Pricey Bankers High Salaries, Low Returns

German banks are paying their top executives high salaries that are not justified by high returns, according to recently conducted studies.
Who says €10 million is too much?

Top pay ought to equate top performance. That equation, however, has not applied to most European banks since the 2008 financial crisis.

Instead, millions in compensation are still being approved, even though the return on invested capital is meager or, in a few cases, even negative. A comparison of key figures offers "no arguments for the notion that there is a strong correlation between payments to top managers and returns for shareholders," wrote authors of a study published on Tuesday by SNL Financial, a financial information firm.

The imbalance is especially glaring at Deutsche Bank, Germany's largest bank. Co-chief executive Anshu Jain heads SNL Financial's list of top earnings, with a total compensation of more than €10 million ($12.5 million). By comparison, Deutsche Bank's after-tax return on equity was modest, at 1.2 percent.

"As stated in our annual report, compensation for top executives is a reflection of a number of factors, and not just the return on equity in a single year," a Deutsche Bank spokesman said in an official statement. According to the statement, the bank's two co-CEOs each received total compensation of about €7.5 million for 2013, and not the higher figure indicated in the study.

Less than 6 percent of all banks in Germany earned their equity capital costs in the last three years.

However, the annual report also states that Mr. Jain did receive €10 million in compensation. The difference is primarily explained by accounting for variable salary components from previous years and commitments to payments at a later date.

Clearly, regulators have been focusing more heavily on return on equity to challenge stronger profitability in the banks' business models.

Presenting the results of the Europe-wide banking stress test, Andreas Dombret, a member of the executive board of the German central bank, the Bundesbank, said banks' earning power is weak, especially in Germany – in both an international and a European comparison. He noted that banks should question whether their profitability figures are even accurate anymore.

According to a study by the consulting firm Bain, less than 6 percent of all banks in Germany earned their equity capital costs in the last three years.

At the European level, lenders are also struggling with weak profitability and special burdens from the financial crisis. Analysts at SNL Financial noted with some astonishment that the head of Britain's Lloyds Banking Group collected almost €9 million in compensation in 2013, while the bank's return on equity was minus 1.89 percent.

Weak market development among European bank shares has had little effect on compensation.

At the other end of the scale, Annika Falkengren, chief executive of Skandinaviska Enskilda Banken (SEB), earned only €2.3 million last year, while the Swedish bank earned an impressive return of 13.22 percent. Analyst Matti Ahokas of Danske Bank attributed Ms. Falkengren's comparatively low compensation to the social and political environment in Sweden, in which bonuses are frowned upon. At the same time, he noted, there is substantial transparency with respect to compensation in Sweden.

The top 15 earners in European banks

Jürgen Kurz, a spokesman for the German Shareholders' Association, or DWS, pointed to weaknesses in one analysis that only took one fiscal year into account, because, for example, a large share of variable compensation was structured for the long term. But he generally agreed a large salary for top executives is no guarantee of top performance.

Compensation, Kurz argued, should develop in parallel to corporate success. "That's still a problem at the moment," he said.

Analysts at Berenberg Bank, a private institution, conclude that weak market development among European bank shares has had little effect on compensation. So even in bad time, there have been no cuts.

The average fixed salary of a bank chief executive in Europe increased by 28 percent from 2008 to 2011, while the Stoxx Europe 600 Banks share index did nothing but tread water. The analysis confirmed the worst fears that there is a strong correlation between a bank's size and complexity and total compensation.

Deutsche Bank is at the head of the pack when it comes to paying not only its executive board members but also its supervisory board team.

Deutsche Bank is at the head of the pack when it comes to paying not only its executive board members but also its supervisory board team. With estimated earnings of €900,000 in 2014, Paul Achleiter, the chairman of the supervisory board, is second only to his counterpart at automaker Volkswagen.

The management consultancy Towers Watson calculated this pay to be a 38 percent increase over 2013.

An analysis of the extent to which pay for supervisory board members correlates with a bank's performance has yet to be completed.

 

Peter Köhler leads Handelsblatt's team of banking reporters. To contact the author: [email protected]