Ten days of turmoil end in calm capitulation David Cameron should have seen it coming. For weeks he had been delivering lectures on "responsible capitalism" and the need for shareholders to get off their hands to prevent "rewards for failure." His rhetoric was about to crash headlong into corporate reality. Mr Cameron was putting the finishing touches to his long-awaited speech on moral capitalism on January 19 when the Financial Times broke the news that Royal Bank of Scotland was intent on paying Stephen Hester, its chief executive, a bonus of more than £1m, even though the bank's share price had almost halved. Panic broke out in the heart of government. Furious Treasury officials - taken by surprise by the timing of the story - called the bank to try to agree a line that would buy some time. They decided the prime minister would say the FT story was "inaccurate" because the bank's remuneration committee had not formally agreed Mr Hester's bonus - a claim not made in the original story. The battle of Mr Hester's bonus had begun. Although the RBS board believed its chief executive had met his targets, to the media and Labour it looked like a classic case of reward for failure: they turned to Mr Cameron to use the taxpayer's 83 per cent stake to stop it. But there was a problem. Sir Philip Hampton, RBS chairman, told George Osborne that the board would not be subject to political pressure. "He made it clear that it would be intolerable to have shadow directors running the company," says one official close to the chairman. Both Treasury and bank officials say that Sir Philip and Mr Hester - in their separate conversations with the chancellor - never made explicit threats to quit. But Mr Osborne was in little doubt. "There was a credible threat," says one ally to the chancellor. We could have ended up looking for a new CEO. Mr Osborne ordered officials to scour through the contract signed by Mr Hester after he was recruited by Gordon Brown to rebuild the bank following its rescue by the taxpayer in 2008. "We looked at all the options," says Danny Alexander, Treasury chief secretary. They did not look promising. Although the remuneration committee had discretion on the award, Mr Hester had met many of his targets. As political pressure mounted, Mr Osborne briefed the cabinet on January 24. "George made it clear the Treasury would deal with this," says one at the meeting. None of us really knew exactly what the contract said. But the political omens were bleak. Vince Cable, Liberal Democrat business secretary, could see this was a no-win situation and washed his hands of the affair, saying that the question of Mr Hester's bonus was "above his pay grade." Mr Osborne decided to cut his losses and asked for the matter to be brought to a head within days. UK Financial Investments, which handles the taxpayer's 83 per cent stake in the bank, met RBS directors on January 25 to hammer out a compromise under which Mr Hester would receive £963,000 in shares - allowing Mr Cameron to say the bonus was half the £2m awarded in the previous year. News of the final deal began to filter out on the evening of January 26, but the story was about to take an unexpected turn. Egged on by a BBC Question Time audience, Jeremy Browne, a Lib Dem foreign office minister, said Mr Hester had a moral "duty" to turn down the bonus. One RBS director thought that announcing Mr Hester's bonus ahead of time would "make the story go away." Instead, it meant that the chief executive's package was now seen in isolation and could not be placed against what is expected to be a far greater bonus to be awarded to Bob Diamond, chief executive of Barclays, next month. Furthermore, neither the bank nor the government seemed to have a media strategy to defend Mr Hester's bonus. Ministers ran for cover and Mr Osborne aborted several planned media interviews in Davos on Friday morning. Also in Davos, Ed Miliband began plotting the strategy that would bring the affair to a climax. Sitting in a meeting of world leaders, he could be seen texting Rosie Winterton, Labour chief whip, planning a Commons vote on Mr Hester's award. The initiative was announced on Sunday evening. When he heard the news at his chalet in Verbier, Mr Hester thought he might still be able to face down his tormentors. He hit the phone to members of the board, including Sir Philip, but found that the mood had changed. According to one director "the board wasn't strongly urging him to take the bonus." As the resolve of the bank's senior team waned, Mr Hester's advisers warned that David Cameron was unlikely to mobilise Tory MPs to defend his £1m payment, raising the prospect of an overwhelming cross-party vote for him to give it up. In spite of his reputation for having a fiery temper, Mr Hester's mood that night was described by colleagues as "businesslike" and "pragmatic." After 10 days of turmoil came the calm of capitulation. Additional reporting by Patrick Jenkins and Chris Giles