RBS 2010 Annual Report Download - page 248

Dear Shareholder,
Iam pleased to be presenting the Group’s Remuneration Report for 2010.
During the year, the Remuneration Committee has built on the progress
made during 2009 when significant changes were made to the structure
of rewards to staff following a thorough review of remuneration policy. We
have continued to embed these practices throughout the organisation to
ensure that they are aligned with good corporate governance and robust
risk management.
Our focus is to ensure that our remuneration policy continues to support
delivery of the Group’s Strategic Plan. We are working hard to complete a
hugely challenging and complex turnaround and are on track to deliver
across a range of measures. The Group plays an important economic
role, both as an employer and a lender. If we are going to achieve our
strategic objectives and deliver a return to our shareholders including the
UK taxpayer, we need talented and motivated management and
employees. This requires us to pay them fairly within the context of the
markets in which they operate. In setting pay policy, we take account of
our duties to shareholders and our strategic objectives and seek to
ensure that shareholder interests are not damaged as a result of staff
retention, recruitment or motivation issues. Our commitment is to reward
success not failure, and we are also very conscious of the need to
demonstrate restraint.
Across the Group we operate a range of incentive structures which are
designed to reinforce messages about what employees are being asked
to achieve, and deliver pay for performance. Our key objective in
determining bonus awards is not to pay more than is warranted given
business performance. In this context performance includes financial and
non financial measures, risk performance and any other relevant factors.
Our aggregate bonus awards for 2010 are lower than prior year as a
result of lower profits and bonuses in the investment banking division and
our recognition of the need for moderation. There is clear focus on
differentiation, so that individually and by business, the best performers
and the best performance will continue to be rewarded. There is strong
central governance and oversight of both bonus pools and individual
awards, and each year a significant proportion of staff will receive zero
bonus.
The key elements of our remuneration policy are:
Pay for performance
Performance related pay is designed to reflect success or failure against
the range of targets which we set for our people, taking into account the
context in which results were achieved. By way of example, the pay
arrangements for executive directors are aligned to the performance of
the Group and performance related pay is paid entirely in shares over
several years. Executive directors have “no reward for failure” provisions
in their service contracts. Further information on the company’s business
performance and progress towards achievement of its strategic
objectives can be found on pages 12 to 13.
Performance management
We operate a structured process to ensure that all employees have clear
objectives that are linked to long-term plans designed to drive business
objectives including financial performance, risk, people and customer
measures. Assessment of individuals’ performance is subject to a
rigorous review of achievements against their objectives.
Risk adjustment
Focus on risk is achieved through clear risk input into incentive plan
design and target setting, as well as a thorough risk review of
performance, bonus pools and clawback. The Remuneration Committee
has been supported in this by the Board Risk Committee and the RBS
Risk Management function.
Deferral
The Remuneration Committee is acutely aware of the external focus on
the role of incentive payments in the financial sector. The reality is that
these remain a key part of the structure of pay across the industry.
However, we have radically reformed our incentive plans. For our more
senior employees annual awards are deferred over three years and a
portion of the awards are paid in shares which increases alignment with
the interests of shareholders. There will be a £2,000 cap on cash
bonuses paid in March 2011, as was the case last year.
Clawback
We have had clawback provisions in place since 2009, which means that,
in certain circumstances, the Group can reduce deferred annual
incentives and long-term incentive awards up to the point they are
released. Clawback allows us to respond appropriately if the performance
factors on which reward decisions were based turn out not to reflect the
corresponding performance in the longer term.
Shareholder consultation
In early 2011, we consulted extensively with institutional shareholders
and other stakeholders on our remuneration approach. The consultation
process involved one to one meetings and a roundtable session hosted
by the Association of British Insurers and National Association of Pension
Funds. Our presentation covered our wider remuneration policy as well
as executive directors’ remuneration and we have been pleased with both
the level of engagement with investors and the positive feedback we
have received.
Topics discussed with investors included pay positioning, scale and
design of incentive structures, risk alignment of remuneration, deferral,
clawback and remuneration disclosures. We have listened to the
feedback from investors and have made a number of enhancements to
disclosures in the Remuneration Report as a result.
Investors recognised the difficult challenge faced by the Remuneration
Committee in positioning pay competitively to support business goals,
while being mindful of the wider economic environment and the need to
show restraint. The Remuneration Committee and the Board have
considered carefully their responsibilities and have applied judgement to
achieve a balance whereby remuneration policy supports business goals
without causing unacceptably high people risks.
RBS Group 2010246
Letter from the Chair of the Remuneration Committee