RBS's executive pay should not be linked to share price

Royal Bank of Scotland is the latest company to illustrate how pay committees can tie themselves up in knots by setting share price targets in long-term incentive schemes. RBS decided more than a month ago that 50p was a reasonable three-year minimum target for its executives to aim at. But the shares now stand at 55p and investors, inevitably, are grumbling. Chairman Sir Philip Hampton today promised to review the numbers and reveal his decision next week. In all likelihood, nobody will be happy with the result. RBS executives will be miffed if 50p becomes, say, 60p – they'll think that they've lost out in "the remarkable volatility of recent times," as Hampton called it. Shareholders may feel that the board hasn't gone far enough. The madness here lies in believing that share prices are an effective way to measure executives' long-term performance. That is especially so for a bank in RBS's position – a lot of its value in three years' time will be determined by events that are entirely outside management's control, such as interest-rate policy and the state of the UK economy. RBS's scheme also includes a few non-share price measures – such as delivery of the strategic plan. But that doesn't excuse the inclusion of the bald share price element. We are invited to blame the shareholders (in other words, UK Financial Investments) for insisting on the criteria. Okay, we will.