WHEN Stephen Hester, the chief executive of the Royal Bank of Scotland, turned down his bonus of £963,000 last week, it was widely seen as an inevitable capitulation to growing public and political criticism.
Sir David Higgins, the chief executive of Network Rail, turning down his bonus of £340,000 yesterday is more likely to be seen as a move designed to prevent the criticism from starting in the first place.
Whatever the motivation, it is absolutely right that Sir David and his fellow directors at Network Rail have made the decision to refuse the bonuses, for two reasons.
Firstly, the bonus structure at Network Rail – a structure which particularly benefited the former chief executive Iain Coucher, who left in 2010 with a controversial compensation package of £1.6m – has been operated as if this were a private company operating in a competitive commercial market. In this scenario, the argument is that the financial rewards for a chief executive must be good if talent is to be attracted and kept.
However, this picture of Network Rail is a fallacy – it is not a private company in any real sense. In 2010-11, it received £4bn of public money, with Government funding highest in Scotland at 15.6p per kilometre of track.
There is a commercial element to the business, of course – more than £6bn was raised from ticket sales in the same period but, like RBS, the taxpayer has a significant stake in this company and bonuses of the level of Mr Hester's and Sir David's in a subsidised company at a time of immense pressure on public funds are not acceptable.
The second reason Sir David has made the right decision is that bonuses should only be paid out for exceptional performance – and on this test, Network Rail has failed also. Only last December, the Office of Rail Regulation (ORR) found Network Rail in breach of its licence because of declining punctuality, and Richard Price, ORR's chief executive, said the company's performance on punctuality was getting worse, not better. The idea therefore that the men responsible for that performance should be given large cash rewards is beyond the pale.
But credit where it is due. After the arguably divisive reign of Mr Coucher, Sir David is widely seen as a progressive chief executive and he has certainly shown good judgment on bonuses this week.
His decision to direct the money he would have received to improving safety on the railways is also welcome and this should be his focus in future. Safety, punctuality, cost – in all of these areas, Network Rail must show improvement.Only then should the issue of bonuses be revisited.
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