Superman money

A superman needs a super-sized salary. Stephan Hester, the CEO of the state-owned bank RBS, is so productive that he can demand a £9.6 million pay package.

Am I jealous? Well, maybe just a bit. However, I have genuine difficulty in understanding how such a preposterous salary could be granted to a public-sector employee.

The villains behind this shameful decision will argue that Mr. Hestor is an exceptionally gifted man and that talent does not come cheap. Besides, much of the payment will take the form of bonuses, which are related to specific targets. If Mr. Hester doesn't produce, he doesn't get paid.

Notwithstanding this superficially plausible argument, Mr. Hester would have almost certainly accepted a salary package half the size. The marginal productivity gain from each additional £1 million added to his salary would have been minimal.

So why do companies hand out such ludicrous packages. It stems from shareholder weakness. Each additional £1 million of salary paid to Mr. Hestor is £1 million less that can be paid out as dividends. Even in the good times, banks paid modest dividends. However, salary growth throughout the boom was phenomenal. Therefore, shareholders have an incentive to hold back these offensive remuneration packages yet are unable to do so.

Today, large corporations including banks are effectively controlled by small groups of management insiders. The control is most striking on executive compensation committees. With each passing pay round, more of the operating surplus of companies has ended up in the pockets of the management rather than shareholders.

But what about RBS -isn't there some kind of political control exercised over this public enterprise? Therein lies the true scandal of this pay package. UK Financial Investments, the body that controls the taxpayer’s 70 per cent stake in RBS, approved this incentive plan.

It is another victory for bankers and another defeat for taxpayers.