Lord Myners has attacked bankers’ pay and said that schemes based on share price performance led to excessive risk-taking.

The Treasury Minister’s comments may put him on a fresh collision course with Royal Bank of Scotland (RBS), which last week unveiled a remuneration package for Stephen Hester, its chief executive. It is largely based on the bank’s share price and could lead to him being paid up to £9.7 million if the stock reaches 70p.

Addressing the British Bankers’ Association in the City on Tuesday, Lord Myners said that pay schemes based on share price alone produced a “perverse incentive” for chief executives to “push the risk envelope”.

Such schemes paid out large bonuses when the share price rose but were not “symmetrical” and did not impose a financial penalty if the share price fell, he said. The comments could cause further irritation with Lord Myners at RBS after the argument that erupted between them over the pension of Sir Fred Goodwin, the former RBS chief executive.

Lord Myners also warned of the “insidious influence” of consultants on companies’ decisions over executive pay and criticised institutional investors for being too focused on short-term share price performance.

Comments by the minister that taxpayers who have bailed out banks do not want to see them pay huge bonuses to staff were echoed by Stephen Green, chairman of HSBC. Mr Green told the assembled bankers that the impact of the financial crisis on public trust in banks had been devastating. He added that bank boards still did not understand the sense of outrage with financial institutions and said that reports of large “golden hellos” being paid to star recruits “frankly makes your heart sink”.

Mr Green was joined by Peter Sands, chief executive of Standard Chartered, and Lord Turner of Ecchinswell, chairman of the Financial Services Authority (FSA), in a robust attack on the suggestion by the Conservatives and some commentators that banks could be split into deposit-taking and investment banking operations in a modern-day repeat of America’s Glass-Steagall Act. Lord Turner said that such a move would be unworkable, but made clear that banks wanting to engage in risky areas — described by Mervyn King, the Governor of the Bank of England, as “casino banking” — would have to hold more capital.

The FSA boss has signalled that there would be far higher capital requirements against banks’ trading books, which were at the heart of the financial crisis as banks used them to build up huge risk without taking sufficient provisions.

The answer to the question of whether certain banks are deemed to be too big to fail, Lord Turner said, would be to levy a “capital surcharge” against the biggest players to try to mitigate the risk of their collapse.

Also addressing the gathering, Paul Tucker, Deputy Governor of the Bank of England, had some unpleasant messages for bankers. He warned that the Financial Services Compensation Scheme — the industry-funded insurance pot that pays out to depositors if their bank collapses — needs to be reconstituted.

The scheme should be funded in advance by banks to ensure that the money is in place, Mr Tucker said. Premiums also need to vary according to how risky a bank is, so that the safest ones do not end up bailing out the weaker players. Banks have in the past strongly opposed pre-funding and risk-based premiums.

Warning for banks

• Royal Bank of Scotland and Lloyds Banking Group may have to sell businesses under changes that may be imposed by the European Commission

• Neelie Kroes, the Competition Commissioner, said that Brussels would focus on British banks that had received billions in state aid

• Ms Kroes said: “The massive aid received by banks such as Lloyds and RBS allows these banks to remain leaders in markets which are concentrated. For Lloyds, the problems rest with its share of the retail banking market, and with RBS it is UK small and medium-sized enterprise and corporate banking markets.”

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