The public outcry (  more exactly the media outcry) over Stephen Hester’s bonus is as distasteful as it is wrong-headed. It is distasteful as it is no more than what was agreed in 2008 when Hester took over the job of CEO of RBS – we are  going back on a promise we (arguably) shouldn’t have made but a promise is a promise. It is wrong-headed because it misses the bigger issue with RBS pay. The 2011 share award is about 5% of Hester’s five year package.

It’s all very well them joining the financial lynch mob now, but where were these journalists when the rules were being laid down? The Remuneration Committee of RBS is chaired by someone who only took on the job in November 2011 (though I suspect that it’s only a matter of time before she is drawn into this). Quite properly she has applied the rules she has inherited. Governing groups are there to apply the rules!

If anything is to be learned from current events, it needs to be learned about how the rules are established (not whether they are applied).

There are organisations who make it their business to draw attention to the full scale of executive rewards and ask the questions we are asking now about quantum and fairness. They do this before and at the time the rules are made. Such an organisation is PIRC, an independent body which incites shareholder activism to improve the standards of governance in Britain’s boardrooms.

I suspect that Tom Powdrill of PIRC , who may be reading this, would be smiling a wry smile. PIRC work through the organisations that hold the shares in companies like RBS. The case of RBS is subtly different, the only organisation that holds a decent shareholding in RBS is the UK Treasury which is owned by you and me. You might argue that the pension and insurance funds that hold large tranches of other UK corporates are also ultimately owned by the likes of you and me but they are subject to insistent lobbying (not least by PIRC).

RBS is owned by us, we made the rules and we were looking  to renege on the promises we made to the CEO of RBS when we recruited him. This is shameful behaviour on our part and we are right to point an accusing finger at David Cameron as CEO of UK plc and to Gordon and Tony on whose watch the RBS debacle happened. They are our representatives in this , they got us into this mess and it’s a pretty shameful state of affairs when our Prime Minister let’s the lynch mob run wild. We do not need PIRC to hold our hand, we need politicians with a little more backbone.

Frankly Steven Hester is not bothered much about his £1m share incentive. He doesn’t need the money and his main concern is that he hung on as long as he did. If he’d been a little quicker off the mark (like his chairman), he could have saved himself a lot of bother- the scrutiny of the rest of his package sounds like it’ll give him a whole lot of bother!

The much bigger issue behind executive pay awards that run into millions per year relate to fairness within society.In the middle ages, Venice determined that the Doge ( a Chairman if ever I saw one) was unpaid but got a cushy lifestyle from the state. The CEO who really ran Venice, got a huge salary that was justified by it making him unbribeable. If the price to be paid for receiving a huge pay packet was behaviour of the highest standards in a lawless age, good luck to the Venetians. But many in public and private sector jobs are expected to behave with total probity and are paid a relative pittance.

Today we argue that executive pay is set by market forces. The market of which RBS is part, the banking market, showed itself as a rotten market in the years leading up to its collapse in 2008. To suppose that the appointment of Stephen Hester on a package that looks rather Goodwynian was surely an error. It simply said “business as usual” and for banks at least, business should never be the same again.

A pay cap that ensures that the highest paid in a company cannot be rewarded in total more than a certain multiple of the average pay of those in his or her organisation is a fair and just curtailment of the power of the executive elite and would do something to stop Remcos being the self-serving cartels they have often become. Some would argue that in the case of the banks, where average pay may be twice or more the national average, UK average earnings might be a better measure.

But no such rules can be enforced until we , the rulemakers, exert our power to make them and enforce them. Sadly, in the case of the RBS pay awards in 2012, we have shown bad faith in our behaviour and diminished not improved the governance standards in Britain. Other countries , who regard the UK as a beacon of good governance  should be surprised and disappointed at the way we ae handling this issue. The long-term damage to Britain stemming from RBS executive remuneration will arise from two matters

1. Our failure to properly establish the Rules in 2008
2. Our failure to stand by the promises made then.

In order for us to move forward in a positive way from these failures, we need to adopt a common strategy to pay based on a social contract between shareholders, ordinary job-holders, political leaders and the executives who will increasingly become the victims of the pay-awards they have previously benefited from.