No bank is going to pay large bonuses this year, but are Deutsche Bank's bonuses going to be particularly disappointing? According to headhunters, the answer is yes.
"The bonus question remains very uncertain this year," says one London headhunter. "The only firm expectation at this point seems to be that Deutsche's bonus pool will be down 30%. We're hearing that Anshu Jain doesn't want to see a lot of money going out of the door and that he wants to make a clear break with the past."
Another senior London-based headhunter suggests a mere 30% reduction is optimistic for bonuses at Deutsche. "Senior staff are saying that the bonus pool will be 60%-70% down at Deutsche Bank this year. The problem is that they're massively overstaffed and they can't cut people easily in Germany. They need to take a lot of costs out of the business - the bonus pool is going to be slashed. In some of their business areas receiving any bonus at all will be a miracle."
Deutsche declined to comment.
Like UBS and Barclays, Deutsche runs the risk of a substantial Libor-related fine, provision for which may impact this year's bonus pool. The bank is also committed to achieving a 12% return on equity by 2015, up from 8% in 2011, and is in the process of cutting 1,500 investment banking jobs.
If Deutsche does slash bonuses more substantially than other banks, it won't be the first time it's been an early mover on pay. Anshu Jain indicated a willingness to make unpopular pay modifications in September when he increased the vesting period for managing directors' bonuses to five years (with nothing to be paid out in between). Unless other banks implemented similar deferrals, Deutsche MDs would leave, admitted Jain at the time, adding that he thought other banks would soon do the same. None have, so far.
Iin the event that Deutsche does decimate its bonus pool, it may not be the only bank to do so. Jon Terry, a compensation and benefits specialist at PWC is predicting that all European banks will cut bonuses by 20-40% this year.
Dirk Becker, an analyst at Kepler Capital Markets in Frankfurt, agrees that all banks will take an axe to performance-related pay. "Banks didn't pay bonuses because they wanted to pay bonuses," says Becker. "They paid them because they needed to retain people and keep the franchise together. Now that so many banks have cut staff, there's no need to offer bonuses as retention tool. Shareholders will also been resistant to bonuses when banks like Deutsche are not covering their cost of capital."
Andreas Plaisier at Warburg Research in Frankfurt, agrees there is pressure on pay at Deutsche, but also says that it's no more than elsewhere: "The revenue stream is more volatile and less predictable than in the past." However, Plaisier agrees that Deutsche is particularly squeezed due to its large German cost base, pointing out that it's harder to cut in Germany and severance costs are higher.
Headhunters point to additional motivating factors for a big pay cut at Deutsche Bank, not least the fact that the investment bank remains very bloated. According to JPMorgan analyst Kian Abouhossein, Deutsche is second only to Credit Suisse in terms of the percentage of total staff it has working in the investment bank - a fact that is generally concealed because Deutsche attributes many of its back office investment banking staff to central functions. As the second chart below (also from JPMorgan) shows, Deutsche's investment bank also has one of the lowest returns on capital. And as former head of the investment bank turned co-CEO, Jain may be keen to tackle investment banking bonuses as a method of demonstrating his willingness to get tough with his former colleagues whilst prioritizing the interests of the bank as a whole.
The only good news (for bankers on Wall Street) is that Deutsche's bonus slashing may be restricted to its office on London Wall. When Colin Fan and Robert Rankin made their strategy presentation in September they highlighted North American equities in particular as an area for investment, suggesting bonuses won't be cut there at the very least. US headhunters also say the New York jobs market is more solid than the market in London, suggesting bonuses may still need to be paid for retention reasons. Like Barclays, Deutsche could yet find itself having to divert what's left of the bonus pool to its bankers in the US.