U.S. Settlement

Deutsche Bank Warns of Bonus Cuts

  • Why it matters

    Why it matters

    Many believe that bank bonus culture led to the financial crisis.

  • Facts

    Facts

    • In Europe, banking sector bonuses are limited to twice an employee’s base salary and 40 to 60 percent of those bonuses must be paid out over a period of three to five years.
    • The response of many financial institutions – Deutsche Bank among them – has been to raise the base salary of their employees.
    • In 2015, despite a loss of €6.8 billion on its books, Deutsche Bank paid out around €10.5 billion in salaries and bonuses. In 2009, the bank had logged a profit of €5 billion, yet only paid out €9.3 billion to its employees. This year, analysts expect the bank to make a loss of around €900 million.
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John Cryan
Bonuses aren't the only problem plaguing Deutsche Bank and its CEO John Cryan. Photo: DPA

Deutsche Bank has told its staff that their bonuses for the past year would be cut in half to help compensate for the $7.2 billion it has agreed to pay over its role in selling toxic mortgage backed securities.

A day after the U.S. Justice department said it had reached a settlement with Germany’s largest bank, chief executive John Cryan wrote to staff saying cuts were inevitable.

“Now that we have a clearer idea of the financial impact of the settlement with the U.S. Department of Justice and our performances for the year, we feel that tough measures are unavoidable,” he said in a a letter he co-signed with other members of the bank’s management board.

On Tuesday United States Attorney General Loretta Lynch accused Deutsche Bank of contributing to the 2008 financial crisis, as she announced the details of the settlement.

Some of the bank’s biggest shareholders spoke of an “overdue signal” of remorse that will be necessary if Deutsche Bank wants to win back the confidence of investors and customers.

But the bonuses are far from the only problem that has been bothering investors.

Deutsche Bank is still struggling to come up with a viable strategy for the future and will likely have no other option than to ask employees to make further sacrifices.

For weeks, Deutsche Bank’s management board has been working through various options to soften the blow of the hefty settlement. Those options range all the way from reintegrating its subsidiary Postbank to downsizing the bank’s U.S. operations.

 

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Deutsche Bank plans to present a precisely formulated strategy in the coming months, according to Handelsblatt sources. Whatever the board decides, there’s a good chance it will include some adjustment to the bank’s capital market business, which is considered by many to be unsustainably large.

The bank is likely to want to get back to basics, using its trading skills to provide a service service for customers from the “real economy,” meaning family businesses, insurance companies, pension funds, governments and private equity firms.

Deutsche Bank has already begun to scale back its business with other banks and hedge funds, many of which are based in the U.S., but the management board has yet to commit itself to anything.

The $7.2 billion penalty is no pittance, yet Mr. Cryan has every reason to be relieved. The Justice Department had begun the process with an offer to settle for $14 billion – an amount that alarmed many observers who questioned whether Deutsche Bank had enough capital on hand to cover such a fee. At the time, those fears caused Deutsche’s shares to plummet as investors withdrew billions. There were even rumors making the rounds that a government bailout could be in store.

In that context, a $7.2 billion settlement is a relief: a welcome development in the eyes of some investors and Germany’s highest-ranking financial official, Finance Minister Wolfgang Schäuble, who recently spoke to Handelsblatt about how the bonus culture of banks needed to be changed.

Deutsche Bank’s biggest investors have long been irritated with the fact that managers were still showering employees with relatively generous bonuses while the performance of the bank’s share price was lackluster.

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In Europe, banking sector bonuses are limited to twice an employee’s base salary and 40 to 60 percent of those bonuses must be paid out over a period of three to five years, depending on an employee’s standing within the bank.

The response of many financial institutions – Deutsche Bank among them – has been to raise the base salary of their employees.

In 2015, despite a loss of €6.8 billion on its books, Deutsche Bank paid out around €10.5 billion in salaries and bonuses. That compares to 2009, when the bank had logged a profit of €5 billion, yet only paid out €9.3 billion to its employees. This year, analysts expect the bank to make a loss of around €900 million.

Deutsche Bank’s current plan to slash bonuses will mainly affect high-ranking employees, though some of them could receive special incentive packages to offset the effect of the bonus cuts.

The bank said employees with the titles of vice president, director and managers would not receive the “individual variable compensation component” for the 2016 financial year. Some payments could still be made to eligible employees, however, under the so-called “group variable compensation component,” according to new rules that were introduced last year and that are based on the bank’s overall performance.

A small number of employees will be shielded from the changes. These employees – who bring with them important contacts to customers that are imperative to the future success of the company – will be granted special long-term incentives, “partly in the form of shares, which will be deferred up to six years.”

Michael Maisch is the deputy chief of Handelsblatt’s finance desk and based in Frankfurt, Germany’s financial capital. Yasmin Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. Daniel Schäfer is head of Handelsblatt’s finance pages and based in Frankfurt. To contact the authors : maisch@handelsblatt.com, osman@handelsblatt.com and d.schaefer@handelsblatt.com