My late father-in-law was a professional man (an architect) but was never quite clear on the concept of paying for services rendered -- except, of course, when he was the one getting paid. He had a particular blind spot when it came to financial advice. I once suggested to him that if a broker could guarantee to make him $100 richer, and in the process the broker became $500 richer himself, that would still be a deal worth doing. He simply could not get to grips with that idea.
Urged on by the media, politicians seem to have adopted the same mindset when it comes to bankers' bonuses. There's no doubt that before the credit crunch, a lot of bonuses were paid out on the basis of dubious mark-to-market estimates of future profits. But what does that have to do with the package that's just been announced for Stephen Hester, CEO of Royal Bank of Scotland? Sure, it's a lumpy package -- the base salary is £1.2 million, for a start. But to earn the rest of it, Hester is going to have to meet some pretty tough performance targets, which is as it should be.
Hester gets £1.6 million in RBS sub debt, vested over a number of years. This can be clawed back if the bank performs badly, so George Osborne's complaint that the package is "a one-way bet" is simply wrong. For the longer term, Hester can get a further £6.4 million in equity and options if the bank's share price doubles from its current level. Just to make that more difficult, some of the Government's pref shares in the bank can be converted to common at a price just below the threshold for Hester to receive the maximum payout, so in effect the Government can dilute him out of a portion of his bonus.
If the RBS share price hits the 70p level that earns Hester the full £10 million whack, the taxpayer stands to make £7 billion profit on its stake in the bank. Would you pay £10 million to someone who earned you £7 billion? My father-in-law wouldn't, and apparently neither would George Osborne, but I'm pretty sure I would.
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