Credit Suisse’s PAF 2 programme is bad. But Deutsche Bank’s new bonus scheme for its 150 top investment bankers seems worse.
For 2011, Credit Suisse granted its PAF 2 (‘Partner Asset Facility 2’) awards to 5,500 of its managing directors and senior employees. PAF2 made up 35% of last year’s senior-level bonuses at Credit Suisse and can be seized back, in full, if its recipients leave Credit Suisse within 3 years of the grant date. In theory, PAF2 awards can be cashed in after four years. However Credit Suisse reserves the right (‘at the election of either the Group or the holders acting collectively’) to delay paying anything for nine years. The only good news is that while Credit Suisse bankers are waiting for PAF 2 to pay, they’ll earn a coupon of 5-6% on the value of their holding.
We don’t have the full details on Deutsche’s new pay plan yet – they’ll be revealed later today when Stephan Leithner, Deutsche’s European CEO makes his presentation. However, yesterday’s presentation and analyst Q&A with Jürgen Fitschen and Anshu Jain suggested that Deutsche plans to defer bonuses for 150 senior bankers for five years. There will be no vesting in the interim. Unlike PAF 2, this will apply to the entirety of the payout.
Deutsche had 1,250 code staff when it released its remuneration report for 2011, so the good news is that not all ‘risk takers’ at Deutsche will be affected. The bad news is that senior Deutsche bankers who are affected will now have five ‘lean’ years while they have to live solely on their salaries (typically around £275k for MDs) and the scraps of previous years’ vestings.
There are plenty of unanswered questions (which will hopefully be resolved by Leithner). Firstly, will Deutsche Bankers receive a PAF2-style coupon on their deferred bonuses while they wait? Secondly, if a banker in receipt of the five year deferral is made redundant from Deutsche, will the stock vest immediately? Thirdly, will all that deferred bonus have to be foregone if a banker from Deutsche joins a competitor within 5 years (in which case, which other bank will buy out the entire amount?)? Fourthly, Deutsche has some very punitive clawback rules which state that any stock awards can be clawed back entirely in the event of a divisional or group loss – how will this be applied to the five year deferrals? If the clawback applies, does anyone really have much chance of receiving the payout anyway?
And the final question is: why would anyone senior now want to join Deutsche of their own accord?
This last issue does seem to have occurred to Jain and Fitschen. When they were questioned about it by analysts yesterday, Jain admitted that Deutsche was the only bank he was aware of to have implemented a five year cliff vesting (Nomura introduced five year deferrals back in May, but stock vests throughout the five year period).
“Unless other banks follow, Deutsche won’t be able to compete,” Jain admitted. However, he also expressed his certainty that other banks will follow and that long vesting periods for senior staff will become commonplace.
There were also clear signs that Fitschen, a retail banker, is stamping down on investment banking pay at Deutsche. “The industry allowed itself too much luxury in the past,” said Fitschen. “Our tolerance for that luxury has gone down.” He added that although banking has paid a lot historically and has been more attractive than other industries, it’s possible that banking pay will fall in future while pay in other industries catches up.
Grow your own
Most of all, Deutsche’s decision to go out on a limb and make itself entirely uncompetitive in terms of senior-level compensation can be taken as a sign: it has no real intention of hiring people at the top end and will instead focus on recruiting graduates and bringing them up through the ranks – by which time they’ll hopefully be sufficiently wedded to Deutsche that a five year cliff-vesting deferral will be no big deal.
Alternatively, if Deutsche does want to hire senior staff externally, who will want to join now? Would you?