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Telling a bonus from a ‘retention award’

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By Owen Sanderson
21 Mar 2017

Deutsche Bank’s latest wheeze to pay its best and brightest might look like a crafty sleight of hand typical of weaselly bankers. But having announced a pared-back bonus pool just a few weeks ago, it transpires the firm has ear-marked extra dosh to make up for it. Under the hair shirt was a silk vest all along, one might think. However, Deutsche has no choice but to pay the market rate for staff if it is to deliver any return to shareholders.

Deutsche slashed its bonus pool for 2016. We know, because it said so, in a memo to all employees on January 18, published on the bank’s investor relations portal, adopting a suitably sombre tone for the “tough decisions that will demand a great deal of us”.

That gave the bank a headline 77% cut in its variable compensation pool for 2016, from €2.4bn the year before to €500m for 2016. Individual compensation for vice-presidents, directors and managing directors was axed, while the “group component” was cut in half as well (perhaps appropriately, for the bank’s second consecutive year of losses). The management board waived bonuses for itself entirely.

But alongside the shrunken bonus pool of €500m is €1.1bn of “retention awards”, paid to 5,522 employees “who are key contributors to the bank’s future success in crucial roles, who are in high demand in the market and who would be very difficult to replace”.

Deutsche said a retention award “is not designed to compensate the recipients for their performance in 2016 and therefore does not form part of 2016 compensation”.

But this distinction is wilfully obtuse. How else would one identify a “key contributor”, if not by their recent performance?

In every year, at every bank on the Street, bonus payments are partly a recognition of past success, and partly a payment to make staff feel valued — and moreover to encourage them to stick around. Managers fight for their desk to be well paid because they want to preserve their businesses and do well next year, not purely out of a sense of justice and fair play.

Deutsche Bank admits, in the same report where it explains the retention awards, that this is the case.

It “retains the ability to adjust the total amount of individual variable compensation on the basis of a discretionary decision” and factors affecting that decision can include “balance of employee protection and shareholder return, strategic importance of the division to the group, future business strategy needs such as franchise protection and growth, relative performance versus peers and market position/trends”.

The subtle distinctions between retaining “key contributors to the bank’s future success” and considering “future business strategy needs such as franchise protection and growth” elude GlobalCapital, but perhaps that’s why we’re journalists, rather than members of Deutsche’s compensation committee.

Deutsche’s retention awards, it’s true, are not paid immediately. Half vests in four years, half in five, for “material risk takers” (i.e. the most senior front office staff). Half is paid in cash, half in shares, with a share price floor, said to be €22, meaning that bankers receive nothing if the shares are below this level at the time of vesting.

This strengthens, a little, Deutsche’s argument that the payments are about retention, and somehow not about previous performance, particularly when compared with other firms. Barclays cut deferrals and changed its accounting policies this year, deferring only 30% of its bonus payments rather than 46% the year before. But, as at Deutsche, material risk takers suffer greater deferral — 60% of anything between £500k and £1m, and 100% over £1m.

But Deutsche’s policy doesn’t change the rules, it simply forces other firms to buy out unvested comp when poaching its staff. How this happens is a matter for individual hiring negotiations, but it certainly happens. Barclays granted Jes Staley 896,540 shares when he joined as group chief executive, buying him out of his unvested JP Morgan compensation, for instance.

The Deutsche retention awards for material risk takers, however, bear more than a passing resemblance to the previous year’s “key position awards”. Like the retention awards, these went to “select employees who are critical for the bank”, and like the retention awards, they are structured with a four year deferral, with part of the awards linked to Deutsche’s share price performance. All will be paid in shares, unlike the 50:50 split in retention awards.

The crucial difference, however, is cosmetic. “Key position awards” counted as variable compensation, forcing Deutsche to trot out the usual justifications that “in order to sustain the momentum that has been built up over the last months it is essential that the employees are rewarded adequately”.

R etention awards, though, are different and special — because this year, for Deutsche, is all about the restructuring, and comp awards have to reflect that superficially.

The bank can put on sackcloth and ashes, and its management can affect austerity in front of regulators and investors. But at the same time, like any investment bank, if it does not pay staff, they will walk, and its business will wither. Paying them, but pretending not to, is the inevitable result.

By Owen Sanderson
21 Mar 2017