Deutsche foots bill for Morgan bonus bonanza

Deutsche Bank, the German giant behind three troubled Morgan Grenfell Asset Managment funds, is expected to pay millions of pounds of bonuses to fund managers in spite of the enormous losses revealed last week.

The bonuses will be paid to help Morgan Grenfell Asset Management retain its highly regarded fund management team and improve morale, which has taken a severe knock after three top-performing funds were suspended last week as a result of the activities of Peter Young, the fund manager at the centre of investigations.

A senior official in Frankfurt made clear that there was no intention of cancelling bonuses because of the losses run up by Mr Young, which have forced Deutsche to inject pounds 180m so far.

"Before we can say anything precise about the extent to which bonuses will be affected, we have to know how big the damage is," Hellmut Hartmann, spokesman for Deutsche Bank, said in Frankfurt.

"But I don't believe that even if there will be a poorer performance of the funds it will influence the bonuses to a big extent. Our advantage is that a financially strong parent stands behind this unfortunate incident," Mr Hartmann said. "This has done quite a lot of damage to our image," he added.

This emerged as Deutsche Bank committed itself to further protecting the funds by promising to buy units in the two trusts affected - European Growth Trust and Europa - and shares in European Capital Growth Fund.

Mr Young, manager of European Capital Growth and European Growth, was suspended last week after regulators uncovered a maze of Luxembourg-registered shell companies which he appears to have used to hide his exposure to risky hi-tech stocks.

It is believed that fund managers at Morgan Grenfell Asset Management are paid bonuses around February or March on the basis of the entire group's performance but with an additional discretionary award based on their own performance.

Bonuses are crucial in the City, where basic salaries, already substantial, can be at least doubled by the yearly bonus round. Last year ING, the Dutch bank that took over Barings after it collapsed, was forced to honour bonus promises to keep key teams together. A sudden loss of staff can even jeopardise the stability of firms.

Fund managers, traditionally the poor relative to bond, foreign exchange and derivative traders, can still expect bonuses of at least 70 per cent of their basic salary, which can reach pounds 100,000.

"Performance is important and fund managers who are successful will be rewarded," said Martin Symon, consultant at headhunters Jonathan Wren.

Remuneration packages also attract the attention of regulators because of concerns that pay deals based on performance can encourage executives to take too many risks.

Mr Hartmann acknowledged that risks are taken by Deutsche employees. "Obviously our control system didn't work well enough, but we can't handcuff our staff. We want them to work as real entrepreneurs, who take a higher risk in order to make a higher profit."

The German bank has sent Udo Behrenwald, head of DWS, its German fund management arm, to London to help unravel Mr Young's trading positions and establish why he managed to hide his actions from his managers.

The bank does not intend to send any other German officials to sort out its flagship British arm.

"The examination of the proceedings and the control system will probably take a couple of weeks. We are still busy finding out what has actually happened,"Mr Hartmann said.

Morgan Grenfell said that the rate of redemption had continued to slow down significantly and "there is currently sufficient liquidity in each of the three investment funds to meet redemption demands."

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