The ethical foundations of management remuneration in the banking sector: Deutsche Bank and four other German banks draw up common principles for management remuneration
Financial institutions that are successful on an enduring basis form an essential part of the economic and social fabric of stable societies. They perform centralized service functions for citizens, the economy and the state. At the same time, they make a significant contribution to maintaining confidence in the system and they promote growth and prosperity. Their decision makers carry a large burden of responsibility. The ethical principles on which management remuneration systems are based therefore are becoming an indispensable factor for long-term success in the banking sector.
In a joint position paper, Deutsche Bank and four other German banks have committed themselves to ethical principles in the remuneration of management. Here, the core aim is to make remuneration systems open and transparent and to eliminate false incentives. Along with Deutsche Bank, the signatories to the paper include Commerzbank AG, DZ BANK AG, HSBC Trinkaus & Burkhardt AG and HypoVereinsbank. The process was facilitated by the Wittenberg Center for Global Ethics.
The signatories to this position paper have committed themselves to leadership that is oriented towards success and based on values. This requires that the remuneration and performance assessment of management also need to be built on ethical principles as well as empirical quantities and financial indicators. This demands the following.
- Every payment must be clearly justified and appropriate to the services rendered.
- A decisive factor in performance assessments is that managers are required to act according to company-specific values that need to be clearly transparent inside and outside the company.
- Accordingly, the satisfaction of employees and customers are relevant factors for calculating variable salary components.
- Every company should set maximum limits for the overall remuneration of its management staff for the financial year in question and justify them accordingly.
- Appropriate consideration needs to be given to market-driven earnings that cannot be specifically attributed to the performance of the company’s management when decisions are taken on profit-oriented variable payments. This implies that variable salary components must not be exclusively fixed to a rigid set of financial indicators.
- Any loss of earnings, short-time working or redundancies among employees that are necessary in times of crisis and the measures that are adopted need to be given appropriate consideration in the variable remuneration of managers.
- Management remuneration systems must counteract any incentives that promote excessive risk-taking.
- Managers that take risks and that stand to gain an advantage from taking them must also suffer the disadvantages caused as a consequence of taking these risks and be in a position to pay the price.
- Decision-makers must deal with the issue of external expectations and be in a position to deliver a credible opinion.
Jürgen Fitschen, Co-Chairman of the Management Board and the Group Executive Committee of Deutsche Bank, said: “A consistent leadership culture is necessary in which corporate values, business strategy and formal incentives support each other.”
In March, the independent compensation review panel established by Deutsche Bank and chaired by Jürgen Hambrecht, former Chairman of BASF’s Board of Executive Directors, presented its recommendations for a sustainable, transparent and competitive compensation system.
“A consistent leadership culture is necessary in which corporate values, business strategy and formal incentives support each other.”