Banking: They’re bonuses, John, but not as we know it

Poor old Deutsche Bank. It’s thinking longer and harder about pay these days than ever before. The level of transparency in its annual report is testament to that, alongside the now-signature move by the John Cryan regime of publishing memos to staff online.

But this year’s efforts have got quite a few bankers at the firm hot under the collar. Rather than embracing the variable compensation structure as a new and exciting way of participating in the recovery and long-term sustainability of their beloved employer, it turns out some of them hate it.

Of course, Deutsche Bank watchers will remember that early in his tenure Cryan questioned the need for bonuses at all, saying most bankers were not exactly entrepreneurial.

Let’s take a quick look at some of this year’s features. Big chunk being deferred? Well, OK then, new world and all that. Cliff vesting for equity? Hmm, suppose so, we’ve seen that before. Share price target for whatever special award has been cooked up? Not feeling especially great about that, but you never know, it could work out. Have to stay at the firm for the next six years? Whatever, I’ll let my next shop worry about that.

No bonus at all? Hang on a minute.

To be fair, we discovered the last bit on January 18 in a Cryan memo. And it is not quite no bonus at all; his memo made clear that staff would get paid their “group” bonus component but not their “individual” component. By all accounts the “group” bit was pretty token for investment bank staff. The bonus pot dropped 77%.

So what's new? Well, on March 20 we had the annual report to digest, with its acres of compensation structure details. Within that it sets out the detail of the fancy new ‘Bonus That Is Not A Bonus’, or as Deutsche prefers to call it, a Retention Award.

Last year’s natty feature, you’ll no doubt remember, was something called the Key Position Award (KPA). It was paid to selected employees who were deemed to be crucial to the implementation of Strategy 2020, the bank’s current plan. It was a deferred equity award, cliff-vesting after four years after which it must be retained for a further year. Part of it was only to be awarded if the bank’s share price hits a certain (undisclosed) target at the time of vesting. Ugh – but at the same time you can see the bank’s point.

The cliff-vesting and the share price target make it similar to this year’s iteration, the Retention Award, of which half is paid in cash and half in stock. For the most senior staff (Material Risk Takers in Deutsche-speak), the award vests in year four and year five, with the equity portion then subject to an additional year of retention after vesting. Again, it is cliff vesting, and again, if the (undisclosed) share price target isn’t hit, you get zilch. If you leave, you forfeit what hasn’t been delivered, but that’s not exactly new either.

But the difference is that while the KPA was still explicitly a reward for performance in 2015 – albeit structured to be more aligned with the timeframe of the Strategy 2020 – the Retention Award is explicitly not a bonus. A bonus for individual performance would of course be unthinkable in a year where the bank is taking a tough line with bonuses for individual performance because of overall group performance.

From the annual report: “These Retention Awards are not designed to compensate the recipients for their performance in 2016 and therefore do not form part of 2016 compensation. The awards were granted in order to foster retention of the recipients.” 

That last sentence is a nicely crafted one, since it immediately alerts you to its corollary: the absence of an award is in order to foster your non-retention. We didn’t pay you? Take the hint.

For those that are in line to be paid, whether it is a bonus or a Bonus That Is Not A Bonus shouldn’t make much difference one way or another, which prompts the question of whether it should make much difference to anyone analyzing Deutsche’s pay policy either.

Some 5% of the bank have received these retention awards – about 5,500 staff. The total being earmarked for it is €1.1 billion ($1.19 billion). Added to the €500 million bonus pool, that is still below the €2.4 billion bonus pool from the previous year, just not 77% below.

Euromoney’s understanding is that the share price target for this year’s Bonus That Is Not A Bonus is in the low €20s. If that is true, then it is something like 50% above where the stock is now. In the last five years it has fallen 50%.

Cryan wants a turnaround. If anyone wants to get paid, it’s going to have to be the full 180 degrees.