Deutsche Bank lifts cash share of bonuses

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Deutsche Bank has restructured its bonus scheme to pay more cash and less stock in a bid to cut staff costs over the next few years.

The move should incentivise staff in the short term to achieve the 25% return on equity target set by chief executive Josef Ackermann. It will also give the bank more flexibility in laying off staff, because it will not have to buy them out of long-term share schemes. However, analysts were unanimous last week in forecasting that Ackermann would not hit the 25% target in 2005.

The bonus decision is also understood to be a reaction to internal concerns that Deutsche Bank stock has failed to perform and does not act as a sufficient incentive.

Two years ago, Deutsche controversially repriced many staff options because its stock had fallen sharply. In the past year, the share price has risen 4.6% and, while it is nearly double the level of early 2003, it is more than 40% below its highs of 2001.

The move also reflects the fact that most senior staff are locked in for the next three to five years by existing stock awards and additional ones would dilute the bank's restless shareholders.

Last week, Clemens Börsig, finance director, said Deutsche Bank had taken the decision to cut significantly the deferred equity component of remuneration. This month it will award 15 million shares in deferred stock with a value of €1bn ($1.3bn) to staff as part of their bonuses for 2004. Of this, €100m will be accounted for in the fourth quarter of the year, with the remaining €900m spread over the next five years.

The bank told staff about their bonuses on Friday, the day after Ackermann outlined an aggressive programme of 6,400 job losses. The higher cash element was a pleasant surprise for those who retain their jobs. In the past few years, European banks have increased the equity element of their bonuses to emulate the share ownership culture at rival US investment banks.

One senior source at Deutsche said: 'You can think of this in terms of having a good year and paying down some of the mortgage. Restricted stock awards build up over time and it will give the bank more flexibility and lower costs in the longer term. There are plenty of advantages with restricted stock awards, but if you have too many of them they become something of a liability.'

In 2003, Deutsche Bank took a charge of €773m for deferred equity awards that had accumulated in previous years, up 65% on the year before.

The bank said buying out restricted stock awards from redundant staff would account for €200m of the forecast €1.2bn cost of the restructuring and job cuts programme. 'It makes sense to start cutting stock awards when they prevent your freedom of movement in future,' said a senior source at Deutsche.

Deutsche Bank will need all the help it can get in cutting costs, given the reaction of bank analysts to its full-year results. In addition to the job cuts, Ackermann is aiming for 4% revenue growth to hit the 25% pre-tax return on equity target. None of the eight analysts surveyed by Financial News believed he would do so, predicting an average return on equity of 21%. The most optimistic forecast was 22% from Fox-Pitt, Kelton, JP Morgan and Merrill Lynch, while the lowest was 19% from Bear Stearns.

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