportion of the spoils to bankers this year: so, for example, Goldman's comp ratio for 2009 is 35.8% and JP Morgan's (which uses a different method of calculation) is similar.
Arguably, if RBS's comp ratio emerges at nearer 30%, it can claim that it is being as parsimonious (which is a relative concept) as would be allowed by its perceived need to retain and motivate its people (who, as I've mentioned, won't get out of bed in a collective sense for less than £1bn in toto).