ROYAL Bank of Scotland chairman Sir Philip Hampton has said the effectiveness of bonuses is "over-rated" as he cautioned that the proposed European Union cap on such pay-outs will lead to a rise in basic pay for high earners.

Sir Philip said some pay negotiations at RBS, whose board he has headed since 2009, had been "out of body experiences" as bankers expressed outrage at offers of multi-million pound packages.

He told an event hosted by the High Pay Centre think tank in London: "The effectiveness of incentivisation is over-rated as a tool."

He added: "I am pretty sceptical incentives drive real differences in behaviour in any easily identifiable way."

Rather, he said, bonuses can "drive the wrong behaviour", such as the mis-selling of payment protection insurance.

The former finance director at Lloyds TSB, BT and BG Group, said the bonuses he was offered in these roles "didn't affect any aspect of the way I performed".

He said that "alignment" of executive awards with the needs of the business is important but that setting targets is problematic because "the world has got this maddening habit of changing".

Sir Philip was particularly scathing about the notion of "target bonuses" which lead to a sense of entitlement

"I have had some completely out-of-body experiences in recent years when I have talked to somebody about getting a £4m package and had outrage coming across the table from the other side because they know somebody doing a comparable job at another bank is getting £6m," he said.

He added: "What has happened over the last 15 years is the expectation that bonuses would be here come what may with the performance of the business."

The move by the European Commission to cap bonuses at twice basic salary is "regrettable", he said.

"But you can understand why the EC wants to intervene in what has been probably a market failure."

He said he hoped there wouldn't be a huge increase in salaries to compensate. But he added: "I think there will probably be some inflation of basic pay."

RBS last month promoted retail chief Ross McEwan to head the group after the exit of Stephen Hester, who ran RBS after its near collapse but who turned down two successive annual bonuses in part due to a political outcry.

Sir Michael Darrington, who retired as chief executive of bakery chain Greggs in 2008 said: "I think Stephen Hester at RBS did an exceptional job when he was trying to sort it out and he was under-appreciated and poorly paid for what he did."

He told the audience at the event held at the Institute of Directors, that a key part of the success of an executive is in leaving at the right time.

Citing former RBS chief executive Fred Goodwin, he said: "If he had retired in 2006 everyone would have thought he was brilliant. Three years later he is being pilloried."

Sir Philip said "Stephen Hester did an outstanding job, particularly in the first three years."

He said that awarding Mr Hester a bonus after a big drop in RBS's share price was a "difficult political and indeed media message".

Robert Talbut, chief investment officer at Royal London Asset Management, said: "One of the major failings of the current system is that it does tend to encourage short term behaviours."

He called for executives to be given shares in their companies that they cannot sell for at least five years.

Frances O'Grady, general secretary of the Trades Union Congress, said: "There is no compelling evidence that performance related pay works in any arena.

"Increasingly people think it is a big con and an alibi for unfair pay and increases at the top."