By George Hay
LONDON, Sept 4 (Reuters Breakingviews) - Deutsche Bank’s (DBKGn.DE) new leaders are saying the right things about banker pay. On July 31 new co-chief executives Anshu Jain and Juergen Fitschen made reform of compensation one of their three key objectives. With the German lender’s strategy day on Sept. 11 looming, they need to follow up with decisive action.
Jain and Fitschen should start by more closely aligning pay with the long-term health of the bank. Deutsche could take a leaf out of HSBC’s (HSBA.L) book and make its bankers wait five years rather than three to receive those share-based elements of bonuses that have been deferred. They could then only be allowed to sell their shares when they retire or leave the firm.
But neither of these reforms would address the problem identified by the duo themselves in July - excessive absolute levels of pay. The bluntest way to do this would be a variant of what the European Parliament has proposed - namely, capping the variable part of bonuses at a certain proportion of fixed salary, such as 100 percent. If Jain and Fitschen unilaterally did this, Deutsche bankers might well stampede for the exit. But if the new CEOs tried to counter this by raising fixed salaries to compensate, they would reduce their capacity to rein in costs in bad years.
Yet having flagged the problem, the co-CEOs would look silly if they didn’t propose something tangible to address the overall quantum of pay and their other focus - how bonuses compare to shareholder returns. One way to square the circle would be to commit to only pay bonuses if Deutsche exceeded its cost of equity.
Jain and Fitschen could then pledge to divide the economic profit spoils equally between investors and the employee bonus pool. They could even impose a cap beyond which everything went to shareholders. That cap could be set so that the average bonus per employee did not exceed the $337,000 average payout per employee recorded by top rivals in 2011. That would still incentivise individual bankers to maximise their efforts.
The temptation will be to play it safe. But rivals like Barclays (BARC.L) are in similar reform mode and the investment banking slowdown looks structural, not cyclical. Jain and Fitschen have a golden opportunity to position Deutsche as the enlightened trailblazers of a new era.
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- Deutsche Bank needs to further address both the absolute level of compensation and the relative balance between rewards for shareholders and those for employees, new co-chief executives Juergen Fitschen and Anshu Jain said on July 31.
- The new CEOs of the German lender said that compensation processes needed to become less complex, more transparent, and clearly and visibly aligned to sustainable performance.
- Deutsche will reveal details of its new strategy when it holds strategy days for its investors on Sept. 11 and 12.
- Average compensation per employee for the investment banks of Barclays Capital, JPMorgan, Goldman Sachs, Morgan Stanley, Credit Suisse and UBS was $337,000 in 2011 and $392,000 in 2010, according to analyst estimates.
- Deutsche has already tightened its clawback rules. Unvested shares in incentive schemes transferred when senior bankers join Deutsche are now eligible to be clawed back, if the new staff joined later than Dec. 11.
- Upfront cash bonuses should not exceed bankers’ fixed salaries, German finance minister Wolfgang Schauble wrote on Aug. 31.
- Strategy Update, July 31: here
- Schaeuble article, Aug. 31: here#axzz256ktxdzx
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
- For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Chris Hughes and David Evans)
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