Banker Liability

Deutsche Bank Freezes Bonuses

Source: DPA
No Christmas presents this year for you, mate.
  • Why it matters

    Why it matters

    If Deutsche Bank withholds bonuses for its senior executives, it could send a signal to hold bankers more directly accountable for global financial crises.

  • Facts

    Facts

    • Deutsche Bank has said it will withhold some bonus payments for several executives until several law suits are settled.
    • None of the affected executives have been charged with wrongdoing.
    • The bonus payments were due to be paid in August.
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    Audio

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Germany’s Deutsche Bank is withholding bonus payments for several senior executives, including co-chief executives Anshu Jain and Jürgen Fitschen, Handelsblatt has learned.

The bank’s supervisory board, which has the power to hire and fire the chief executive, is holding back the money until several legal disputes engulfing the bank are resolved, according to industry sources.

The decision is an unprecedented one for the banking industry. Several banks have cancelled bonus payments for bankers who have failed to hit targets or been found guilty of misconduct, but Deutsche Bank has held back bonuses as a precautionary measures.

The bank is currently facing several investigations, ranging from accusations that some of its traders, like many in other banks, colluded to fix the Libor exchange rate, to charges that it broke U.S. sanctions to do business in Iran. Mr. Fitschen and four former executives are also facing obstruction of justice charges related to the long-running dispute with the Kirch media empire.

Deutsche Bank’s executives voluntarily waived their bonuses at the height of the financial crisis in 2008, but this is the first time they have been ordered to do so.

Mr. Achleitner said the decision to withhold bonuses was not a sign of no confidence, or an indication that the board members had failed in their duties.

The move has angered some board members, and at least one has written to supervisory board chairman Paul Achleitner, asking why the bank has decided to withhold bonuses only from directors and not other staff such as traders in London.

Industry sources said Mr. Achleitner has stressed in his letter that the decision to withhold bonuses was not a sign of no confidence, nor an indication that the board members had somehow failed in their duties.

Thomas Heidorn at the Frankfurt School of Finance and Management told Handelsblatt Global Edition that the move was an unusual one.

“There has been a huge discussion on bonus systems and how they lead to risk taking. The thinking now is that if you take legal risks it is like taking market risks, you face the same consequences,” Mr. Heidorn said.The senior managers probably want to communicate the view that this is true for all people working at the bank, at all levels.”

He added that Mr. Achleitner would have checked carefully that the move did not break the terms of the contracts.

“Deutsche Bank is the kind of bank that would have checked ahead of time that this is possible, so there is a very high likelihood that it is,” Mr. Heidorn said.

Deutsche Bank Executive compensation-01

Sources told Handelsblatt that the bank has withheld around €10 million ($12.6 million) of bonus payments that were due to be paid in August. Some payments were due to go to bankers who are no longer with the bank. Former chief executive Josef Ackermann and his close ally, head of risk Hugo Bänziger, are also affected, as is former chief operating officer Hermann-Josef Lamberti. The withholding also affects other current executives including the head of legal affairs, Stephan Leithner, chief risk officer Stuart Lewis and chief operating officer Henry Ritchotte.

The supervisory board made its decision to freeze performance-related bonuses for 2011, 2012, 2013, and part of 2014, at a meeting in London in July.

For the year 2011, when many of the bank’s legal problems first began, seven board members received €26.4 million in pay, of which nearly €18 million was through performance related bonuses to be paid out over several years.

Deutsche Bank had to pay €3 billion in legal costs last year, and has been setting money aside to deal with ongoing claims. It now has a legal war chest of around €2.2 billion.

In 2013, the EU introduced legislation limiting bank bonuses, believing that high bonuses encouraged risk taking behavior. Under the new rules, the most highly paid bankers can only receive 20 percent of their bonuses, and the remaining payments must be staggered across several years. In addition, banks can freeze or claw back premiums.

“The thinking now is that if you take legal risks it is like taking market risks, you face the same consequences.”

Professor Dr. Thomas Heidorn, Frankfurt School of Finance and Management

Germany’s financial watchdog BaFin complained in January this year that the country’s banks had been too slow to curb bonuses in the wake of the E.U. legislation.

Rainer Zimmek, managing director of Trust Management Consultants in Düsseldorf, said that Deutsche Bank was “sending the right signal” in freezing these bonuses.

The issue of banking bonuses is again in the spotlight after several banks including Barclays, Lloyds Banking Group, Royal Bank of Scotland and UBS have all cut bonuses in response to legal settlements over their involvement in the Libor rate-rigging scandal.

Earlier this week,  Lloyds this week fired eight employees and ordered them to pay back €3 million of bonuses for rigging benchmark interest rates, but the amount is only a fraction of the €367 million fine U.S. authorities imposed on the bank.

“The bonuses will never have any relationship to the fines. One person’s bonus will never be enough to pay these fines. But that is not the point. The point is to send a signal, saying if you do this, there will be consequences,” said Mr. Heidorn.

In January, the Bank of England will introduce some of the most strict rules on bank bonuses, requiring bankers to hand back bonuses up to seven years after they are awarded, if they are found guilty of misconduct.

The United States has also tried to impose caps, such as the “Say on Pay” rule in the 2010 Dodd-Frank Act that reformed financial regulation, but the legislation has been held up by regulators squabbling with one another over how to implement the caps.

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Meera Selva is an editor at Handelsblatt Global Edition in Berlin and covered banking in Germany and the United Kingdom for more than 15 years. Peter Köhler and Laura de la Motte lead the banking team for Handelsblatt in Frankfurt. Lára Hilmarsdóttir contributed reporting. To contact the author: selva@handelsblatt.com

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