Supplementary written evidence submitted
by Royal Bank of Scotland
Thank you for inviting me to respond to your
questions around the Asset Protection Scheme and a number of current
issues when I gave evidence to the Committee last month. I offered
to provide some additional detail which is outlined below. RBS
will be providing comments as part of a submission to your Financial
Institutionstoo important to fail? inquiry.
You asked how many companies that RBS has lent
to and subsequently taken a controlling stake in. As mentioned
in my evidence to you, we have a well experienced group called
our Global Restructuring Group (GRG). These are a team of professionals
whose job it is to work closely with businesses in financial difficulty
and help to rejuvenate and restore the customers to profitable
It is always the aim of the Bank to return struggling
businesses to financial health as this benefits both the borrower
and RBS, giving the bank the best chance of recovering its investment.
In some cases this can involve restructuring, or writing off,
a portion of debts in return for a stake in the business. This
helps ease the pressure on companies' cashflows by removing or
reducing regular interest payments.
RBS currently has an equity stake in 120 businesses
as a result of restructuring in the UK. The average stake held
is less than 15%. Without this intervention these 120 businesses
could become insolvent, resulting in thousands of job losses.
The total value of these stakes is around £30m. For many
of these distressed businesses, the alternative would possibly
have been for the Bank to seek to recover lending through the
enforcement of its security, which is likely to have been effected
through a formal insolvency process.
It is not bank policy to seek controlling stakes
in businesses which have had their debts restructured. There only
a very small number of cases where we hold stakes greater than
50% of the economic value of the company.
During our meeting you commented that an improving
economic environment may benefit RBS and that, more specifically,
there would be a subsequent benefit to me if the value of my remuneration
increased as a result of the RBS Group share price reaching 40p.
I would remind you that the job I was asked to take on at RBS,
when fully appreciated by the stock market in January 2009, after
the 2008 loss was communicated, valued RBS shares at 10p each.
The move from 10p to 40p would increase RBS value (most attributable
to tax payers) by c £20 billion.
A detailed summary of the share related awards
that I received last year, together with the relevant performance
conditions, is set out in Appendix 1. These awards are subject
to absolute and relative Total Shareholder Return measures, both
These measures target both share price grow1h
in absolute terms and performance against a basket of our competitors.
The vesting schedule is highly geared towards outperformance of
the median with the full payout only taking place if RBS achieves
a doubling of share price from the time of grant and top quartile
performance against the comparator group.
Assuming a share price on vesting of 40p, an
illustration of the value of these awards is contained in Appendix
It is also worth noting that if the RBS Remuneration
Committee considers that the vesting outcome does not reflect
the Group's underlying financial results, or if the Committee
considers that the financial results have been achieved with excessive
risk, then a financial underpin can be used to reduce vesting
of an award, or to allow the award to lapse in its entirety.
Finally, I should also say that we have consulted
our leading shareholders and stakeholders on changes to our remuneration
policy, including changes to our long term incentives for senior
staff. This will be presented to all our shareholders ahead of
a vote at our AGM in April. We have purposely positioned ourselves
at the leading edge of remuneration policy in the UK and everything
we do is designed to maintain that position.
2009 AWARDS GRANTED
Share awards granted
4,800,000 shares under the Medium-term
Performance Plan (MPP) at nil cost, and;
An option over 9,550,000 shares under
the Executive Share Option Plan (ESOP) at an option price of £0.372.
The above awards are made on four principles:
1. No reward for failure. If Stephen Hester
is unsuccessful these awards will be worth little or nothing.
2. Exacting Performance criteria. The maximum
vesting is dependent on an almost doubling of the company's value
(to 70p) and the relative out performance (top quartile) of a
panel of peer companies.
3. Tied to long term shareholder value.
If Stephen Hester is eligible for the maximum vesting at 70p this
will represent an uplift in shareholder value of £18.5 billion
from the closing share price of 37.2 p on 19 June 2009.
4. Dependent on underlying performance.
Nothing will be released under these awards unless the Group's
Remuneration Committee is satisfied with the Group's underlying
performance. Clawback will apply and the Remuneration Committee
reserves the right to vary these awards downward depending on
the underpinning issues of financial performance, capital requirements
Mr Hester has also voluntarily agreed to retain
any shares that he receives under the MPP in 2009 for a further
two years past the vesting date. This reflects his personal commitment
to driving the Groups' performance over the longer term.
The awards will vest in June 2012 subject to
the achievement of performance conditions measured over the three
year period. Awards are subject to relative and absolute Total
Shareholder Return (TSR) measures, both weighted equally. The
performance measures apply to both MPP and ESOP awards.
(a) Relative TSR
The relative TSR measure compares the RBS Group's
performance against a basket of banks from the UK and overseas,
weighted towards those companies most similar to the Group. To
receive any of the shares and options subject to this performance
measure, the Group's performance must be at least as good as the
average of the comparator companies, with vesting as follows:
To receive 25% of the shares and
options subject to the Relative TSR measure, RBS would need to
be at the median of its relative TSR group.
To receive 100% of the shares and
options, RBS would need to be in the top quartile of its relative
(b) Abolute TSR
The absolute TSR measure is based on the achievement
of share price targets by the end of the performance period. Vesting
is determined as follows:
To receive 25% of the shares and
options subject to the Absolute TSR measure, the share price would
need to reach 40 pence.
To receive 50% of the shares and
options the share price would need to reach 55 pence or more.
To receive 100% of the shares and
options the share price would need to reach 70 pence or more.
(c) Financial Underpin
In addition, if the Group's Remuneration Committee
consider that the vesting outcome calibrated in line with the
performance conditions outlined above does not reflect the Group's
underlying financial results or if the Committee considers that
the financial results have been achieved with excessive risk,
then the terms of the awards allow for an underpin to be used
to reduce vesting of an award, or to allow the award to lapse
in its entirety.
2009 MPP AND ESOP AWARDS
Absolute TSR Measure
The following table estimates the value of the
MPP and ESOP awards that are subject to the Absolute TSR measure.
The table assumes that the share price at the time of vesting
is 40p, the threshold price for any vesting to take place under
|Plan||Total No of shares awarded
||Shares subject to Absolute TSR (50%)
||Vesting rate at 40p||No Of Shares Vesting|
|Option Price to pay for Award||"Profit" on Award|
As described in Appendix 1, the relative TSR measure compares
the RBS Group's performance against a basket of banks. If the
Group ended the performance period in median position, and the
share price was at 40p at that time, then the same "profit"
figures as the Absolute TSR table, above, would apply. If the
Group ended the period in the top quartile, then 100% of the shares
would vest, resulting in a proportionally higher "profit"
10 March 2010