Hester decided to forego the award of 3.6m shares, worth around £960,000, after the Labour party said it would force a House of Commons vote on the issue in a bid to make the government block the controversial payout.
Friends of Hester told City A.M. he had spent the weekend considering his options and had decided to relinquish his 2011 bonus after it became clear the political row would not die down. They said the issue was threatening to distract him from the job of nursing the bank back to health.
The climbdown is something of a coup for Labour, which used a similar vote to force Rupert Murdoch’s News Corp to drop its bid for satellite broadcaster BSkyB. Although a vote against the bonus would not have been binding, it would have heaped pressure on the government to block the payout.
Vince Cable, the business secretary, last night welcomed Hester’s decision, describing it as a “very welcome move”.
He added: “He is responding to public concern and criticism about the level of renegotiation in the bank, in particular in relation to his position. He is doing the right thing.”
The furore threatens to torpedo the whole principle of at-arm’s-length ownership, where the government’s stake in RBS and Lloyds is managed by UKFI, an independent body set up by Labour in the wake of the financial crisis.
Last night, Chuka Umunna, Labour’s shadow business secretary, told City A.M. the government’s relationship with state-owned banks needed to be re-examined.
He said: “It needs to be revisited so that it’s not so hands-off. Whether we like it or not, RBS is looked upon differently because it wouldn’t exist if the taxpayer hadn’t bailed it out.
“The government has said shareholders should take more of an interest when it comes to setting executive pay. It is not unreasonable to expect the government to set an example as the biggest shareholder in RBS.”
At the weekend, it emerged that RBS chairman Sir Philip Hampton had decided to waive a bonus that was potentially worth £1.4m, which some interpreted as a signal he expected Hester to do the same.
Labour leader Ed Miliband welcomed Hester’s decision, but said the debate about executive pay is only just beginning. “Stephen Hester has done the right thing,” he said last night.