Royal Bank of Scotland has set up a team of people to look at how the pay packages of chief executive Stephen Hester and other senior executives should be modified to avoid future confrontation with politicians over big bonuses.

Sir Philip Hampton, chairman, said he was considering whether annual bonuses for top staff such as Mr Hester should be done away with altogether.

“Clearly there’s a challenge around the annual bonus, but if you switched that into a long-term incentive plan or salary, you might start to address the issue,” Sir Philip said. “Something has to change. We have to make it more palatable.”

Last weekend, after a period of sustained attack from the media and politicians, particularly Ed Milliband, Labour leader, Mr Hester decided to waive his entitlement to a bonus for 2011, which would have been worth close to £1m. RBS is 83 per cent owned by the UK government.

Mr Hester is paid an annual salary of £1.2m. For 2011, he was entitled to a bonus of up to 6m shares, currently worth £1.7m, depending on his performance. In addition, there is a three year long-term incentive plan, or LTIP, worth up to four times Mr Hester’s salary, also depending on performance.

Sir Philip promised there would be greater transparency over pay and performance targets. That would be easier if performance periods were longer, as it would get around problems associated with short-term predictions that might be share price sensitive.

He also suggested RBS would start to publish a metric relating Mr Hester’s remuneration to that of bank staff on low or average pay.

But in a move that could peeve commercial investors in RBS, Sir Philip admitted that future pay structures might have to become less respectful of corporate governance best practice. “We may need remuneration schemes that don’t tick all the boxes, schemes that institutional investors don’t like,” he said.

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