Claims by David Cameron and Nick Clegg that they are unable to influence the level of bonuses paid out by the Royal Bank of Scotland to its chief executive are misleading, documents provided to The Independent reveal.
RBS's board is due to meet today to discuss bonus payments for Stephen Hester and other senior employees. The meeting comes after Mr Cameron and Mr Clegg suggested that the Government's ability to limit the payments at RBS – which is 83 per cent owned by the taxpayer – was "constrained" as a result of "contractual arrangements" with Mr Hester by the last Labour government.
But a copy of Mr Hester's personal contract with RBS, updated in 2009 and seen by The Independent, reveals he has no contractual right to a bonus – and the Government could use its position as the bank's largest shareholder to veto any remuneration it thought was excessive.
In the section on bonuses, the contract states: "The executive [Mr Hester] may, at the discretion of the Remuneration Committee, be entitled to participate in any Bonus Scheme as approved by the Remuneration Committee, the terms of which may, at the sole discretion of the Remuneration Committee, require the Executive to defer a proportion of any bonus awarded to him."
Sources at RBS confirmed that the Remuneration Committee's recommendations had to be put to a full vote of shareholders at the annual general meeting, which the Government controls.
Although that vote is advisory, the source confirmed it would be "inconceivable" that the Government's wishes would not be followed. The contract and RBS's position would appear to be at odds with comments by Mr Cameron and Mr Clegg on the issue.
Mr Cameron said: "He was brought in to do this job, his contract was put into place by the last government – we are obviously constrained by that contract." Mr Clegg said: "The last government not only let the banks get away with blue murder – then they entered into contracts with them, which allowed them to continue to pay themselves large bonuses. Now whether you like it or not – and I don't particularly like it – we are constrained by those contractual obligations."
Vince Cable, the Business Secretary, also said there were "conditions according to which the head of RBS was appointed and the contract negotiated". These do not appear clear in the contract.
A spokesman for Mr Clegg said he "has never seen Stephen Hester's contract. However, he has been repeatedly advised that the Government is legally constrained by contractual obligations and employment law. If there are no contractual obligations, then clearly this needs to be looked at again.."
Last night Lord Myners, the Treasury minister responsible for the banks when Labour was in power, confirmed there was no contractual obligation for a guaranteed bonus in the contract.
Running RBS: The bank's top table
Sir Philip Hampton
Sir Philip has been chairman of RBS since 2009. Asked to compare our banks with those in Europe, he declared: "The British banks are the best looking horse in the glue factory."
Was chairman of British Land before taking on RBS as chief executive - arguably the toughest job in British business. He described the bank as "the world's biggest basketcase" when he arrived in 2008.
As head of the remuneration committee, Hughes is in the firing line over Hester's pay. Was at Vodafone during the row over when chief executive Sir Chris Gent should leave.
McKinsey consultancy was springboard to success, where she advised a string of America's biggest firms. Has plush California home plus the obligatory French chateau.
Sir Sandy Crombie
Spent pretty much his whole working life at Standard Life, where he became chief executive in 2004 until retiring in 2009. His position as independent director means he is the eyes and ears of the shareholders.
Bruce Van Saun
Heavyweight US banker has been Hester's right hand man in steering RBS's restructuring as finance director. He spent 11 years at Bank of New York.