Royal Bank of Scotland, Northern Rock and Lloyds Banking Group - Treasury Contents


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 Institutions—too important to fail? inquiry.

EQUITY STAKES

  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 business.

  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.

REMUNERATION

  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 weighted equally.

  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 2.

  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.

APPENDIX 1

SUMMARY OF 2009 AWARDS GRANTED AND PERFORMANCE CONDITIONS

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.

Award Principles

  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 and risk.

  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.

Performance conditions

  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 TSR group.

(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.

APPENDIX 2

ILLUSTRATIVE VALUE RECEIVED FROM 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 the awards.
PlanTotal No of shares awarded Shares subject to Absolute TSR (50%) Vesting rate at 40pNo Of Shares Vesting
Option Price to pay for Award"Profit" on Award
MPP4,800,0002,400,000 25%600,000£0.000 £240,000
ESOP9,550,0004,775,000 25%1,193,750£0.372 £33,425
Total 1,793,750 £273,425


  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" figure.

10 March 2010





 
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