Make no mistake: pay at Deutsche Bank has been a disappointment. In its annual compensation report, which is out today, Deutsche confirms the 77% reduction in the bonus pool for 2016. Perversely, it also affirms the ‘attraction and retention of the best talent’ as a core purpose of the bank’s compensation policy, and links senior management pay to ’employee commitment.’
There’s more to Deutsche’s latest compensation round than bonus decimation though. Today’s report also marks the introduction of a new bonus structure, the maintenance of harsh deferrals even while other banks defer less, and confirmation of the importance of senior ‘control’ staff.
Deutsche Bank has got a whole new bonus structure for its employees
From now on Deutsche’s employee bonuses will be split into two parts: there’ll be a reward for the performance of the group and a reward for performance of the individual. Unfortunately, the bank doesn’t indicate the split between the two.
The group component is determined with reference to the bank’s overall core equity tier one ratio, to its leverage ratio, its cost base and its post tax return on equity. Deutsche omits to say exactly what its targets are for compensation purposes, but in his recent strategy presentation, CEO John Cryan promised to deliver a CET1 ratio above 13%, a leverage ratio of 4.5%, to cut another €3.1bn from costs and to achieve a 10% return on average tangible equity in a “normalized operating environment.” If anything less than this comes to pass, the implication is that the group component of employees’ bonuses will be cut.
The individual component is determined with reference to an individual’s achievement of objectives and expectations and the performance of his/her division. There will also be consideration of the strategic importance of the division to the group, business strategy needs, relative performance vs. peers, market position and trends and ‘non-financial” factors (ie. cultural affinity with DB).
Deutsche Bank has got a whole new bonus structure for its executives
It’s not just Deutsche’s employees who are being paid differently. The management board is too.
As of this year, 75% of bonuses for Deutsche’s management board are being deferred for a full five years, after which they still need to be retained for a year.
These bonuses are paid in the form of ‘annual performance awards’ and ‘long term performance awards’. Both are based on an assessment of Deutsche’s performance compared to rivals. Annual performance awards look at Deutsche’s CET1 and leverage ratios, at its costs, at its ‘value added’ and at employee commitment and behavious. Long term performance awards look at Deutsche’s relative total shareholder return compared to rivals over a three year basis, plus metrics related to its culture and clients.
Deutsche’s new long term performance awards contain some serious downside leverage based on the measure of relative total shareholder return (RTSR). If Deutsche’s RTSR is less than 100% that of its peer group, the RTSR element of management’s bonuses declines disproportionately. If it’s less than 60%, this element of managements’ bonuses declines to nothing at all.
Deutsche shall will not be comparing itself to Goldman Sachs for bonus benchmarking purposes in future
Returns at Goldman Sachs are rather a lot higher than at Deutsche Bank. Over the past three years, annual average return on equity at Goldman Sachs was 9.9%. At Deutsche RoE was negative in 2015 and 2016 and only 2.7% in 2014.
This might be one reason why Deutsche has decided it won’t be benchmarking itself against Goldman Sachs when it calculates the RTSR element of bonuses in future. Nor will it benchmarking itself against Morgan Stanley (8% return on equity in 2016). Instead, it will be comparing itself to BNP Paribas, Société Générale, Barclays, Credit Suisse, UBS, Bank of America, Citigroup, HSBC and JP Morgan Chase.
Deutsche says it’s omitting Goldman and Morgan Stanley from the comparisons because they’re too, “investment banking centric.”
Deutsche’s bankers were treated doubly harshly in 2016
We knew this already, but it’s worth reiterating. Not only did Deutsche wipe out all individual bonuses for employees above vice president level this year, but it also cut the remaining group component of their payouts to 50% of their potential level.
The really, really, really high pay at Deutsche Bank has completely disappeared
In 2015 there were people at Deutsche Bank getting paid €10m and €11m euros. In 2016 there was none of this. As the chart below shows, the number of people earning €1m+ plummeted at Deutsche last year and the number of people earning €3m+ shrunk to almost nothing. Deutsche’s millionaires didn’t disappear entirely though – there were still two people earning €6m to €7m and still 316 people earning more than €1m, which isn’t bad for a bank that made a loss.
Deutsche Bank won’t be relaxing its deferral rules for future bonuses, which are a lot harsher than rivals
Deutsche Bank is going against the grain. While banks like UBS and Barclays dial back the harsh deferral policies introduced after the financial crisis, Deutsche is keeping them.
Deutsche is being very strict about who it considers to be the “material risk takers” bound by harsh European Union compensation rules. At Deutsche, anyone above vice president (VP) level is deemed to fall into this category. And all Deutsche material risk takers have 40% of their bonuses deferred over four years. Anyone with a bonus over €500k gets the whole thing deferred.
At Barclays and UBS most employees have their bonuses deferred over three years. At Barclays, 100% deferrals only kick in for bonuses above £1m (€1.15m). At UBS you get 48% of your bonus deferred if it’s €280k or above, and you’ll never get a cash bonus greater than €1m.
On average, Deutsche pays it salespeople and traders far more than its corporate financiers or its compliance and risk people
If you’re looking for high pay no matter your level of seniority, Deutsche’s global markets division is the place to be. People there were paid 50% more than people in Deutsche’s corporate and investment bank (CIB) on average last year. This was despite the global markets division generating a 0% return on equity while the CIB generated 9%…
But pay for senior staff at Deutsche Bank is far more equal across the divisions
When you look at material risk takers at Deutsche (ie. everyone above VP level), pay is far more equal. The implication is that comparatively poorly paid juniors in the CIB are causing the disparity.
Deutsche paid its chief regulatory officer the same as the heads of its investment bank last year
If you’re looking for a measure of the increased importance of controls at Deutsche Bank, look at the way it allocated pay to senior managers last year.
For 2016, Sylvie Matherat, the German bank’s chief regulatory officer, earned €2.4m. This was identical to Garth Ritchie and Jeffrey Urwin, then heads of global markets and corporate and investment banking respectively.
It helps that senior executives waived their bonuses for last year, but still.
Deutsche is paying big guarantees to attract corporate financiers and salespeople and traders
Lastly, Deutsche Bank says it wants to deepen its M&A and ECM relationships this year, implying that it might hire some rainmakers. This being the case, corporate financiers approached by Deutsche ought to know that the bank pays guarantees. Last year, 15 people in global markets and 10 people in the corporate and investment bank got guarantees. In global markets the average guarantee was €1.3m. In the CIB it was €1.9m.
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Contact: sbutcher@efinancialcareers.com
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Photo credit: Former Deutsche Bank offices in London by Nicolas Nova is licensed under CC BY 2.0.