Objectives and Principles of the Compensation System for Management Board Members

In structuring the compensation system for Management Board members, the objective of the Supervisory Board was to design a system which adequately compensates the Management Board members in line with the market and competitors, and in accordance with all statutory and regulatory requirements while considering the Management Board member’s scope of activity and responsibility as well as their collective and individual performance, along with the long-term overall performance of the bank.

In this regard, the Supervisory Board regularly reviews the compensation system for Management Board members. The review focuses in particular on the question of whether the structure of the compensation system is appropriate and on necessary adjustments to new regulatory requirements. In the case of a change or restructuring of the compensation framework, the Supervisory Board will use the possibility provided in the German Act on the Appropriateness of Management Board Remuneration (Gesetz zur Angemessenheit der Vorstandsvergütung – VorstAG) for the General Meeting to approve the system of compensation for Management Board members. The bank’s objective is to grant the shareholders the greatest possible level of transparency with regard to the structure of the compensation system for Management Board members. Since the coming into force of the VorstAG in 2009, the compensation system has been presented to the General Meeting three times, particularly in connection with the implementation of new regulatory provisions, and was approved by a large majority each time. Most recently, in May 2013, the General Meeting, on the occasion of a fundamental restructuring, approved the compensation system which the Supervisory Board had previously adopted by a majority of 88.71 % on April 11, 2013 retroactive to January 1, 2013.

The restructuring is largely based on the recommendations of the ´Independent Compensation Review Panel led by its Chairman Dr. Jürgen Hambrecht. In 2012, the Panel was asked, among other things, to conduct a detailed examination of the existing compensation system for the Management Board. The Panel consisted of five external, top-ranking professionals. The recommendations were finalized during the year 2013 and taken into account by the Supervisory Board in the restructuring of the compensation system. The key features of the new compensation structure, which are effective as of January 1, 2013, are outlined in detail in this Compensation Report.

Responsibility

The Supervisory Board as a plenary body is responsible for the structuring of the compensation system and for determining the individual compensation of each Management Board member.

Until and including 2013, the Chairman’s Committee supported the Supervisory Board in the process. Its functions included, in particular, advising the Supervisory Board on all issues in connection with the compensation of the members of the Management Board. Furthermore, it prepared all of the resolutions on the compensation system and on the determination of the individual compensation of the members of the Management Board. The Chairman’s Committee of the Supervisory Board comprises a total of four members, of which two are representatives of the Group’s employees. The Chairman’s Committee met regularly in 2013 and, in particular, extensively prepared the restructuring of the compensation system for the Management Board members.

As of the 2014 financial year, the Supervisory Board will be supported by the new Compensation Control Committee, which is assuming the essential functions with regard to the compensation system for the Management Board members and the determination of individual compensation previously carried out by the Chairman’s Committee. The requirement to establish this additional Committee from Supervisory Board members is a result of new regulatory approaches under CRD 4. This Directive has been refined and transposed into German law by the CRD 4 Implementation Act by way of amendments to the German Banking Act (Kreditwesengesetz – KWG) and revised versions of the InstitutsVergV at the national level. With regard to the Management Board, the tasks of the Compensation Control Committee include, in particular, supporting and monitoring the Supervisory Board in the appropriate structuring of the compensation system, as well as preparing the resolutions of the Supervisory Board regarding individual compensation.

The establishment of the Committee is mandatory as of January 1, 2014. However, the Supervisory Board addressed the composition and the functions of the Committee early on in the fourth quarter of 2013, established a Compensation Control Committee and also extensively discussed the functions and requirements assigned to it. As required by law, the Compensation Control Committee comprises four members, of which at least one must have sufficient expertise and professional experience in the area of risk management and risk controlling and at least one other must be an employee representative.

The resolutions of the Supervisory Board on the determination of the Variable Compensation for Management Board members were discussed in detail by the Compensation Control Committee at the end of January 2014 and were prepared by it for the Supervisory Board as a plenary body. In these considerations, the focus was in particular on reviewing the appropriateness of the compensation in a horizontal analysis vis-à-vis the bank’s competitors, as well as in vertical analysis per the German Corporate Governance Codex requirements. In the context of this comparative review, the appropriateness of the compensation was reviewed with respect to:

  • the ratio of fixed to Variable Compensation;
  • the ratio of short-term to long-term awards;
  • the ratio of immediately due to deferred compensation components; and
  • the ratio of immediately vested compensation elements to compensation elements subject to forfeiture conditions.

In addition, the appropriateness of the total amount of compensation in relation to the average income of the employees was considered.

Principles

The structuring of the compensation system for members of the Management Board takes place in consideration of and within the framework of the statutory and regulatory requirements. Notably, the widely varying requirements applicable worldwide which are imposed on global companies such as Deutsche Bank present the Supervisory Board with the challenge of integrating more extensive requirements and aspects into a uniform compensation system, and thereby balancing the inherent complexity with the need for transparency.

When designing the specific structure of the compensation system, determining individual compensation amounts, and structuring its delivery and allocation, the focus is on ensuring a close link between the interest of both the Management Board members and shareholders. This is achieved through the utilization of clearly defined key financial figures which are directly linked to the performance of Deutsche Bank and granting equity-based compensation components amounting to at least 50 % of the total Variable Compensation. The equity-based compensation components are directly linked to the performance of the Deutsche Bank share price, and only become eligible for payment over a period of several years. The performance of Deutsche Bank compared to other companies in the market is another important criterion for structuring and determining compensation.

Furthermore, the compensation system for the Management Board members is aligned with performance and success targets. Particular emphasis is given to the bank’s long-term focus, as well as appropriateness and sustainability measures. Through the structure of the compensation system the members of the Management Board are motivated to avoid unreasonably high risks, to achieve the objectives set out in the bank’s strategies and to work continuously towards the positive development of the Group.

In the context of his review of the compensation system and the determination of the Variable Compensation the Supervisory Board uses the expertise of independent external compensation consultants and, if necessary, legal consultants. If the Supervisory Board believes a change is required, it will adjust the framework accordingly after rigorous review of the proposal by the Compensation Control Committee.

Compensation Structure since January 2013

The Supervisory Board’s fundamental change to the compensation system for Management Board members came into effect on January 1, 2013. The compensation system approved by the Supervisory Board and the compensation structures it encompasses are reflected in the individual Management Board members‘ contracts. The features to the structures are outlined in detail below.

At the beginning of the year, the Supervisory Board reviews the fixed compensation and the target figures for the Variable Compensation components. Furthermore, it defines the general Group-wide and individual objectives for the Management Board members and verifies that the standardized target objectives set for the Long-Term Performance Award are still aligned to the bank’s long-term strategy. The performance of individual Management Board members will be evaluated by the Supervisory Board and discussed with the Management Board members throughout and at the end of the year.

The total compensation resulting from the new compensation system is divided into both non-performance-related and performance-related components.

Non-Performance-Related Components

The non-performance-related components primarily consist of the fixed compensation. The fixed compensation is disbursed as a base salary in twelve equal monthly payments.

In the context of the redesign, the existing amounts of base salaries of the Management Board members were not adjusted and therefore remain unchanged from the previous year as follows:

in €

2013

2012

Base salary

 

 

Co-Chairmen

2,300,000

2,300,000

Ordinary Board member

1,150,000

1,150,000

The Supervisory Board will review the fixed compensation for members of the Management Board in light of the new regulatory requirements in the course of the year 2014, and adopt any necessary changes.

Additional non-performance related components include “other benefits”. These, too, remained unchanged throughout the restructuring of the compensation system. The “other benefits” comprise the monetary value of non-cash benefits such as company cars and driver services, insurance premiums, expenses for company-related social functions and security measures including payments, if applicable, of taxes on these benefits as well as taxable reimbursements of expenses.

Performance-Related Components (Variable Compensation)

The Variable Compensation is performance-related and, as before, consists primarily of two components:

  • the Annual Performance Award (formerly Bonus) and
  • the Long-Term Performance Award.

The following table compares the compensation structure until December 31, 2012 to the structure applicable as of January 1, 2013:

Performance-Related Components – Previous structure (graphic)

Compared to the former compensation system the performance-related compensation to be determined beginning in the 2013 financial year is increasingly aligned with fulfilling the defined (strategic) objectives of the bank.

Annual Performance Award (APA)

As part of the Management Board Member’s Variable Compensation, the APA rewards the achievement of the Bank’s short and medium-term business policy and corporate objectives that were set as part of the objective setting agreement for the respective financial year’s performance evaluation. Not only is financial success taken into account in the process, but also the conduct towards staff members and clients as part of carrying out business activities.

The total amount of the APA is determined on the basis of several components:

  • 60 % of the Award amount depends on general Group-wide objectives that are identical for all Management Board members;
  • The remaining 40 % of the Award amount is based on individual performance and individual objectives that are set by the Supervisory Board for each member of the Management Board separately on the basis of the member’s function.

With regard to the Strategy 2015+, the objectives are generally aligned with the categories “capital”, “costs”, “competencies”, “clients” and “culture” and thus not only reflect quantitative objectives, but also address qualitative aspects of the performance delivered. The objectives chosen from these categories will be reviewed regularly to reflect changes in both general conditions and changes in strategy.

Objectives for the 2013 Financial Year

The following Group-wide key financial figures were agreed to as metrics for the 2013 financial year and apply equally to all Management Board members. The targets to be achieved may also generally include other aspects, such as return-on-investment targets, derived from the five identified categories:

  • Category Capital: Core Tier 1 ratio (Common Equity Tier 1 ratio (CET 1)) and Leverage ratio;
  • Category Costs: Cost-Income-Ratio (CIR);
  • Category Competencies: Value added reported; and
  • Categories Culture / Clients: Employee Commitment Index and Reputational Index.

Each category of these objectives is weighted at 15 % in the determination of the Award amount. Thus, the proportion of these categories as part of the overall APA is equal to 60 %.

In assessing the individual performance component, the Supervisory Board agrees with each Board member separately on

  • a quantitative objective from the categories Capital / Costs / Competencies and
  • a qualitative objective from the categories Culture / Clients.

Each of these two objectives is also weighted at 15 % in the determination of the Award amount. Thus, the proportion of these objectives as part of the overall APA is 30 %.

Altogether, the sum of group-wide and individually agreed objectives amounts to 90 % of the overall APA. An additional maximum of 10 % remain for the Supervisory Board to reward outstanding contributions, including project-specific contributions over the course of the financial year as an exercise of its wide discretionary authority.

As part of the annual objective setting process, corresponding factors are set for all objectives that the Supervisory Board will use as the basis for evaluating achievement at the end of the year. The level of the respective target achievement and the final amount of the APA is no longer defined on the basis of a formula, but is determined on a discretionary basis by the Supervisory Board as part of an informed judgment based on the pre-defined factors. The following factors are considered: the actual value delivered, plan values and externally announced target values, comparable figures of the bank’s peers, the prior-year values in terms of a multi-year review of development as well as a qualitative analysis of the achievement level and also the overall risk orientation of the bank.

If the objectives were not achieved during the period being evaluated, the Supervisory Board may determine that an APA will not be granted.

The target and maximum values applicable to the APA for the year 2013 for an ordinary Management Board member and for the Co-Chairmen of the Management Board are as follows:

 

Dec 31, 2013

in €

Minimum

Target

Maximum

Co-Chairmen

 

 

 

Amount per 15 % objective

0

345,000

690,000

APA total

0

2,300,000

4,600,000

Ordinary Board member

 

 

 

Amount per 15 % objective

0

225,000

450,000

APA total

0

1,500,000

3,000,000

Long-Term Performance Award (LTPA)

The level of the Long-Term Performance Award is no longer determined solely on the basis of the relative performance of the Deutsche Bank share in comparison to selected peer institutions. Rather, through the additional inclusion of non-financial parameters, it is also oriented towards how the targets are achieved. This will further ensure sustainable performance development.

Accordingly, the level of the LTPA continues to be linked to the Relative Total Shareholder Return and will additionally be based on a Culture & Client Factor. The level of the LTPA will in general continue to be formula-based and calculated on the basis of pre-defined target figures. The long-term nature of this compensation component will also be maintained by the continued determination of the Relative Total Shareholder Return on the basis of a three-year assessment.

Relative Total Shareholder Return of Deutsche Bank

The Relative Total Shareholder Return (RTSR) of Deutsche Bank is derived from the Total Shareholder Return of Deutsche Bank in relation to the average total shareholder returns of a select peer group (calculated in Euro). The level of the Award portion will continue to be calculated from the average of the annual RTSR for the last three financial years (compensation year and the two preceding years).

If the three-year average of the relative total shareholder return of Deutsche Bank is greater than 100 %, then the value of the RTSR portion increases proportionately to an upper limit of 125 % of the target figure, i.e. the value increases by 1 % for each percentage point above 100 %. As in the past, if the three-year average of the relative total shareholder return is lower than 100 %, the value generally declines disproportionately; however, the discount provision has been modified. If the relative total shareholder return is calculated to be in the range of smaller than 100 % to 80 %, the value of the Award portion is reduced for each lower percentage point by 2 percentage points. In the range between 80 % and 60 %, the value of the Award portion is reduced for each lower percentage point by 3 percentage points. As before, if the three-year average of the RTSR does not exceed 60 %, the value of the Award portion is set to zero.

As part of the revision of the compensation system and the intended stronger alignment to Deutsche Bank’s strategy, the peer group used for the calculation of the relative total shareholder return was adjusted. The peer group now comprises the following banks:

  • BNP Paribas and Société Générale (both from the eurozone),
  • Barclays, Credit Suisse and UBS (from Europe outside the eurozone), as well as
  • Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase and Morgan Stanley (all from the USA).

The criteria used to select the peer group are: generally comparable business activities, comparable size and international presence. The selection shall continue to be reviewed regularly over the years to come.

Culture & Client Factor

Through the newly introduced Culture & Client Factor, client satisfaction will be measured, along with the observance of ethical standards in dealing with clients, to foster a sustainable performance. In the future, this Factor will be determined based on a formulaic approach.

For a transitional phase, and until the final development and calibration of a corresponding system, the Supervisory Board will assess the status of the bank’s development in these aspects at its discretion based on divisionally specific survey results as well as other market analyzes along the four categories “below average”, “average”, “good” and “excellent”. For a classification in the “excellent” category, 125 % of the Culture & Client Factor target figure is assigned, 100 % for “good”, and 50 % for “average”. For “below average”, the value of the Award portion is set to zero.

The LTPA will be calculated based on – in comparison to 2012 – slightly modified target figures in conjunction with the achieved RTSR as well as the Culture & Client Factor. The LTPA can be a maximum of 125 % of the respective target figures.

The weighting of these two performance metrics is two-thirds for the RTSR value and one-third for the Culture & Client value.

 

Dec 31, 2013

in €

Minimum

Target

Maximum

Co-Chairmen

 

 

 

RTSR component

0

3,066,667

3,833,333

Culture & Client component

0

1,533,333

1,916,667

LTPA total

0

4,600,000

5,750,000

Ordinary Board member

 

 

 

RTSR component

0

2,000,000

2,500,000

Culture & Client component

0

1,000,000

1,250,000

LTPA total

0

3,000,000

3,750,000

Maximum Compensation

The maximum amounts listed below result from the amendments to the compensation structure.

 

Dec 31, 2013

in €

Base salary

APA

LTPA

Total compensation

Co-Chairmen

 

 

 

 

New structure

 

 

 

 

Target

2,300,000

2,300,000

4,600,000

9,200,000

Maximum

2,300,000

4,600,000

5,750,000

12,650,000

Ordinary Board member

 

 

 

 

New structure

 

 

 

 

Target

1,150,000

1,500,000

3,000,000

5,650,000

Maximum

1,150,000

3,000,000

3,750,000

7,900,000

The total compensation of a Management Board member is subject to a separate cap of € 9.85 million which voluntarily has been set by the Supervisory Board for the overall total compensation for the 2013 compensation year. Accordingly, the calculated maximum of the total compensation of € 12.65 million for the Co-Chairmen cannot take effect and therefore, the potential maximum Variable Compensation for each Co-Chairman is limited to € 7.55 million.

Long-Term Incentive/Sustainability

In accordance with the respective regulatory and bank-specific requirements in effect, the total amount of APA and LTPA continues to be granted primarily on a deferred basis and spread out over several years. This ensures a long-term incentive effect over a multi-year period.

According to the requirements of the InstitutsVergV at least 60 % of the total Variable Compensation must be granted on a deferred basis. Not less than half of this deferred portion may comprise equity-based compensation components, while the remaining portion must be granted as deferred cash compensation. Both compensation components must be deferred over a multi-year period which, for the equity-based compensation components, must be followed by a retention period. During the period until payment or delivery, the compensation portions awarded on a deferred basis may be forfeited. A maximum of 40 % of the total Variable Compensation may be granted on a non-deferred basis. However, at least half of this must consist of equity-based compensation components and only the remaining portion may be paid out directly in cash. Of the total Variable Compensation, no more than a maximum of 20 % may be paid out in cash immediately, while at least 80 % must be paid or delivered at a later date.

The following chart shows the required structure of the Variable Compensation components according to the InstitutsVergV.

Split/structure of Variable Compensation for the Management Board
Split/structure of Variable Compensation for the Management Board (graphic)

The APA is, in principle, granted as a non-deferred component (“Upfront Award”). The Upfront Awards amount to a maximum of 40 % of the total Variable Compensation. In accordance with regulatory requirements, at least half of the Upfront Award amount is granted in equity-based compensation components (“Equity Upfront Award”). The Equity Upfront Awards are subject to a retention period of three years. Only after this retention period has ended may the awards be sold. The remaining portion is paid out in cash immediately (“Cash Upfront”). If regulatory requirements or bank-specific rules make it necessary, parts of the APA are granted on a deferred basis, whereby this is generally carried out in the form of deferred cash compensation components (“Restricted Incentive Awards”). The Restricted Incentive Awards vest in four equal tranches. The first tranche vests approximately one and a half years after it is granted. The remaining tranches each subsequently vest in intervals of one year. Payment takes place upon vesting. The deferred cash compensation is thus disbursed over a period of approximately four and a half years.

The LTPA is granted 100 % on a deferred basis and only in the form of equity-based compensation components (“Restricted Equity Award”). The Restricted Equity Awards vest after four and a half years in one tranche (“cliff vesting”) and have an additional retention period of six months. Accordingly, Management Board members are first permitted to dispose of the equities after approximately five years if the entitlement has not been forfeited due to infringements of forfeiture conditions during this period.

LTPA time horizon (graphic)

This creates a long-term incentive effect and ensures a link to the performance of the Deutsche Bank share, also beyond the three-year period underlying the performance assessment for the LTPA.

The following chart shows the payment date for the immediate cash compensation and specifically the time period for the payment or the delivery of the other Variable Compensation components in the five consecutive years following the grant year.

Timeframe for payment or delivery and non-forfeiture for the Management Board
Timeframe for payment or delivery and non-forfeiture for the Management Board (graphic)

As Restricted Incentive Awards do not bear interest prior to payment, a one-time premium in the amount of 2 % is added upon grant.

The equity-based awards (Equity Upfront Awards and Restricted Equity Awards) granted are entitled to an additional dividend equivalent to further align the Management Board’s interests to those of shareholders. The dividend equivalent is determined according to the following formula:

 

 

 

 

 

 

Actual dividend

x

Number of share awards

 

 

Deutsche Bank share price on date dividend is paid

 

Forfeiture Conditions

Because some of the compensation components are deferred or spread out over several years (Restricted Equity Awards, Restricted Incentive Awards and Equity Upfront Awards) certain forfeiture conditions are applicable until vesting or the end of the retention periods, in order to create a long-term incentive. Awards may be fully or partially forfeited, for example, due to individual misconduct (including a breach of regulations) or to termination for cause, and, with regard to Restricted Equity Awards and Restricted Incentive Awards, also due to a negative Group result or to individual negative contributions to results. In addition the LTPA will be forfeited completely if the statutory or regulatory minimum requirements for the core capital ratio are not met during this period.

The forfeiture conditions are an essential aspect of the awards and ensure they are aligned with the long-term performance of both the Group and the individuals.

Limitations in the Event of Exceptional Developments

In the event of exceptional developments (for example, the sale of large investments), the total compensation for each Management Board member is limited to a maximum amount. A payment of Variable Compensation elements will not take place if the payment of Variable Compensation components is prohibited or restricted by the German Federal Financial Supervisory Authority in accordance with existing statutory requirements.

Shareholding Guidelines

To foster the identification with Deutsche Bank and its shareholders, the Management Board members will be required to invest a portion of their private funds in Deutsche Bank shares. For this purpose, the Management Board members will continuously hold a number of Deutsche Bank shares in their securities accounts equivalent to three times the annual base salary for the Co-Chairmen and two times the annual base salary for ordinary Management Board members. Deferred, equity-based compensation may be taken into account at 75 % of its value towards fulfillment of the obligation.

There is a waiting period of 36 months for the Co-Chairmen and 24 months for ordinary Management Board members until this requirement must be fulfilled. The retention obligations for shares will only become effective as from 2016 for the Co-Chairmen and as from 2015 for the ordinary Management Board members; however, all Management Board members already fulfilled the requirements in 2013 before the end of the contractual waiting period. Observance of the requirement is reviewed semi-annually as of June 30 and December 31. If the required number of shares is not met, the Management Board members must correct any deficiencies by the next review.

As compensation components are deferred or spread out over several years, another link to the performance of the Deutsche Bank share is established that should generally continue to exist even for the period after leaving the Management Board.

Compensation Structure until December 2012

The compensation structure valid until December 31, 2012 consisted of both, non-performance-related and performance-related components. The non-performance-related components comprised the base salary and other benefits. The performance-related compensation consisted of two components, a bonus and a LTPA.

The total bonus was determined on the basis of two components. Their levels were based on a pre-defined target figure, which was multiplied with an annually calculated factor and depended on the development of the return on equity. The first component of the bonus was determined on the basis of the actually achieved return on equity of a given year as a ratio of the plan figure defined for that year. The second component of the bonus was determined on the basis of the actually achieved return on equity. The two components were each assessed over a two-year period: the year for which the bonus was determined and the preceding year. The calculated total bonus was determined as follows:

 

 

 

 

 

 

 

 

Total Bonus

=

Bonus component 1

+

Bonus component 2

 

 

Target figure 1 x factor 1

Target figure 2 x factor 2

 

The calculated total bonus was capped at 1.5 times the total target figure. If minimum levels defined for each bonus component were not reached, the respective bonus component or the total bonus was not paid. The Supervisory Board carried out an additional assessment that could result in an increase or reduction of the calculated total bonus amount. The discretion allowed the Supervisory Board to sanction an increase or reduction of up to 50 % of the calculated total bonus amount for an ordinary Management Board member and in an increase of up to 150 % or reduction of up to 100 % for the Management Board Co-Chairmen. Accordingly, the total bonus could amount to a maximum of 2.25 times the total target figure for an ordinary Management Board member and of 3.75 times for the Management Board Co-Chairmen.

The level of the LTPA was tied to the total shareholder return of Deutsche Bank in relation to the average total shareholder returns of a select group of six comparable leading banks (calculated in Euro). The result thereof was the Relative Total Shareholder Return (RTSR). The LTPA was calculated from the average of the annual RTSR for the last three financial years (reporting year and the two preceding years). The comparable leading banks were:

  • Banco Santander and BNP Paribas (both from the eurozone);
  • Barclays and Credit Suisse (both from Europe outside the eurozone); and
  • JPMorgan Chase and Goldman Sachs (both from the USA).

The LTPA had an upper limit (cap) of 125 % of the target figure. If a defined figure was not reached, no LTPA was granted.