RBS 2011 Annual Report Download - page 274

272 RBS Group 2011
Letter from Penny Hughes
Chair of the Group Remuneration Committee
Dear Shareholder,
Remuneration in banks continues to be an important and sensitive topic
and this is particularly true at RBS. And so it has been another eventful
and challenging year for the Group Remuneration Committee.
It is worth reiterating that since 2008, there has been a complete change
of the executive leadership team at RBS. Those who were responsible for
the problems of the past have been replaced by a team charged with
fixing them. On pay, we operate with a strong sense of restraint but it's
important that our people believe that they'll be treated fairly and
competitively. We consider that this is in the best interests of our
shareholders and customers. We aim to set pay and incentives based on
performance and market conditions, appropriate to the different markets
in which our people operate, the objectives we set them and results we
get from them, and a desire to minimise costs where consistent with our
wider goals. We are a commercially run bank and that principle must
apply to how we pay all of our employees. Overall, our pay is towards the
lower end of market norms in aggregate.
My priority as Chair of the Group Remuneration Committee is to
implement a remuneration policy that serves the long-term interests of
our shareholders including, of course, the UK taxpayer. We recognise the
duty of public accountability and therefore the need to be sensitive to the
public’s views on pay, particularly for senior people. It is a difficult
balance that we are trying to achieve in reconciling the, at times,
conflicting objectives of our various stakeholders.
Financial Performance
Akey factor in the Committee’s deliberations is the financial performance
of the Group. RBS is a unique recovery challenge and success must be
measured by the progress we are making towards being a safer, stronger
and more sustainable bank. Effectively we are asking our management
team to do two jobs; to successfully compete with strong banking
competitors across our ongoing businesses AND to recover RBS from its
legacy risk profile, itself the largest corporate restructuring on record. In
2011 the Group put even greater priority on actions to strengthen its
balance sheet and reduce risks in the face of difficult economic and
financial market conditions, as it continued to work through the
restructuring plan embarked upon in 2009. Key financial achievements
for 2011 were:
xCore Bank Operating Profit of £6.1 billion represents a strong
performance and compares well with other similar sized banks;
xCore Bank’s Return on Equity (ROE) was 10.5%, with Retail &
Commercial ROE at 11.3%, or 16.6% excluding Ulster Bank. Our
investment bank’s ROE was 7.7%, notwithstanding the challenging
market conditions;
xThe Group funded balance sheet decreased by £49 billion to £977
billion;
xThe Core Tier 1 ratio of 10.6% and tangible net asset value per
share of 50.1p were broadly stable over the year, in spite of de-
risking costs and regulatory impacts;
xGroup operating profit was £1.9 billion, up 11% after adjusting for
the disposal of Global Merchant Services at the end of 2010;
xGroup expenses were 7% lower in 2011 than in 2010 at £15.5 billion;
with staff costs down 9%;
xImpairment losses totalled £7.4 billion, which is down 20% from
2010; and
xTargets for reducing Non-Core assets have been exceeded,
reducing by £44 billion to £94 billion in 2011.
As well as the financial achievements above, the Committee takes into
account the Group's performance against a range of broader strategic
objectives, including support to personal and business customers in the
communities in which it operates. In 2011 gross new lending to business
increased by 22%, with lending to SMEs up 4%, exceeding the Group's
Merlin targets. The Committee also considers the scale of the businesses
our leadership team are managing. For example, during 2011, our 2,000
UK retail branches served 18 million customers; our corporate banking
division accounted for almost half of all new lending to UK SMEs; and our
investment bank operated in 38 countries and arranged €12 billion of
loans and €10 billion of bonds for UK corporates.
Whilst there is still much to do to deliver an overall profitable business as
we pay for the costs of repair, we are already much better positioned as a
safer, stronger bank.
Executive directors
Events at the start of 2012 put the difficulty of balancing our stakeholders’
interests firmly into the public spotlight. The bonus for Stephen Hester in
relation to the 2011 performance year attracted considerable attention
from the media and politicians and I wanted to explain the reasons
behind that decision.
We have been very clear over recent years that pay for performance, not
failure, is at the heart of our remuneration policy. Under the leadership of
the current executive directors, RBS has made significant progress in
exceptionally difficult circumstances. In recognition of this, the Board
believed, and still believe, that the award to its Group Chief Executive
was justified in the context of the market and appropriate based on
achievement against the performance objectives that had been set (see
page 282 for further details). The Board’s decision was well-balanced
and took into account all the circumstances, including the fall in share
price over 2011, which was mirrored in most other banks. The award was
offered on terms that are arguably amongst the most reformed in our
industry and endorsed at the 2011 AGM by over 99% of our
shareholders. The award would have been delivered entirely in shares,
been deferred and subject to clawback.
Directors’ remuneration report