Handelsblatt Exclusive

Deep Freeze at Deutsche Bank

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Changing how bankers are paid.
  • Why it matters

    Why it matters

    CEO John Cryan must perform a delicate balancing act over pay, reflecting the public mood on the one hand but also stemming a possible exodus of top talent.

  • Facts

    Facts

    • Between 2009 and 2014, the bank reduced its total bonuses paid to employees from €4.8 billion to €2.7 billion. Another 15 percent will be cut off the top in 2015.
    • The 250 top executives received the deferred portion of their bonuses in stock, which is now subject to a five-year holding period.
    • A London executive recruiter said more Deutsche Bank employees were seeking a change in recent months.
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    Audio

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It was a clarion call unheard of in the banking industry. But once the words were spoken, every banker at Deutsche Bank knew a new era had indeed dawned at Germany’s largest bank.

“I think people in banking are paid too much,” Deutsche Bank’s chief executive, John Cryan, said at a Frankfurt conference last November. “Many people in the sector still believe they should be paid entrepreneurial wages for turning up to work with a regular salary, a pension and probably a health-care scheme and playing with other people’s money.”

Mr. Cryan’s target was not just exorbitant wage earners, but the culture of excessive bonuses that had become standard in banking before the 2008 financial crisis. In the old days, when banks made big profits, giant year-end rewards could be easily explained away.

But in the eight years since the global economy nearly shuddered to a halt, with banks such as Deutsche Bank struggling to avoid big losses and adjusting to a new, more modest normal, the excessive benefits of the past no longer fit the present — like wearing a brash, wide tie in an era of understated modesty.

A consultant rather than investment banker by trade, Mr. Cryan openly wondered whether bankers truly worked harder for more money: “I’ve never been able to understand the way additional excess riches drive people to behave differently.”

Now Mr. Cryan, a British banker who took over the helm at Deutsche Bank in July, is following his words up with actions. The bank’s overall bonus pool is likely to drop by about 15 percent in 2015, to around €2.3 billion, Handelsblatt has learned, and even further in investment banking.

The cuts are part of a broader overhaul of Deutsche Bank’s incentive structure that targets high-flying investment bankers. While the moves will be welcomed by shareholders and the public, recruiters warn Mr. Cryan risks driving away talent to rivals that haven’t hit the brakes so hard.

It’s a delicate balance for the man in charge of Deutsche Bank, which is in the middle of a massive restructuring, and possibly 15,000 layoffs, that is denting morale and may lead to the closing dozens of unprofitable businesses. But it is inevitable after Deutsche Bank lost a record €6.8 billion in 2015.

Mr. Cryan’s challenge is to reform the bank’s image after years of legal scandals, but also to hold onto enough talent to keep the struggling bank profitable and growing in the coming years.

“Morale and the general mood [at Deutsche Bank] are worse that at other banks.”

London Recruiter

To be sure, Mr. Cryan isn’t the first executive to lower the bonus pool at Germany’s largest bank, which has steadily reduced payouts as it has struggled with thousands of legal cases and regulatory investigations ever since the 2008 financial crisis.

In 2009, Deutsche Bank still paid €4.8 billion ($5.22 billion) in bonuses to its roughly 100,000 employees. By 2014, that number had declined to only €2.7 billion.

Nor is Deutsche Bank the only major bank being forced to curb incentives. Jon Terry of consulting firm PwC expects that bonuses across the board in the European banking sector will decline in most cases by 10 to 20 percent over the previous year, and at the very least remain stable.

Bonuses were once seen as the ultimate measure of a banker’s self-worth and value in the marketplace. But after regulators and politicians came to the conclusion that performance bonuses also played a central role in the excesses pervading the industry before the financial crisis, bonuses became more strictly regulated, at least in Europe.

The most important change has been that bonus payments must be limited to no more than twice the base salary of a banker. In addition, only a fraction of bonuses can now be paid out in cash, while the lion’s share must be stretched out in stock options across several years.

 

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Deutsche Bank already began applying especially strict rules to its top executives in 2013. The 250 most important executives now receive the deferred portion of their compensation exclusively in stock, which is subject to a holding period of five years.

But Mr. Cryan is clearly taking a more drastic approach. Among other things, he’s targeting specific sectors that have been the embroiled in some of the bank’s biggest legal scandals.

The annual bonus cuts could be as high as 30 percent in some areas of the important investment banking division, which has borne the brunt of legal investigations and surprisingly slid into the red in the fourth quarter of 2015.

In addition, top investment bankers will have to wait longer before actually gaining access to their bonuses. As Handelsblatt has learned, the rule once applied only to top executives is now being expanded to apply to the 250 most important employees in the investment banking division.

“I have no idea why I was offered a contract with a bonus in it because I promise you I will not work any harder or any less hard.”

John Cryan, Deutsche Bank co-CEO

The measure provides the bank with access to the bonuses for a longer period of time, as well as the option of demanding repayment of a portion of the bonuses if supposed profits turn into losses over the years, or if any fresh employee misconduct comes to light.

But limiting bonuses is a tricky balancing act for Mr. Cryan. On the one hand, the cuts are necessary, given that Deutsche Bank reported a record loss of €6.8 billion in 2015 and does not intend to pay any dividends to shareholders for two years.

On the other hand, Mr. Cryan must take steps to prevent an exodus of key employees. This is why bonuses in some areas where business was good last year, such as payment transactions or parts of investment management, will remain the same or decline only slightly.

It will be only a scrap of comfort for Deutsche Bank’s investment bankers, but the entire industry can expect to see significantly smaller bonuses for 2015, because most banks saw nothing but lackluster business in the second half of the year.

On Tuesday, for example, Jes Staley, the new head of major British bank Barclays, announced that the bonus pool would be reduced by 10 percent, to £1.7 billion. Tidjane Thiam, at the helm of Credit Suisse since last summer, has also made it clear that he intends to slash performance bonuses.

Nevertheless, it’s a more sensitive topic for Deutsche Bank than for many of its competitors. When bank share prices began to slide earlier this year, losses at the Frankfurt-based lender were especially dramatic. Deutsche Bank’s share price has plunged by about 25 percent since early January, a decline that is felt most acutely by employees who are paid mostly in stock.

“Morale and the general mood are worse that at other banks,” said a London recruiter who also works for the Frankfurt lender, noting that he had seen an increase in Deutsche Bank employees seeking to change jobs in recent months.

But at least employees cannot complain that they are the only ones suffering from the cuts. The supervisory board has already eliminated the entire 2015 bonus for Mr. Cryan and all of his fellow members of the management board.

That seems just fine with Mr. Cryan. Back in November, he said: “I have no idea why I was offered a contract with a bonus in it because I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less.”

 

Daniel Schäfer leads Handelsblatt’s finance section and Michael Maisch is Handelsblatt’s deputy finance editor. Katharina Slodczyk is Handelsblatt’s financial correspondent in London. Christopher Cermak of Handelsblatt Global Edition also contributed to this story. To contact the authors: dschaefer@handelsblatt.com, maisch@handelsblatt.com and slodczyk@handelsblatt.com

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