Deutsche Bank's bonuses and the key questions facing CEO Christian Sewing

[FRANKFURT] As Deutsche Bank AG nears its end-of-year decision on bonuses, one question looms large for chief executive officer (CEO) Christian Sewing: How much can he afford to pay to keep top investment bankers?

Mr Sewing may use performance-based pay to induce top rainmakers to stay as he seeks to defend businesses such as dealmaking and stock and bond issuance after big cutbacks elsewhere.

But his pledge to reduce costs by US$6.4 billion as part of his sweeping revamp limits how much he can shell out.

His challenge - retaining key employees at a difficult time while not antagonising shareholders - mirrors the predicament of his predecessor John Cryan two years ago, when top investment bankers were clamoring for higher bonuses after deep cuts in the prior year had led to defections. Mr Cryan relented, a decision that contributed to a loss at the bank. He was ousted a few months later.

Deutsche Bank decides on bonuses in December and January, and pays them out in March.

Here are the key questions Mr Sewing has to weigh over the coming weeks:

1. How can Deutsche Bank balance departures with hires?

More than a dozen high-profile executives from the investment banking units that Mr Sewing wants to keep have joined rivals since May, when the CEO dropped the first big hint that he was going to take an ax to the business.

Many top performers are only staying because compensation is still comparatively good, even though morale has slumped after years of piecemeal cuts to the business, according to people familiar with the matter.

The bank points to new hires and says that attrition in the investment bank is actually down compared with the prior two years. It has hired almost 30 managing directors and directors in corporate finance since the beginning of the year, investment bank head Mark Fedorcik said by phone.

"We pay for performance and our clients and team understand and appreciate our strategy and areas of strength," he said.

2. How much money can Mr Sewing spend?

Deutsche Bank spent 1.9 billion euros (S$2.86 billion) last year on bonuses. The bank has said the size of the pool this year will reflect the shrinking workforce, which is down 5 per cent so far, and the fact that it has shuttered equities trading. European investment bankers more generally are facing smaller bonuses this year.

The CEO maintains that the bank still has the means to compensate top talent even as it undertakes one of the most radical restructurings in its history.

"We will compensate our people according to their operating performance," he said in July after announcing 18,000 job cuts and a retreat from equities trading. The bank will pay "in a competitive way".

3. What businesses will Mr Sewing focus on?

Mr Fedorcik said his corporate finance unit seeks to grow advisory and debt origination and he pointed to several recent hires including Paolo Cicchine while promising more next year.

He has also vowed to keep a sizeable equity capital markets business despite shuttering equities trading. However, that unit - along with M&A advisory - has been particularly hard hit by departures since May.

As for securities trading, equities is essentially gone but the bank wants to remain strong in fixed-income trading, a business overseen by Ram Nayak. The lender has highlighted credit and foreign exchange and the unit has recently added a few people.

4. How has the investment bank performed?

While the CEO has vowed to at least stabilise the investment bank, revenue was down 11 per cent in the first nine months of the year and pretax profit plummeted 47 per cent.

The units where most of the departed executives used to work are no exceptions. Income from helping companies raise money through share sales is down 40 per cent over the period. The business of advising companies on deals did better, rising 3 per cent.

The malaise is being reflected in a comparison with peers. Deutsche Bank slipped to 15th rank in advising on mergers and acquisitions this year, from 11th in 2018 and 8th the year before, according to data compiled by Bloomberg. It has fallen to 12th place in global equity offerings, from 8th.

"When I look at our revenues and where we're heading from a 2019 perspective, I'm very confident versus where we were in 2018," said Mr Fedorcik.

5. What other options does Mr Sewing have?

The bank in the past increased the spread between bonus payments for top performers and the rest as a way to save money while making sure the most important people stay.

To replace expensive executives who leave, Deutsche Bank brought in more junior hires.

There's also an internal debate about how many departures can be filled through reassigning bankers from other parts of the business, the people familiar said, asking not to be identified discussing internal deliberations.

BLOOMBERG