Will Hester's actions have an impact on the shareholders?

Mr Stephen Hester, the current Chief Executive at Royal Bank of Scotland (RBS) recently turned down an annual bonus of 3.6 million shares. These shares were valued at almost £1,000,000, putting the value of the shares into perspective. (The Wall Street Journal, 2012). Hester was arguably forced into this position as a result of public demand. It has to be questioned as to whether this was the correct decision and whether shareholders will benefit from this.

Hester became Chief Executive at RBS in November 2008, replacing Fred Goodwin. He was brought in to restructure the bank after it suffered severely from the economic crisis and from bad management. The bank was eventually bailed out by the Government, who purchased 83% of the company’s shares (BBC News, 2011). Fred Goodwin was referred to as ‘Sir’ Fred until this month. He had his knighthood taken away from him as a result of his actions when at the helm of RBS. Martin Dickson (2012) believes that Goodwin did make bad decisions but "he was hardly alone in causing the credit crunch".

Chief Executives are heavily scrutinised, particularly in the UK and the US. It can be argued that they are easy targets and that if a company’s share price falls, it is due to a collective performance rather than just one individual.

Hester is paid an annual salary of £1.2million, which most would argue is enough in itself. However Hester’s bonus is decided by a board of directors rather than by himself. So he can not necessarily be blamed for the size of this bonus. It also has to be mentioned that Hester was in a good job before accepting his current role. It is generally agreed that he has performed well at RBS under the circumstances; this should be commended. There were rumours of Hester and his staff quitting their roles over this debacle, but this never came to fruition. It should be noted that these were only rumours and that Hester never suggested that this could happen.

In Heston’s tenure he has delivered good results and arguably over achieved. To receive his bonus, he is evaluated on five categories:

1. Strategic direction
2. Financial performance
3. Stakeholders and lending
4. Risk and control
5. Capability and development

(Financial Times, 2012)

If Hester did well on these targets then why should he not be rewarded? £1 million as a ratio of RBS’s profit is relatively insignificant and maybe this should be taken into account rather than just taking the actual figure into consideration.

Some would argue that the Prime Minister David Cameron is to blame for this bonus. He agreed to the bonus as it was under £1million; this decision was heavily criticized by his opposite number, Ed Miliband (Financial Times, 2012).

Hester received £6.5m in bonuses in 2010 (Daily Mail, 2011). This alone would suggest that that the £1 million bonus offered this year was not needed. Excess and greed is not appreciated by the general public. The public are technically majority shareholders of this company so their voice should be heard, and in this case, it has been. In comparison to Bob Diamond, CEO of Barclays, his bonuses seem very small. However Barclays are in a much more stable position as a company than RBS currently are. Therefore they would argue that they are in a position to offer higher bonuses.

RBS Share price has been below the FTSE 100 since the end of 2009 (Thomson Reuters Datastream). This suggests that shareholder value has not been achieved since this time onwards. Once the circumstances of the company are taken into account then it becomes clear why.

Some suggest that there should be a closer link between the performance of a company’s share price and its chief executive’s bonus. Under these circumstances, if shareholder wealth maximisation was being achieved then the person who enabled this achievement could be rewarded for their efforts appropriately. It should be remembered that shareholder wealth maximisation is different to profit maximisation and that it is also seen as the better option to judge a company’s overall performance.

Jensen (2010) suggests that an ‘enlightened approach’ to value maximisation is something that should be considered by organisations. This is when the need to acknowledge stakeholders is appreciated but to not feel indebted to them at all times. If RBS were more transparent then they would probably gain more trust and confidence from the public.

Value management suggests that the following five methods are used to increase company value:

Increase returns on existing capital

1. Increase returns on existing capitals
2. Raise investment in positive spread business units
3. Divesting from assets
4. Extending the planning horizon
5. Lower the required rate of return

RBS can use these techniques to stabilise the company in the short term and to re-establish the company in the long term. The directors of RBS would argue that management value was taken into account when Hester's bonus categories were set.

In conclusion, I believe that Hester’s performance should be evaluated on the performance of RBS rather than a potential bonus. His job is one of the toughest jobs in the world which many would not be able to cope with. I believe that this is not truly taken into account and that Hester is an easy target. There is the belief that Hester could drop his standards as a result of not receiving his bonus. If this is the case then RBS could seriously suffer as a result. If RBS were to suffer then the UK’s economy would also suffer. It has to be remembered that 83% of the company's shares are owned by the Government and therefore it is paramount that the company recovers and that the share price increases in order for the country to benefit.

Annual bonuses should not necessarily be scrapped. However, they should be re-evaluated by most companies. If shareholder wealth maximisation is being achieved then reasonable bonuses could be offered.