£37,000 a day: What RBS boss Hester could earn with controversial pay and bonus package

SCOTLAND has a new record for pay in the public sector today: a package worth up to £12 million over three years for the new chief of the 70 per cent publicly owned Royal Bank of Scotland.

It is set to astound and inflame in equal measure.

The deal for chief executive Stephen Hester was agreed by the government agency UK Financial Investments (UKFI) and other leading institutional investors at the weekend.

Both in size and structure, it has prompted some to suggest that a massive opportunity has been missed to make a clean break with the past.

A leading figure in the financial community said: "What RBS needs is a totally new business model, not a chief executive paid to put back the failed business as if nothing has changed."

Mr Hester is now Scotland's highest-paid public sector employee. RBS and Lloyds Banking Group staff were officially included in the Scottish Government's measure of public sector employment released last week.

While the bonus element will not kick in unless certain criteria – including a recovery in RBS shares to 70p – are met, The Scotsman understands that the move has appalled many RBS staff and small investors.

Indeed, if Mr Hester meets his targets within the first 12 months he will be rewarded with the equivalent of £37,000 for every working day.

In February, Mr Hester told the Treasury committee: "I do think banking pay in some areas of the industry is way too high and needs to come down and I intend us to lead that process."

The risk he now takes is that a package of this magnitude will incite a new round of bonus demands within the bank.

Roger Lawson, of the RBS Shareholders Action Group, said: "It is outrageous the government does not use its power to bring the remuneration of bankers in these companies down to a reasonable level. Do they need to pay him this much to make him work harder?"

The planned package comes as RBS is laying off thousands of staff. Graham Goddard, deputy general secretary of the Unite union, said it would be met "with absolute disbelief by front line staff in the finance industry.

"Staff and customers are sick of seeing senior bankers earn such huge financial awards, when every week hundreds of hardworking and loyal staff are losing their jobs."

Sources close to RBS yesterday pointed out that the package was less than that for HSBC chief executive Michael Geoghegan, who is on a £1.1m basic salary and a long-term incentive bonus of £7.5m.

But then HSBC did not suffer a collapse on anything like the scale of RBS. And it is not in receipt of massive taxpayer funds.

Over at Lloyds Banking Group, chief executive Eric Daniels is paid a basic salary of £1m a year and is in line for a long-term incentive bonus equivalent to 200 per cent of salary, or £2m. But it is not immediately clear his workload in integrating two banks and sorting out the toxic corporate loan book of HBOS should be deemed only a third of Mr Hester's.

Under the package, the bonus fruit machine would only spew out the maximum payment if RBS shares hit 70p. With the government's stake bought at 50p, this would mean an £8 billion profit for the taxpayer.

But some analysts argue a recovery will probably owe more to the government, which has pushed a reflation package, and the Bank of England, which has slashed interest rates to a record low of 0.5 per cent and embarked on quantitative easing.

Private investors may also be dismayed that a recovery in the shares to 70p should occasion such a pay-out, given that so many of them loyally subscribed to the RBS rights issue at 200p a share barely a year ago.

The return to massive bonuses will be viewed as singularly inept timing and deeply disappointing for those who looked to Mr Hester to make a new start and change RBS culture.

That now looks all the more difficult given the signal that this deal sends throughout the group – here and overseas.

The pay package is likely to be nodded through by the full board now UKFI – an unelected body supposed to be at arm's length from management decisions – has given its blessing.

The non-executive directors now include Sir Sandy Crombie, chief executive of Standard Life. As a major institutional investor with £125 billion of other people's money under custody, Standard Life has a duty to act as a policeman on behalf of the millions of investors and policyholders it represents. But whistle-blowing hardly seems possible when its chief executive now sits on the RBS board.

Nor is the structure of the long-term bonus plan likely to earn plaudits for clarity and transparency.

The plan is said to rely "on a mix of targets, including relative total shareholder return and absolute share price performance". Such phraseology, reminiscent of previous obscure corporate remuneration reports, suggests an approach to accountability that has learnt nothing from the debacles of the past year.

WHAT HE COULD BUY WITH £12m

32.8m
RBS shares

16m
copies of The Scotsman on weekdays

7,295
duck houses – or 5,455 moats cleaned

102
average annual allowances for MPs in 2007-8 (£118,000)

632
ordinary RBS employees

35 years
of Sir Fred Goodwin's pension, after the former RBS chief executive took a £200,000 cut

15%
of Cristiano Ronaldo (£80m transfer from Manchester United to Real Madrid)

SALARY, BONUSES, SHARES: ANATOMY OF A DEAL

BASIC SALARY: £1.2m. As each year of the three-year long-term incentive plan goes by, Mr Hester's basic salary would be expected to remain at least at the same level. This would mean a basic payout over the three years of probably nearer £3.6m. However, for calculating the current package on offer, only this year's salary is included.

ANNUAL NON-CASH BONUS PAYMENTS: totalling £2m over three years. Paid in RBS bonds or loans (essentially corporate debt that Mr Hester can cash in). They can be clawed back if the performance on which the awards are made is found to have been faulty.

LONG-TERM INCENTIVE PLANS: £6.4m. Paid in a mixture of free RBS shares (one-third) and share options (two-thirds) at the end of the three-year period. The potential profit from the share options depends on the difference between the price at which the option is granted and the market price of the shares when options are triggered. RBS won support from UK Financial Investments, which controls the government's more than 70 per cent stake, for Mr Hester's salary and long-term bonus arrangements at a meeting last week.

UKFI is thought to have backed the move because of links to the bank's share price. This would have to pass a 70p threshold for the long-term bonus to be paid in full, by which point the taxpayer would have made millions in profits.