Corporate governance watchdog Pirc yesterday criticised remuneration awards to the new guard at Royal Bank of Scotland, chairman Sir Philip Hampton and chief executive Stephen Hester, as well as taking issue with former leader Sir Fred Goodwin's pension.

Pirc, which advises institutional shareholders on which way to vote on company resolutions, is recommending investors oppose Royal's remuneration report at the bank's annual meeting in Edinburgh on April 3.

Its intervention is note- worthy because the wider public debate about remunera- tion at Royal has focused firmly on the pension being paid to Goodwin, who was chief executive of the bank when it had to seek a £20bn bail-out from the UK taxpayer last October. Goodwin's pension is now worth £703,000-a-year, having been valued at £693,000 per annum at Royal's December 31 accounting year-end.

Pirc highlights Goodwin's pension as just one of three problems it has with Royal's remuneration practices. The other two relate to the new-broom management.

Both the Association of British Insurers and consultancy RiskMetrics Group, which bases its voting recommendations on the corporate governance policy of the National Association of Pension Funds, are also drawing investors' attention to share-based awards made to Hampton and Hester.

Spelling out its concerns about remuneration at Royal, in a note published yesterday, Pirc says: "We have a number of concerns regard- ing remuneration practices at Royal Bank of Scotland In light of these reservations we recommend shareholders oppose the remuneration report."

A large vote against Royal's remuneration report, or significant abstention, would represent an embarrassment to the bank's new board if any such protest were based partly on awards to Hester and Hampton. However, barring what would appear to be the very unlikely event that the 57.9% government stake in Royal is voted against, the resolution to approve the remuneration report would still seem likely to be passed.

Pirc objects to a condi- tional share-based award of up to £1.5m to Hampton, who became chairman of Royal on February 3, because the performance criteria attached to this link him too closely with management of the bank.

RiskMetrics Group, which is recommending abstention on the remuneration report, highlights its view that the performance-based share award means "Hampton can no longer be deemed independent".

It notes "NAPF policy allows the chairman to sit on the remuneration committee if he/she met the independence criteria on appointment and where independence has not been compromised in the interim".

Hampton is non-executive chairman of Royal, and receives fees of about £750,000 per annum for this role. The one-off share award of up to two years' fees will vest on the third anniversary of the grant, subject to the performance criteria being met.

Pirc says: "We have concerns regarding the per- formance-measured share award made to the company's new chairman, Philip Hampton, of an equivalent potential value of £1.5m.

"We consider that it is contrary to best practice for a non-executive director to participate in a performance share plan that links him so closely with the management of the company."

Pirc also takes issue with an award of 10.4 million shares in Royal to Hester, who became chief executive on November 21. This award was made to compensate him for giving up potential share-based rewards at British Land, his former employer, as a result of his decision to lead the Scottish-headquartered bank.

These 10.4 million shares are, at Royal's closing price of 25.4p last night, worth £2.6m. Royal's annual report states "the majority of these awards will vest between February 2009 and the third anniversary of his appointment as group chief executive".

Pirc highlights the fact this "restricted share award" has no performance conditions attached to it. Pirc is also concerned the shares could vest immediately were Royal to terminate Hester's contract for a reason other than under-performance.

It says: "Mr Hester received a restricted share award of over 10.4 million shares, which have no performance conditions attached other than con- tinued employment, to compensate him for lost awards at his previous employer. PIRC only considers such awards to be appropriate when challenging and transparent performance conditions are applied in order that shareholders are guaranteed a return as a result.

"In addition, Mr Hester has the entitlement under his Continued on Page 29 Continued from Page 30 contract to immediately vest these awards if his contract is terminated by the company and he does not underperform."

Pirc concludes: "Given that Mr Hester's restricted share awards are designed to retain him within the company, we do not consider any circumstances for early vesting of awards to be acceptable."

The corporate governance watchdog is in much more familiar territory in its objections to Goodwin's pension, of which there is huge public awareness.

Pirc says: "During the year, Sir Fred Goodwin left the company as chief executive and waived any payment due to him with regards to his notice period. Under the rules of the company's defined bene- fit pension scheme, he is due to receive the full entitlement to his accrued pension, in the remuneration report valued at £693,000 per annum, despite his early retirement.

"We consider this to be con- trary to best practice, and that his provision should have been discounted to reflect his early retirement. In particular, we are concerned that under the scheme rules the provision to give Sir Fred a full pension is at the discretion of the company, and that the decision to do so was authorised by both the remuneration committee and the board as a whole."

The Association of British Insurers, which represents investors owning an overall 15% of UK-listed companies, has placed an "amber-top" alert on Royal ahead of its annual meeting to signal "considered judgment is required by shareholders".

It highlights the "bad" decision on Goodwin's pension as normally warranting a "red-top" alert but notes most of the directors who made it have moved on.

However, it also takes issue with the awards to Hester and Hampton.

Peter Montagnon, director of investment affairs at the ABI said: "Our report also draws attention to share incentives received by the new chairman and chief executive. These are unconventional in that those for the chairman will carry performance targets, while those for the chief executive, the majority of which are designed to compensate him for loss of share-incentive benefits from previous employment, will not. The amber top is also designed to flag these for shareholder judgment because of their unconventional nature."

UK Financial Investments, which looks after a government stake in Royal which is poised to rise from 57.9% to about 70.4% with the conversion of about £5bn Preference shares issued in last October's £20bn recapitalisation into Ordinary stock, steered clear of giving a view on the observations on Hampton and Hester. However, it reiterated its opposition to Goodwin's pension. It said: "UKFI has made abundantly clear its profound opposition to the decision of the former board to enhance Sir Fred Goodwin's pension and has agreed with RBS that every legal avenue for redress must be explored. The vote on remuneration runs much wider across a bank with 170,000 em- ployees and UKFI will make its voting decision in due course."

Royal Bank said last night: "When Stephen Hester agreed to become CEO of RBS, he was compensated for the options he forfeited at British Land, based on an independent valuation. RBS was delighted to attract an executive of Stephen Hester's undoubted quality at a very critical time for the company and decided he should not lose out because he joined RBS. At his own insistence, his contract carries a clause which includes no reward for failure.

"Philip Hampton's reward package is designed to align his own interests firmly with the long-term interests of all our shareholders, which of course includes the UK taxpayer. It reflects the scale and complexity of the job he agreed to do at a critical time for the company and aligns remuneration with the imperative of returning RBS to standalone financial strength and repaying the UK taxpayer."