Deutsche Bank And The Thorny Question Of Banker Bonuses

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.

Deutsche Bank in Frankfurt, Germany
Deutsche Bank in Frankfurt, Germany
Meike Schreiber

FRANKFURT â€" 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.

Herd mentality

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?

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!

Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum


SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.

It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!