RBS bonus and shareholder wealth

State owned Royal Bank of Scotland (RBS), which is a 82% taxpayers owned; has decided to hand over £1 million bonus to its CEO Stephen Hester on 26^th January 2012.  This bonus was highly criticized by the public and the controversy build up during the week turned the Labour to force House of Commons a vote calling for this. Consequently this led  Mr. Hester to turn down the bonus.  There were different arguments against this huge bonus, as it seems a reward for failure.  RBS share price has fallen and has failed to meet its lending targets. 

However, there is no possible comparison between the match of dividends and bonus payouts with Mr. Hester and RBS, as RBS last paid a dividend in May 2008. Five years ago, RBS shares were worth around 700p each but now they trade at 27p, down from 46p over the past year. 

According to corporate objective of shareholder wealth maximisation, the agency cost approve any incentive scheme for managers to encourage the pursuit of shareholder wealth maximisation (Arnold, 2008).

As shown in the above graph, it is clear that since Mr.Stephen Hester's appointment in December 2009, there is no much of a share price increase or decrease. It is clear that there is no noticeable value creation or destruction by Mr. Hester during is leadership since 2009.  

 Managers take decisions in a market mechanism. There could be other pressures from the market where managers are unable to create a significant value, but they attempt to enhance even at a bad environment. Shareholders need to look at the broader  picture before deciding to punish managers for not creating value. Since, Dec 2009 RBS share price has been quite stable and there is no value destruction. Thus, it is not fair to stop Mr. Hester's bonus who has attempt to maximise share holder value in a complex market mechanism.

Source: Ft.com , 
 Telegraph, Available at : http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8460639/RBS-graph-from-part-nationalisation-to-now.html