The Government have two aims in setting remuneration levels for state-owned enterprises. They need to ensure that these organisations are effectively managed and consequently accept that there may be prevailing market rates to recruit and retain suitably-qualified management. At the same time, the Government exercise considerable pay restraint. To ensure accountability in this matter, the Chief Secretary signs-off any appointments for those earning over £142,500 in areas under ministerial control.
Stephen Hester's employment contract is between him and the Royal Bank of Scotland (RBS) as his employer. The Government's shareholdings in RBS and Lloyds Banking Group (LBG) are managed on a commercial and arm's-length basis by UK Financial Investments (UKFI), a company that is wholly owned by the Government. UKFI engages as a shareholder to ensure that incentives are based on long-term, sustainable performance and will seek to ensure that neither bank pays any more than the minimum necessary.
The Secretary of State for Business, Innovation and Skills has recently announced proposals aimed at improving the alignment of risk and reward in executive pay. These proposals include the expectation that in the future, remuneration committees will have to explain why they have used specific benchmarks and how they have taken into account employee earnings, including pay differentials, when setting pay.