John Cryan needs to get creative. In 12 months, Deutsche Bank’s stock has fallen 52%. Managing directors at Deutsche Bank might be on high salaries but their stock bonuses have halved and the chances of them getting decently paid for 2016 are about as large as Donald Trump standing down on 7 November. Why bother waiting around just to be told, “You did well, but your efforts count for nothing because we’ve got problems globally.” Especially as this isn’t the first time. Remember: MDs at Deutsche were told to take one for the team last year too.
Cryan’s no idiot. Ok, he’s said some bad things about bonuses in the past and he has a reputation for simple living, but he’s worked in this industry long enough to know that pay is important. Even if Deutsche doesn’t pay, other banks will. In this way, Deutsche Bank risks being drained of its top staff and left with lemons, something J.P. Morgan warned of last week.
With political pressure to cut pay, especially in the investment bank, Cryan’s in no position to hand out sweeteners to his favourites. Or at least, not conspicuously. The public are already complaining about the size of Deutsche Bank’s combined bonuses in 2009 (allegedly more than its current market cap) Equity researchers are writing reports saying that if Deutsche scraps 2016 payments and withholds previous year’s deferrals, it could raise €2.5bn+ of capital.
So, Cryan can’t be seen to pay. But he needs to do something.
Luckily, there are precedents. The secret is to find a pay strategy which keeps shareholders happy while also paying staff.
How Merrill Lynch did it in 1998
In 1998, I was working for Merrill Lynch in Asia. You might not remember the Asian financial crisis, but it was bad – especially at Merrill. That year, the bank made a loss of nearly $900m and thousands of people were made redundant. There were even whispers (turned out to be premature) that the bank might go under. David Komansky, CEO at the time, had his pay cut 32% – but he also came up with a way of making sure we were looked after.
Komansky’s solution was a performance option plan (POP) which was tied to economic value added (EVA) – or value added once you’ve covered your cost of capital. We were handed options which only vested if the EVA we generated met a predetermined threshold. Shareholders loved it because they were covered. It was seen as good corporate governance and we did very well too.
The best thing was that if EVA exceeded the target at all, the POPs started vesting. This was better than our stock program at the time, which vested over five years. Because 1998 was such a bad year, that EVA target was set very low. It meant that when there was a big jump in EVA in 1999 and 2000 our POPs popped. Even better, when they were issued the POPs had a lower fair value than normal options, so we got a lot more of them. 1998 ended up being a very good year for us. – We were well paid by Komansky for all the stress we went through.
How Credit Suisse did it in 2008
If Cryan wants an example from more recent history, he can also look at the $5.5bn ‘toxic bonuses’ Credit Suisse issued in 2008. These were also very popular with investors at the time because they were seen as aligning employees with the pain CS was going through.
Look what really happened though. By 2012, the value of assets in this ‘toxic bonus pool’ had risen by 75%, while Credit Suisse’s shares had declined by 23%. That ‘toxic bonus pool’ was basically a way of paying CS bankers very well while keeping shareholders happy. You could tell that things would work out because management had allocated themselves a share of the toxic bonus pool too…
Is Cryan a man to play pay shenanigans? I’m not sure. You can bet he’s under pressure to do something though. Deutsche’s top bankers know it’s been done in the past and they’ll be pressuring him to do it again. Watch for some kind of pay announcement dressed up shareholder kindness – or watch Deutsche people run for the exits whenever there’s a sniff of an opportunity elsewhere. Either way, watch. Deutsche is going to be interesting.
Philippe Ersatz is the pseudonym of a senior derivatives trader, now retired