RBS Irks Goverment with Bonus Plans

Looks like the issue of big bonuses is coming back to haunt banks in the U.K., with the country’s prime minister David Cameron clearly showing his displeasure towards The Royal Bank of Scotland (RBS) Group’s (NYSE:RBS) decision to set aside £500 million ($8oo million) as bonuses for its employees. ^[1] The British government has questioned the need for hefty bonuses at a time when the economy is in the doldrums. The 82-percent state owned global financial services group cannot take the government’s stand lightly, and bank employees will likely take home smaller bonuses, if any, this year. In February, the country’s Treasury instructed banks, including competitors Barclays (NYSE:BCS) and HSBC (NYSE:HBC), to cut down on their bonuses for 2010. ^[2]

See our full analysis for RBS’s stock

RBS was forced to restrict the bonuses it handed over to employees for the year 2010 to £950 million ($1.5 billion) with cash bonuses being capped at £2,000 ($3,200) per employee. ^[2] But with the government speaking out against this year’s bonus figure that is nearly half of the one set aside last year, it seems to be tightening its grip on RBS.

A reduction in the bonuses handed out by the bank will boost its operating margins for the year – with staff expenses reducing considerably over the last year. But RBS will hardly be celebrating this stand by the government, knowing that it will be very difficult to retain good employees if their incentives are cut to such a large extent.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Cameron warns banks on bonuses, Financial Times, Nov 9 2011 [↩]
2. RBS Will Be Biggest Loser From Britain’s Pay Accord, Bloomberg, Feb 10 2011 [↩] [↩]