Part-nationalised Lloyds Banking Group and Royal Bank of Scotland must pay competitive bonuses to help the taxpayer get its money back from the banks, MPs have been told.
UK Financial Investments (UKFI), the body charged with overseeing the Government’s banking assets, said bonuses for chief executives and key staff are vital in keeping top talent and to maintain value at Lloyds and RBS.
In a hearing with the cross-party Treasury Select Committee, UKFI said it is “very closely involved” in determining pay at the two banks as part of the controversial new year bonus round.
Robin Budenberg, chief executive of UKFI, said: “I understand that it is very difficult to justify the sort of bonuses paid at these banks. But if we want to sell these shares, we have to make sure the banks are able to retain top talent.”
Prime Minister David Cameron has stressed he wants RBS, which is 83% owned by the state, and Lloyds, which is 41% state-owned, to be the “backmarker” in setting bonuses.
However, there are concerns over bonus plans at RBS for chief executive Stephen Hester and its investment bankers, while Lloyds has also been in the headlines amid speculation it is preparing to hand out a £2 million windfall to outgoing boss Eric Daniels.
Mr Budenberg gave no details on the current bonus negotiations, but told the committee: “We believe it is essential to maintain high quality management at these banks. They will effectively determine the outcome of value at the banks.”
The top four executives at UKFI were also grilled over plans to return nationalised bank Northern Rock to private ownership – a process that was formally kick-started last week with the decision to begin hiring advisers.
A sale has long been expected for Northern Rock, but UKFI confirmed that re-mutualisation – which would see Northern Rock run as a mutual business, similar to a building society such as Nationwide – is also one of the options on the table and is a “very realistic possibility”.
Keith Morgan, head of wholly-owned investments at UKFI, said the move is being seriously considered, as well as a straight-forward sale, stock market flotation or merger with a smaller player.