25/01/2012 08:05 GMT | Updated 25/01/2012 08:28 GMT

RBS Boss Stephen Hester In Line For £1m Bonus - But Is It Really Too Much?

If a CEO can reverse the fortunes of a loss-making, state-owned bank and see some of the profits returned to the taxpayer, just how much does he deserve to be paid?

The Royal Bank of Scotland will decide on Wednesday how much its senior directors are due in bonuses. Stephen Hester, the bank's chief executive, is due a bonus believed to be between £1.3m and £1.5m, less than the £2m he received in 2010, but still a significant sum of money in an environment of intense political pressure on bankers' remuneration.

The bank is 83% owned by the UK government after a bailout believed to have cost the taxpayer in excess of £45bn. This gives ministers significant bargaining power with the bank, as its majority shareholder, in influencing the remuneration committee's decision.

How much the chief executive deserves has become a hot button issue over the past few days. The bank has become a symbol of the failings of the banking system and the burden they placed on the taxpayer, and its previous chief executive, Fred Goodwin, has become a comic villain, much reviled in the media for his perceived greed and lack of sensitivity.

A Financial Services Authority (FSA) report into the 2008 failure of the bank said that it was poor management decisions that had led to its near-collapse.

However, since then its fortunes have turned around. RBS has been one of the better performing banks in Europe over the past year. A 40% rise in its share price added around £8bn in market value, which, as UBS analyst John-Paul Crutchley notes, translates to around £6.5bn in extra value to the UK taxpayers' stake.

The company is expected to return to profitability next year, driven by the restructuring of its investment banking arm. The disposal of its "non-core" assets is also proceeding relatively smoothly, with the sale of its aircraft financing business for £4.7bn earlier in January.

"With the benefit of management clearly apparent, it seems surprising that the political establishment which, we think, should be aligned with a good investment outcome for RBS shareholders, is potentially putting this at risk by raising concerns over the CEO’s remuneration," Crutchley wrote in a research note on Wednesday morning.

The politics of executive pay have been thrust front-and-centre in recent months, with the High Pay Commission report noting the increasing discrepancy between directors and average workers, calling it "corrosive" to the economy and society at large.

David Cameron has weighed into the argument, as have senior Liberal Democrat figures, saying that bonuses and high pay without clear evidence of performance should not be tolerated. However, they have also been adamant that results should beget rewards.

Earlier in January, Lloyds chief executive Antonio Horta-Osorio declined to take a bonus after taking two months out for ill health.

Lloyds is 40% state-owned and Horta-Osorio, who oversaw a £3.25bn loss in the first three quarters of 2011, said at the time that "I believe my bonus entitlement should reflect the performance of the Group but also the tough financial circumstances that many people are facing."