Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

When, in the depths of the financial crisis, Credit Suisse Group AG decided to pay out bonuses from a $5 billion pot of toxic assets, the reaction from bankers was indignant.

No Bonus For Shareholders
Deutsche Bank's share price has slumped as doubts grow the bank will achieve its overhaul as planned
Source: Bloomberg

Almost a decade later, Deutsche Bank AG is considering a similar move as it tries to avoid a capital-raising.

Bankers are once again likely to be upset -- but shareholders should welcome it and, over time, employees should do too.

CEO John Cryan is considering plans to give bankers shares in what the lender politely calls its "non-core" business instead of cash bonuses. The operation generated 11 billion euros ($12 billion) of losses between 2012 and 2015 as it was shrunk.

Bad to Worse
Pre-tax annual losses at Deutsche Bank's non-core unit
Source: Company filings

Cryan wants to prune it further by the year-end, and the operation is likely to post a further 1 billion-euro loss in the third quarter, according to consensus estimates compiled by UBS.

A stake in that money-losing business may not sound an attractive proposition at first, but it's probably the least worst way of cutting compensation without crushing morale or angering shareholders with big payouts.

Employees will be still left with some upside if they stay around. Those angry Credit Suisse bankers in 2008 looked pretty well off by 2012, when the illiquid assets they owned had delivered gains of 75 percent. Granted, we aren't in the same crisis environment today as we were in 2008 and the bonanza potential probably won't be quite as sweet. But these are likely heavily marked-down assets that offer reward as well as risk.

It also means Cryan can avoid awarding employees additional shares in Deutsche Bank itself, something that would not only dilute existing investors but mean giving employees shares that already trade at a 70 percent discount to their book value.

Deutsche employees might also be tempted by the fact that equity in the non-core unit looks comparatively sheltered. Shareholders face the risk of capital increase as the bank's legal costs swell.

None of this is a panacea for Deutsche Bank's cost and capital woes. The bank is struggling to figure out a way to bolster its balance sheet, sell assets, cut jobs and pay legal bills without inflicting more pain on the brand and its shareholders.

There Will Be Blood
Deutsche Bank is expected to cut costs deeper in the next few years, especially compensation
Source: Morgan Stanley estimates

Morgan Stanley analysts reckon the bank has a capital shortfall of about 8.5 billion euros to fill by 2018; they expect more another round of job cuts on top of the 9,000 already announced. More bankers are likely to lose their jobs, not just their bonuses.

Cryan recognizes that pay can't carry on as before. Last year, when the bank reported a loss, he scrapped bonuses for his 10-member management board as an example to "society."

But variable compensation still totaled 2.4 billion euros, about half of which was deferred. This year the bank will probably post a pretax loss, according to analyst estimates compiled by Bloomberg.

Rather than scrap bonuses entirely, and leave employees at risk of being poached by peers, a little toxic medicine might be worth taking. What doesn't kill you makes you stronger.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net