RBS 2012 Annual Report Download - page 322

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Directors’ remuneration report
Letter from Penny Hughes
Chair of the Group Performance and Remuneration Committee
Dear Shareholder
There is no doubt that 2012 has been another challenging year and
events such as attempts to manipulate LIBOR and the IT incident have
had a direct impact on the Group, both from a financial and a reputational
point of view. The Board has acknowledged the serious shortcomings in
systems and controls which were uncovered as part of the investigations
into LIBOR and deeply regrets the lack of integrity shown by a small
group of employees.
I would like to assure you that the Committee has spent a great deal of
time challenging and taking action in response to past events and
considering how remuneration can help to drive appropriate behaviours
at RBS in future. Individuals found culpable in relation to LIBOR have left
the Group with no annual incentive awards for 2012 and full clawback of
outstanding awards. The Committee has also taken action across the
Group, particularly in the Markets division, to account for the reputational
damage of these events.
Against this backdrop, we should not lose sight of the fact that the vast
majority of employees at RBS continue to do their jobs well and are not
responsible for the events that have made headlines. Around one third of
our employees joined after the financial crisis. During the IT incident,
there was a very positive illustration of the loyalty and determination of
staff to support customers during a difficult and regrettable period. It is
vital that we retain and motivate good people as the foundation upon
which we will generate a valuable business for shareholders and a bank
that society can respect.
Considerable progress has been made over the past four years and the
Committee remains focused on delivering remuneration structures that
complement our goal of rebuilding a safer and more sustainable
business, capable of serving customers and shareholders well in the long
term. It is a difficult but important balance that we are trying to achieve,
reducing overall spend on pay and increasing accountability whilst
nurturing the business from which future profits can flow. We have sought
to strike this balance fairly, whilst demonstrating our ongoing commitment
to restraint, reflecting the nature of our ownership.
I have set out below a summary of how the Committee approached the
year: how performance has been assessed; the decisions that have been
reached on pay for 2012 and how past mistakes have been taken into
account; and changes that we are making to ensure a fair and
transparent remuneration policy.
Review of Group Performance
A number of significant milestones were reached during the year as part
of the Group’s turnaround plan including:
x Repayment of the liquidity support to UK Government in May 2012;
x The successful flotation of more than one third of our stake in Direct
Line Insurance Group plc in difficult market conditions; and
x The exit from the Asset Protection Scheme in October 2012.
Key financial achievements for 2012 were:
x Core Operating Profit of £6.3 billion, which represents a strong
performance;
x Further significant progress in removing Non-Core assets, a key part
in managing down legacy issues. Non-Core third party assets are
down £36 billion in 2012 to £57 billion, representing 92% progress
towards the 2013 target of c.£40 billion;
x Capital, funding and liquidity positions remain robust with key
performance indicators (KPIs) on short-term wholesale funding,
liquidity portfolio, leverage ratio, Core Tier 1 capital ratio and
loan:deposit ratio all exceeding or in line with medium-term targets;
x Core Return on Equity (ROE) was 10%, with Retail & Commercial
ROE at 10% or 14% excluding Ulster Bank. The ROE for Markets
was 10% in challenging market conditions;
x Group expenses were 6% lower than in 2011 with staff costs down
6%; and
x Impairment losses totalled £5.3 billion, down 29% from 2011.
As well as financial achievements, the Committee takes into account
performance against a broader range of objectives, including support to
customers. For example, in 2012 the Group accounted for 36% of all
Small and Medium Enterprises (SME) lending, compared with its overall
customer market share of 24%. The Group advanced £16 billion of UK
home loans, including £3 billion to first time buyers. Using the Bank of
England’s Funding for Lending Scheme the Group has offered lower
interest rates and waived arrangement fees on certain SME loans,
benefiting over 11,000 SMEs in the second half of 2012.