RBS warns the move could damage its attempts to recover from the financial crisis

The UK Treasury could be dictating bonus payouts at Royal Bank of Scotland for several years after seizing the power to shape the partially nationalised bank's 2009 bonus pool.

RBS has revealed that it has reluctantly surrendered the right to decide how any bonuses should be paid for the current financial year, warning that it could harm the bank's ability to recruit and retain staff.

In a circular to shareholders, RBS said it has granted the Treasury the right to "consent to the quantum and shape of the 2009 bonus pool", as part of the terms of joining the government's asset protection scheme (APS).

"The board has agreed to this requirement solely on the basis that it is an essential part of the overall agreements for the refinancing of the group and accession to the APS," it said.

RBS warned, though, that the move could damage its attempts to recover from the financial crisis.

"This requirement may adversely impact RBS's ability to attract and retain senior managers and other key employees and thereby place RBS at a significant competitive disadvantage against its competitors as well as increasing the risks facing RBS and weakening management's ability to deal with them," it told its shareholders. Investors are due to vote on RBS's entry to the APS at a meeting on 15 December.

While the circular only refers to the 2009 bonus pool, it is expected that the Treasury will hold the power to consent to bonus payouts for as long as the bank continues to ask the government to insure its risky investments.

Public anger

The UK government currently owns 70% of RBS. This stake is managed by UKFI, and will rise to 85% once the bank joins the APS - when it will receive another £25.5bn from the taxpayer. RBS can exit the scheme at any stage, but is expected to need the protection for several years.

Shares in RBS fell by over 5% this morning, to 32.43p, making it the biggest faller on the FTSE 100. Other banks also fell, as the fallout from the Dubai debt crisis continued to worry investors.

The public anger over banking bonuses has grown in recent months after it emerged that some financial institutions, such as Goldman Sachs, are making large profits again despite the recession.

But there are concerns in the City that the government could use its position as the largest shareholder in RBS for political means. The Association of British Insurers, which represents major shareholders, is expected to issue an "amber top" warning to shareholders, possibly as soon as later today.

The warning is a sign that the ABI believes investors face a difficult decision when choosing whether or not to back entry into the APS.

Peter Montagnon, director of investment affairs at the ABI, said it was important that RBS was still able to pay its staff "commercial rates".

"It would not be acceptable to yield to the short-term wishes of one shareholder if this means sacrificing value for all," Montagnon warned.

Ronnie Fox, head of law firm Fox, said the government's decision to take control of RBS's 2009 bonus pool was a "vote-catching" exercise that would harm the bank.

"Remuneration issues for the vast majority of staff are a matter for which a company's management alone should be responsible. If the shareholders, the owners of the business, are unhappy with the decisions taken by the management, they have the power to remove the management," Fox said.

"It is a gross understatement to say that the interference by the Treasury will pose a 'challenge' for management. If total compensation (including bonuses) paid to profit-generating executives at RBS is significantly lower than competitive organisations are paying their senior staff, RBS will simply lose its best people."