Managing incentives, UK banks edition

July 13, 2009

Confused about the British government’s approach to its bank investments? You’re in good company. Consider the following statements from Royal Bank of Scotland and its main shareholder(emphasis is ours):

June 23rd: Sir Philip Hampton, chairman of RBS, on the £9.6m cash-and-shares pay package awarded to Stephen Hester, the bank’s chief executive:

“We now have support for a remuneration plan that ensures the majority of Stephen’s reward is non cash and based on his performance. This means his financial interests are strongly aligned to the interests of all our shareholders in the short-term and over the coming years. “

July 13th: UK Financial Investments, 70 per cent shareholder in RBS, uses its first annual report to discuss the best way to measure its performance managing the government’s bank investments:

“Share prices alone, whilst an important factor for us to monitor, are therefore not an ideal yardstick for measuring UKFI’s overall performance, given the extent to which they are influenced by many factors outside UKFI’s control.”

Not exactly a ringing endorsement of the cult of shareholder value. Which begs the question: do bank executives and civil servants respond differently to equity incentives?

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