RBS 2011 Annual Report Download - page 280

278 RBS Group 2011
The enhanced process for individual accountability review assessments
(which consider material risk management, control and general policy
breach failures, accountability for those events and appropriate action
against individuals) is operated across divisions and functions. RBS Risk
Management has concluded that the accountability review assessments
approach is robust and complete from a perspective of all known material
events having been considered.
The outcomes from recent accountability reviews for the performance
year 2011 have included:
xadjustment of current year bonus awards;
xdismissal;
xclawback of previously awarded deferred and LTIP awards; and
xsuspended vesting pending further investigation.
External developments
In September 2011, the Department for Business Innovation and Skills
(BIS) issued a consultation on plans for investors to have greater clarity
on how companies are run and how executive pay is matched to
performance. The Group Remuneration Committee played an active role
in this consultation process, providing responses and meeting with
representatives from BIS on a number of occasions to discuss possible
outcomes. This demonstrates a real willingness to engage not just with
shareholders but with wider stakeholders in developing a responsible
approach to future remuneration practices.
HM Treasury published a consultation on 6 December 2011 with draft
regulations on remuneration disclosure. This proposes that all large
banks operating in the UK, publish the pay details of their eight highest
paid senior executive officers who are not main board directors. The
consultation follows the Project Merlin agreement in February 2011 that
applied to the five major UK banks including RBS. Details are set out on
page 294.
Pay for performance
The Group Remuneration Committee’s formal process for determining
bonus pools is outlined in the diagram below. This process is designed to
ensure that financial, risk and non-financial performance measures are all
taken in to account in an integrated and structured way with appropriate
reference being made to the business plan and capital adequacy.
There is strong central governance and oversight of both bonus pools
and individual awards. Across the Group, bonus awards for the 2011
performance year are significantly lower than those made last year. This
is due to a combination of factors including financial performance,
particularly in the investment bank division, but also recognising the need
for moderation and the external climate. This year we have recorded
substantial losses for two issues: PPI and Greek sovereign debt. Whilst
current management inherited these issues, the Committee’s judgement
is that reductions to shareholder value of this scale must be reflected in
lower variable compensation across the Group and overall bonus pools
have been reduced as a result.
The process for determining bonus pools is discretionary, to avoid the
unintended consequences and incentives of formulaic systems. However,
the Group Remuneration Committee's discretion is applied within a
structured framework which starts with an assessment of financial
performance measured against budget, prior year and long-term strategic
plans. This analysis is used to adjust market median bonus funding levels
(obtained from rigorous benchmarking against market compensation
data) to a performance-adjusted basis.
Risk is taken into account in the performance assessment through a
thorough risk analysis carried out by RBS Risk Management to a pre-
agreed framework approved by the Group Remuneration and Board Risk
Committees. Performance assessments may be adjusted in situations
where risk performance is outside risk appetite or strategic plans. Non-
financial factors such as turnover, succession issues, customer issues,
market environment and franchise development are then taken into
account in developing a final bonus proposal. Bonus proposals are
reviewed in the context of key compensation framework ratios including:
compensation to revenues, compensation to pre-compensation profit and
bonus to pre-bonus profit. These ratios help to ensure appropriate
sharing of value between employees and shareholders. Finally bonus
proposals are reviewed against our capital adequacy framework to
ensure that regulatory requirements are met.
Market Benchmarking
Financial Performance
Risk Adjustment
Non-financial Factors
Proposed bonus pool
Capital
adequacy
Compensation
ratios
Directors’ remuneration report continued
Proposed bonus pool
Non-financial Factors
Risk Adjustment
Financial Performance
Market Benchmarking
Capital adequacy
Compensation ratios