Deutsche Bank's new chief John Cryan believes end-of-year bonus demands harm the company. But bonus culture may be too deeply embedded throughout the financial sector.
FRANKFURT — When John Cryan speaks, people listen very carefully. And not just because the Deutsche Bank co-chief executive has a low voice, but also because every sentence is like a lick with the whip. He took apart the "lousy" IT crowd during his very first press conference, and now he's turning on his own and the "excess riches" of the banker bonus system.
To fully appreciate the importance of his statement, it's necessary to understand what makes bankers tick. While employees in other sectors work hard without receiving bonuses, simply because they want to deliver good work, top bankers still see themselves as entrepreneurs within their own companies. By their own logic, they demand a portion of the profits made, while shareholders or taxpayers are held liable for the losses.
In investment banking particularly, bosses have tolerated this logic for too long. And those who don't play along will face the threat that an insufficient bonus will lead some star banking mercenary to simply move on to the next banking institution. Without the promise of a bonus carrot, the logic goes, no bank-manager donkey will put one hoof in front of the other.
This is a case of market failure that politicians have had good reasons to try and rectify, particularly in the wake of the 2007 financial crisis. But the only action taken so far has been to cap bonuses, which just caused base salaries to be bumped up to compensate. For Deutsche Bank, in particular, the fixed salaries of 1,100 employees were raised to the tune of 300 million euros. That means an average raise of some 270,000 euros each. If you include bonuses, more than 800 employees of the bank earned more than one million euros each in 2014, including more than 250 employees who brought home between two and nine million euros.
Surprisingly, many shareholders still accept this huge discrepancy, which has nothing to do with the mantra of "shareholder value" that banks keep preaching. Because before dividends are paid to shareholders, bankers take their share. Two to three billion euros per year were set aside as bonuses for bank managers over the last few years, while the shareholders of Deutsche Bank earned only a fraction of that as dividend. And barely anything was left for the very important restocking and improvement of capital resources.
The stagnating stock price indicates that many shareholders have put their foot down, but the remainder of active shareholders can't be trusted to put up any real resistance. One interesting idea is to put the bonus pool up to the vote of the shareholders at the general meeting. According to the manager's logic, the bonuses would be taken from the profits made rather than being filed under running costs. But even if this were to become reality, a mutiny would hardly be in the cards. When the shareholders were recently asked to vote on the bonus cap (as is mandatory), the investors simply waved it through.
There are many reasons for the continuous passivity of investors. But key is the fact that many fund managers are part of the same system and believe that every effort should have a monetary incentive attached to it. And because that kind of mercenary mentality is deeply rooted in all of the sector's star protagonists, they will take the opportunity to switch to a shadow bank or a hedge fund or to the private equity sector. The latter is less regulated and more profitable.
And it seems that many Deutsche Bank employees will turn to the implicit blackmail this situation supplies. Because if this bank truly wants to be the answer to Wall Street banks, to be the first point of contact for Europe's companies, then it needs the industry's top talent. It just recently tried to poach bankers from Goldman Sachs and JP Morgan, who most likely did not believe their ears when they heard Cryan's words.
The bitter truth of this is that someone like John Cryan will probably remain an outsider for the time being. After all, he not only said that bankers earn too much, but he even emphasized that he himself does not need a bonus. It's not clear whether he can actually convince his senior managment team when the bank must decide on bonuses in March. But even if Deutsche Bank can justify cuts in the face of 2015 losses, what will happen when the bank starts to make profits again?