Home > Compensation > What`s compensation like at Royal Bank of Scotland?

What`s compensation like at Royal Bank of Scotland?

Back in 2008 Royal Bank of Scotland was bailed out by the British government, which bought a 79% stake for some £ 45 bn. Since then the bank has recognized losses every year, up to a total £ 43 bn. (1)

After RBS released its deceiving 2014 results, with a new £ 3.5 bn loss, their Remuneration disclosures for 2014 were widely captured by the media. Compensation has become a complex issue, and it is very difficult, even for those used to read the said disclosures, to extract “a complete truth”. This has been the case this time. See for example the article cited below in (2).

 

I read carefully their disclosures, and apart from some mechanisms used to circumvent certain rules while complying with the bank`s obligations, I`d rather say the disclosure is quite clear and the rules governing compensation matters at the bank quite acceptable.

 

I will make a comment on it, that will necessarily be too short.

 

The first thing I liked was the “Group Performance and Remuneration Committee” name. It explains very well where they try to focus on. The company is having net losses in 2014 connected with an impairment when selling an asset, (CFG), but in general the operational trends show a better picture. But the former attracted comments rather than the latter.

 

I will first try to describe the (ED) Executive Directors` Remuneration Policy:

 

Fixed Pay is made of:

 

  • Base Salary.
  • Fixed share allowances: they vest immediately, they must be retained and are released in a five-year period. This is not a performance-based tool, but a time-based one, although the bank says it is a role-based one. For me, it helps giving more room to variable pay, as the latter is capped at 100% of fixed pay, (the bank rejects to use its prerogative to increase it to 200%) and 300% of base salary.
  • Pension, up to 35% of salary, and
  • Benefits up to a £ 26.250 in 2014.

 

Variable Pay pursues to enhance superior long-term performance, while aligning the executive interest with that of the shareholder. It is made of:

 

  • No annual bonus. There is only a bonus for employees below the most senior ones, and of course there is no bonus for EDs.
  • Long-term Incentive Plan (LTIP): it is connected to the group`s Strategic Plan.

 

The main characteristics of the LTIP are:

 

  • Incentives under the LTIP are paid in shares.
  • The measurement period is three years, and shares are granted in year 4 and 5, in equal tranches. After they are granted, the executive is subject to a retention period.
  • Metrics are not only financial, (Economic Profit, (3), Relative TSR, Safe and Secure bank conditions and indicators for customer and client satisfaction).
  • Vesting can evolve from 0% to 100%.
  • There are provisions for malus adjustment of unvested awards and clawback of vested ones. Conduct, failure of risk management, material error can trigger them.
  • Upon leaving, vesting dates generally remain the same for a good leaver.
  • There are discretion capacities for the Committee to alter certain conditions in exceptional circumstances, (vesting, vesting date, etc).

 

RBS has established some shareholding requirements, that EDs need to reach in five years, excluding unvested shares; the CEO target is 250% of fixed salary and 125% is the CFO`s one.

Both the CEO and the CFO received some recruitment share awards to compensate forfeited unvested awards in their previous employments. It seems reasonable in order to recruit the best candidates for a difficult turnaround.

As for Non Executive Directors, (NEDs), they only receive fees, for their time, their responsibility that are comparable to the levels usually paid in similar firms. Some small benefits are also granted. NEDs are not included in any performance or incentive plan.

 

In brief, a good Compensation Plan, well designed, and a good Disclosure also, that includes:

 

  • TSR graphics.
  • Historical pay tables.
  • Something similar to a pay ratio, and pay comparison with other value or value distribution metrics, (taxes, etc).
  • Directors`interest in the group, and shareholding requirement compliance.
  • Shareholders` voting on pay, and connected expected dilution.

 

The disclosure can be found here (4).

 

  1. http://www.theguardian.com/politics/2015/mar/05/george-osborne-sell-government-stake-rbs-quickly-election
  2. http://www.theguardian.com/business/2015/mar/06/royal-bank-of-scotland-top-bankers-received-millions-despite-35bn-loss
  3. As recommended also by IRRC, as we posted here: https://joaquinbarquero.wordpress.com/2014/11/29/performance-metrics-and-long-term-alignment/
  4. http://investors.rbs.com/~/media/Files/R/RBS-IR/documents/rbs-group.pdf

 

 

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