Scott Wright: Big bonuses aren’t a good look for state-backed bank

The journey to this point from the bank’s bailout during the financial crisis of 2008/09 has been long, and certainly not without controversy. At seemingly regular intervals in the last decade, the less-than-wholesome actions of some former management at the bank with regard to the treatment of customers have been writ large in newspaper headlines, while the bank has shelled out hundreds of millions of pounds in various fines relating to its conduct before being rescued by the state.

It has been a bruising period in the bank’s long history and even now, despite the strides taken in recent years, it has not fully shed its capacity to generate scandal, having been fined £260 million after admitting to breaches of money laundering regulations in December.

By and large, though, the bank that now calls itself NatWest is a much steadier, slimmer ship than it was at the time of its £45.5 billion bailout at the height of the financial crisis. And the downsizing continues under the leadership of Alison Rose, the NatWest stalwart who became chief executive in November 2019.

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Under Ms Rose, who led the bank through its name change to NatWest from Royal Bank of Scotland in 2020, the lender has begun to withdraw its Ulster Bank business from the Republic of Ireland, sold off the wealth management arm of private bank Adam & Co (as well as the Adam & Co brand) to Canaccord Genuity Group, and scaled back NatWest Markets, its investment banking division. Branch closures have also continued under Ms Rose, with the bank swinging the axe on a further 32 in England and Wales earlier this month.

But while NatWest is undeniably a smaller and more conservative bank now, it still has the ability to elicit scrutiny. And the latest episode occurred with the publication of the bank’s latest annual report when it was published on Friday.

At a time when UK households are gripped by an ever-worsening cost-of-living crisis, the report not only revealed details of a 44 per cent rise in the bonus pool to nearly £300m for 2021, to be shared by around half of its near-60,000 workforce, but proposals for a new directors’ remuneration policy.

Should the latter receive the approval of shareholders at the bank’s forthcoming annual general meeting in April, it could mean bumper bonuses for Ms Rise and chief financial officer Katie Murray.

In recent years, the remuneration packages for those in the most senior roles at NatWest, such as the chief executive, have been built on several components, with a base salary, fixed share allowance and a long-term incentive award accounting for the bulk of pay.

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Fixed share allowances were introduced by UK banks under European Union rules in 2014 in response to the financial crisis, when bankers’ bonuses came under the spotlight after Royal Bank and Lloyds Banking Group required state intervention to stop them failing. The EU rules capped bonuses for leading executives to 100 per cent of their base salaries, or 200% if approved by shareholders. It meant, though, that banks could get round the bonus cap by paying executives a higher proportion of their earnings as fixed pay. In the case of NatWest, it has been policy since 2017 for its chief executive and chief financial officer to receive fixed share allowances equal to 100% of their basic salary.

For 2021, a year in which NatWest returned to the black with an operating profit of £4.3 billion, Ms Rose received total remuneration of £3.6m, £1m more than in 2020. Her package for 2021 included a base salary of £1.1m, a fixed share allowance of £1.1m, and a long-term incentive award of nearly £1.2m. Ms Murray received total remuneration of £1.6m for 2021.

Now the bank is proposing a major shake-up to the way its senior directors are paid – and it could see the total compensation paid to Ms Rose increase by 19%, and to Ms Murray by 13%.

Robert Gillespie, chairman of the group performance and remuneration committee, writes in the bank’s annual report that the current remuneration policy has “worked well in supporting our culture of prudent risk taking”. But he goes on to state that the committee “has been mindful that the current policy is not aligned to standard market practice and some of its unique features have been subject to challenge”.

Setting out the case for a new approach, he highlights that the bank is “nearing the end of its long process of normalisation and the Government continues to sell its shareholding which will result in a normalised shareholder base”, adding that “we have found the operation of the pre-vest test more difficult than expected”.

He states: “We have concluded in the light of all these factors that substantial change to our existing policy is required and that now is the appropriate time for NatWest Group to transition to a more market-standard remuneration model rather than waiting until the next triennial vote on the policy in 2023.”

Mr Gillespie goes on to state that the bank is not proposing to change its current position of maximising variable pay to 100% of fixed pay. “We do, however, believe that executives should be incentivised using a structure that balances both short-term and longer-term performance, while maintaining our focus on prudent risk management,” he adds. “We are, therefore, proposing that our current long-term incentive construct is replaced by a more widely accepted and competitive construct based around annual bonus plus restricted share plan awards.

“In total, the changes set out in this report would result in expected total compensation increasing by 19% for the CEO and by 13% for the CFO, once the transition period is complete. This would bring both executive directors closer to, but still below, the average expected total compensation paid by the other major UK banks.”

Speaking to journalists as she unveiled NatWest’s 2021 results on Friday, Ms Rose said the bank was “acutely aware of the challenges” people and businesses are facing against the backdrop of the cost-of-living crisis, with inflation now forecast by the Bank of England to surge to more than 7% in the spring.

However, no matter how sincere the message, it is hard to square those words with the bonus culture at her employer, which it must be remembered is still majority-owned by UK taxpayers.

The bank may well argue that its pay for top directors will still be below the average paid at other big banks under its revamped directors’ remuneration policy, but that does not mean a 19% hike is a good look when so many people are worried about how to make ends meet.

The same can also be said of the decision to hike the bank’s wider bonus pool, which is not shared by its executive team, in 2021. The bank points out in the annual report that the pot had been “significantly reduced” in 2020 to reflect the impact of Covid, and also that the 2021 pool was 3% lower than 2019.

When quizzed about the bonus pot, Ms Rose said it “does reflect a strong performance”, adding that “we showed significant restraint if you compare us across the industry”.

Those points are valid, but it is all about how it looks to the average observer. For a state-backed institution to be doling out hefty bonuses at such a challenging economic time, which is showing every sign of becoming even more difficult for many people, the optics are very poor indeed.