Handelsblatt Exclusive Deutsche Bank Overhauls Executive Pay

After shareholders struck down a proposed bonus payment system for top-tier management last year, the bank's supervisory board worked out a new version aimed at soothing investors' concerns.
Paul Achleitner, head of Deutsche Bank's supervisory board, had promised shareholders that the bonus pay system would be revamped.

Following a defeat of Deutsche Bank’s proposed top executive bonus payment system at the lender’s last annual general meeting, its supervisory board worked out an amended version aimed at winning shareholders’ approval, sources told Handelsblatt.

The bank’s supervisory board and its chairman, Paul Achleitner, suffered a blow at the annual meeting last May, when 51.6 percent of shareholders struck down a proposed new bonus system for the bank’s management board members – a rare move, as proposals tend to be approved by shareholders without opposition.

Shareholders condemned the proposal as too complicated and non-transparent, calling for changes to the complex structure of bonus requirements. "We take the critical remarks very seriously and will examine them in detail," Mr. Achleitner promised at the time. Now, eight months later, he intends to deliver.

At the next general meeting, scheduled for May 18, the bank will call for a vote on a revised model for the variable compensation of its top executives, as Handelsblatt has learned from financial sources. Deutsche Bank declined to comment.

Our concerns with regard to the amounts were heightened by the fact that the company has failed to disclose specific performance criteria. Advisory group Glass Lewis

In 2016, Deutsche Bank scrapped bonuses for its senior management altogether and the lender could have ignored shareholders’ sharp dissent, as it is not bound to respect their vote. But that would be tantamount to a provocation, which is why the bank is now trying to accommodate its critics with a simpler and more transparent concept.

The rejected model consisted of a complex three-component structure. In addition to a short-term and a long-term bonus, some board members were to receive a third type of bonus payment. This third element, known as the Division Performance Award, was intended to be a perk for board members in charge of operating divisions, such as investment and retail banking, and was to be based on the respective division’s performance. But shareholders complained that the bank did not disclose any details for the goals individual board members had to achieve to be entitled to the reward.

They suspected the system to be a self-service model of sorts, in which the supervisory board and individual management board members could quietly work out large amounts for themselves, especially given the high sums in question.

Corporate and investment banking head Jeff Urwin, for example, could have theoretically collected up to €3.3 million ($3.55 million) in additional compensation so that, together with the remaining bonus components and under extremely favorable circumstances, he would have collected a total bonus of no less than €13.2 million.

"Our concerns with regard to the amounts were heightened by the fact that the company has failed to disclose specific performance criteria," said proxy advisory service Glass Lewis in a statement. "We find that many companies make allowances for division-based or similar criteria as a component of the normal bonus, instead of offering two different bonuses," a spokesman for the institutional investor advisor said.

Financial insiders have long criticized Deutsche Bank for its reluctance to address the issue. The lender’s supervisory board has not yet formally approved the new concept, but the basics have already been discussed with investors, sources said. Structural changes to the bonus system are expected to be implemented soon.

In the future, there will only be two bonus components instead of three: one bonus feature based on short-term and one on long-term goals. In addition, the long-term bonus should be weighted more heavily, the sources said. Board members in charge of sales will still be judged on the basis of their division’s success, but will no longer receive an additional bonus for that performance. Instead, their achievements become part of the short-term reward.

The supervisory board is also expected to cap the voluntary upper limit for bonus payments per board member at €9.85 million, even in cases of outstanding performance.

In addition, the bank will include so-called claw-back rules in the bonus system, as required under new German regulations. These rules enable banks to demand the repayment of bonuses that have already been issued if executives have inflicted harm on the company.

The bank aims to counter charges of non-transparency by describing the goals for individual divisions more precisely. It will only do so retroactively, however, as the bank aims to prevent competitors from learning about the lender’s specific plans in advance.

Deutsche Bank also envisions changes to its long-term, or group bonus system, the sources said. While the sources could not provide much detail on the exact changes, they said the bank had already tested the waters among key investors and received encouraging responses.

It is still unclear whether the new structure will lead to a change in the overall bonus amounts, however. After all, high bonus payments were introduced to attract strong candidates in a highly competitive market. Given the cutthroat business in areas such as investment banking, Deutsche Bank is likely to maintain its perks for sales executives. The focus on top-tier sales talent also highlights the differences in the payment of other professionals, such as the chief financial officer or the head of information technology.

Under the rejected bonus system, Garth Ritchie, the head of securities trading, could have earned up to €10.5 million, while the bonus ceiling for Chief Financial Officer Marcus Schenck would have been €8 million.

 

Yasmin Osman is a financial editor with Handelsblatt's banking team in Frankfurt. To contact the author: [email protected]