-- Peter Thal Larsen is a Reuters columnist. The views expressed are his own --
By Peter Thal Larsen
London, June 22 (Reuters) - Whoever pronounced the cult of equity to be dead had reckoned without Royal Bank of Scotland. Stephen Hester, chief executive of the state-controlled bank, has just been handed a package of cash and shares worth 9.6 million pounds that would not have looked out of place at the peak of the boom. While the British government has a large financial incentive to promote a share price recovery at RBS, it cannot complain if the rest of the industry follows its lead.
At first glance, Hester's package ticks all the boxes demanded by banking regulators. Though he can boost his 1.2 million pounds cash salary with a bonus of 2 million pounds, this is in the form of RBS subordinated debt and deferred over several years. Meanwhile, how much of the 6.4 million pounds bundle of shares he ultimately receives depends on RBS's share price hitting long-term performance targets. Hester does not collect the full whack unless RBS's share price is above 70 pence -- double its current level -- in three years' time. He can also be fired, without compensation, at any time if the board decides he is failing in his job.
And it ticks the biggest box of all for the government, which owns 73.5 percent of RBS. If Hester meets his targets in full, taxpayers will pocket a healthy profit on the tens of billions that they have injected into RBS, though this could be wiped out by future losses from the government's deal to insure RBS assets.
Nevertheless, this approach sits uncomfortably with calls by Gordon Brown and other ministers for restraint in the banking sector. Last week Sir Fred Goodwin, Hester's disgraced predecessor, handed back some of his 700,000 pound-a-year pension in an effort to repair his public image. Hester's deal risks sending the signal that large pay packages are once again OK. It will certainly raise expectations among RBS's investment bankers that big bonus payments, which were slashed last year, are once again in the pipeline.
Linking bonuses to share price performance is also questionable. The boom showed that large-scale exposure to the shares of their employers does not make bankers more responsible: if it did, Lehman Brothers would still be in business. At best, share awards reward executives for nothing more than rising markets. At worst, they can encourage a reckless pursuit of growth at all costs.
There is no question that Hester faces a daunting task. He must restore RBS to profitability while shrinking its balance sheet -- the world's largest -- and managing the conflicting demands made by the bank's political masters. There are few executives willing and able to take on such a challenge. But his pay package is a missed opportunity to redefine the norm when it comes to bankers' compensation. Do not expect the remaining private-sector banks to be any more restrained. (Edited by David Evans)