Royal Bank of Scotland has sought to defuse mounting political and public pressure in awarding chief executive Stephen Hester a bonus of just under £1-million, less than half the amount he received for 2010.
The controversy over the size of Mr Hester's payout had reached fever pitch in recent weeks, as the state-owned bank announced plans to slash more than 4,000 jobs and shut down large chunks of its investment banking business following dismal results.
David Cameron reluctantly approved the bonus, knowing the decision would whip up fierce political and media criticism. But he feared the RBS chief executive officer and board members might quit if the bonus was scrapped.
Mr. Cameron believes Mr. Hester has done a good job and UKFI, which manages the taxpayer's 83-per-cent stake in the bank, signalled its assent to the deal when it said he had made a "significant contribution" towards rebuilding RBS in 2011.
But the political furor may only just be beginning. Jeremy Browne, a Liberal Democrat foreign office minister, last night reflected public anger on BBC's Question Time when he said Mr. Hester had a "moral duty" to waive the bonus, in a sign of coalition splits on the issue.
With the coalition government seeking to push through far-reaching reforms to combat soaring executive pay levels, bringing down Mr Hester's package was viewed as a crucial test of the prime minister's pledge to crack down on "reward for failure" in the City of London.
Mr Cameron personally demanded that Mr. Hester, who received a £2-million performance bonus last year on top of his £1.2-million salary, be awarded a bonus of no more than £1-million for his work in 2011, a year in which the bank's share price slumped by 48 per cent.
While the award of 3.6m shares, worth £996,000 at Thursday's closing share price of 27.7 pence, is significantly less this year, it will not placate opposition politicians or critics of banking industry pay structures, who claim that little has changed since the financial crisis.
Chris Leslie, Labour's shadow financial secretary to the Treasury, said Mr Hester's award showed that "David Cameron's promises about reining in excessive bonuses at state-owned banks or using shareholder power have proved to be utterly worthless."
As with all share awards, the potential value of the award will fluctuate with the bank's share price. RBS shares need rise only slightly to push the value of the award over Mr. Cameron's supposed line in the sand of £1-million, pay experts noted.
Labour politicians still see a big opportunity in attacking the government, and especially the Conservatives, for being too close to the City. Mr. Miliband has made much of his theme of "responsible capitalism" and believes the public are in no mood to see bankers paid seven-figure bonuses.
Chukka Umunna, the shadow business secretary, told the BBC on Friday that in allowing Mr. Hester his bonus, the government was failing to enact the advice it had given out to shareholders. "The government is the main shareholder [in RBS]and ministers have said that shareholders should play a more active role in reining in excess where they see it," Mr. Umunna said. "And in the main this is a publicly-owned institution and the prime minister and others have failed to do so."
Under the terms of RBS's remuneration plan, Mr. Hester was eligible for a maximum award of 6m shares for 2011, worth about £1.7-million at Thursday's closing price. The final award of 3.6 million shares is 60 per cent of that amount, and will vest in two equal tranches, in March 2013 and March 2014.
"The board is aware of the difficulties in trying to reconcile the competing objectives of all our stakeholders," said Sir Philip Hampton, RBS's chairman. "This is especially true on the issue of pay. Stephen Hester's pay award reflects progress in the categories agreed with our shareholders."
Mr. Hester was also eligible for a deferred share award under the bank's long-term incentive plan (LTIP) of as much as 375 per cent of his salary of £1.2-million.
People familiar with the discussions by RBS's remuneration committee said that the bank accelerated its decision on Mr. Hester's bonus to "make the story go away."
However, the committee has yet to finalize its decision on a series of controversial long-term bonus awards, including nearly 29 million in shares and options granted to embattled investment banking chief John Hourican in April 2009.
The one-off grant to Mr. Hourican, made shortly after he assumed leadership of the investment bank, was tied specifically to "restructuring" RBS's global banking and markets business, according to stock market filings at the time. The bank has declined to reveal the specific targets set, and the business is now being dismantled.