In 1997, long before Royal Bank of Scotland broke on to the world stage of banking, Sir George Mathewson, its chief executive, was paid £725,000. For him, it was a bumper pay-out, representing a 30 per cent increase on his previous year’s earnings.
However, it pales by comparison to the £4.2m taken home by Fred Goodwin 10 years later, after a decade-long acquisition spree that took the bank to the brink of collapse and a record £45bn state bail-out.
As accusations mount that the government stripped Mr Goodwin of his knighthood on Tuesday to distract from the growing maelstrom over bonuses at RBS, some commentators have suggested that the UK has reached a watershed moment over both the amount bankers are paid, and their wider role in society.
Stephen Hester, the bank’s current chief executive, waived his £1m bonus amid an escalating media and political firestorm. RBS insiders say other senior managers may be forced to give up their pay-outs in the coming weeks.
“It is right Fred Goodwin has lost his knighthood but it is only the start of the change we need to see,” said Ed Miliband, Labour leader, on Wednesday.
“We need to change the bonus culture and we need to change the rules so we see real responsibility across the board,” he added.
A close analysis of how RBS paid its top executives over the past 15 years provides a glimpse into how dramatically the landscape has shifted on bank remuneration, in terms of both quantum and complexity.
Before the breakneck expansion that came to define both Mr Goodwin’s rise as well as his fall, the way RBS paid its chief executive was relatively straightforward, according to its annual remuneration reports.
In 1997, for example, Sir George earned a salary of £392,000 and a bonus worth £229,000 – 58 per cent of his fixed pay, out of a maximum eligibility of 60 per cent.
He was also awarded 84,000 options at a price of £6.01, the exact midpoint of the share price trading range during the bank’s fiscal year.
Valued at their exercise price, the grant was worth about 130 per cent of his 1997 salary, and tied to a single performance condition – that the growth in the company’s earnings per share exceed the growth in the UK’s retail prices index by an average of at least 2 per cent each year over a three-year period.
In fact, it was not until 2000, the year that RBS swallowed bigger UK rival NatWest, that the bank’s executive pay levels and structure changed significantly.
That was the year that four of RBS’s executive directors were awarded “special” bonuses totalling more than £2.5m for their role in facilitating the NatWest deal, including £814,000 to Mr Goodwin and £759,000 to Sir George.
In 2001, the first full year that Mr Goodwin served as chief executive, his combined salary and bonus of £1.6m was already almost 30 per cent higher than Sir George’s at its height.
In part, the increases in chief executive pay at RBS mirror pay inflation across UK boardrooms.
According to government figures, FTSE 100 CEO pay increased by 13.6 per cent on average year-on-year between 1999 and 2010, against an average annual increase in the FTSE index of 1.7 per cent.
However, at RBS, the increases were bigger. Between 1999 and 2007, the combined salary and bonus payments to its CEO jumped by an average of 25 per cent. Mr Hester, who took over the job in late 2008, took home £1.2m in 2009 after waiving any entitlement to a bonus, and £3.3m in 2010.
Over the same time frame, RBS introduced a series of changes to its option schemes and other bonus plans, which had the effect of driving up pay levels as RBS’s financial performance and returns to shareholders outpaced other companies during the pre-crisis boom years.
In 2001, for example, senior RBS executives were generally eligible for options over shares worth one-times their annual salary each year, according to the bank’s remuneration report. By 2007, that maximum level of options had been ratcheted up to three-times salary.
Pay experts warn that the complexity and increasingly long-term nature of bank remuneration structures, including at RBS, make it almost impossible to cut pay-outs significantly immediately.
Mr Hester, for example, was awarded £4.2m worth of shares in 2010 that cannot be cashed in for three years, and will receive another deferred chunk of shares, worth as much as £4.5m, for 2011.
Get alerts on UK politics & policy when a new story is published