“Stephen Hester could still receive a pay package for his work last year worth more than £7m, even after RBS moved to cut his annual bonus to less than £1m.”

The Daily Telegraph, 27 January 2012

“Mr Hester, who joined RBS in 2009, now has a pay package for 2011 worth more than £2million”

The Sun, 27 January 2012

The announcement of a £963,000 bonus for the Chief Executive of the Royal Bank of Scotland (RBS), Stephen Hester, has been widely reported today, and resulted in an array of calculations for his potential total pay.

The Daily Telegraph carries the maximum amount of £7.38 million, whilst the Sun claims the total amount is worth over £2 million. So which figure is correct?

Analysis

The Telegraph takes into account three factors in its calculation. Firstly, it adds together the current value of the 3.6 million shares awarded (around £963,000) and his current salary (£1,219,000), totalling around £2,182,000. This is the figure used by the Sun.

The Daily Telegraph have then gone on to add the potential payment under the Long Term Incentive Plan (LTIP) which is designed, in part, to recognise a role played in driving the company's future successes.

In 2010, the LTIP allowed a maximum award of 400 per cent of an Executive Director's salary. As a result, the Telegraph calculate this would allow Stephen Hester to receive £4.8 million under the LTIP, bringing his total pay for 2011 to just over £7 million. Finally, a pension of £420,000 is also factored in, giving a total of around £7.5 million.

However, there are several important caveats to these calculations. According to the RBS press release, the 3.6 million shares awarded as a bonus cannot be traded until late 2014. As RBS themselves note, “only then can their tangible value be established” - the value of those shares is likely to change substantially before then, and may rise or fall.

The exact value of the LTIP is dependent on the criteria set out in the Annual Report for 2010. The latest version of these (for 2011) states that the following will be taken into account and given equal weighting:

• Relative Total Shareholder Return (TSR)
• Core Bank Economic Profit
• Balance Sheet & Risk
• Strategic Scorecard

The TSR is dependent on any change in the value of the shares. At the time of writing, RBS shares currently stand at 27.63p, whilst a year ago on 27 January 2011 they were valued at 43.03p (as shown below). The Telegraph admit that “The actual value of these awards is likely to be substantially lower than this due to the collapse in RBS's share price over the last 12 months”. Consequently the value of the LTIP seems unlikely to reach the £4.8 million maximum given the reduction in share price.

Furthermore, the 2010 annual report uses a reduced percentage of 375 per cent of salary to calculate the LTIP which, excluding the caveats of the TSR, could reduce the estimated total package by around £300,000, all other factors remaining equal.

Conclusion

The monetary value of Stephen Hester's bonus cannot be expressed as an exact figure as it is dependent on the value of the shares in 2014, which the newspapers acknowledge. However, the level of the LTIP will fall somewhat below the maximum £4.8 million cited by the Daily Telegraph due to the fall in the RBS share price and a reduced calculation for 2011.

Mr Hester could, of course, still receive a package worth over £7 million as the Telegraph claims, but only if the value of his 3.6 million new shares rises considerably by 2014.