Why hester turned down the bonus

As an RBS director put it to me, it would have been a great mistake for the semi-nationalised bank to fight parliament to preserve rewards for its chief executive seen by many as excessive. MPs were expected to vote against the bonus payment - and in those circumstances, it was untenable for him to pocket it.

Or at least that was the conclusion that Mr Hester reached tonight in conversation with the bank's chairman, Sir Philip Hampton. So in that sense the board feel Mr Hester has made the correct decision in making the financial sacrifice. His waiving of the bonus lances one boil. But the bank's directors will make no decision on that till they see what other banks, especially Barclays, pay their chief executives.

RBS will only wish to reward Mr Hester in line with the perceived market rate or a bit less. Which is why the bank's directors now bitterly regret having brought forward the decision on Mr Hester's bonus by around a month. It will need to decide whether to ignore popular opinion and shareholders by forcing through the pay rises before next Monday, when HSBC will include full remuneration details in its annual report — the first major UK bank to do so.

The committee has been discussing pay rises for Douglas Flint, the HSBC finance director who appears before the Treasury select committee today, and chief executive Michael Geoghegan, who recently moved to Hong Kong.

The HSBC management is understood to be reluctant to go to war with shareholders over a pay rise if significant major shareholders have strong objections, particularly when rivals at Barclays did not take their cash payouts. The decision of John Varley and Bob Diamond, the top two executives at Barclays , to turn down their bonuses began the pressure on rivals at the state-controlled banks, Lloyds and RBS, which are making a loss.

Hester, w ho was parachuted in to replace Sir Fred Goodwin during the October bailout , still stands to be rewarded through a long-term pay scheme which is being drawn up and will be put to shareholders at the annual meeting in April. He had been in discussions with Hampton about his bonus even before Lord Mandelson urged him to think about the payment.