Allianz’s Structured Alpha bonus cuts: a one-and-done that never stung

Management bonus cuts at German insurer  Allianz following the Structured Alpha scandal in the US proved to be a one-and-done that passed without ever bringing nominal pay cuts to more than a single board member.

Investigations into oversight of the rogue US operations with its €5.6 billion pre-tax price tag “did not reveal any breaches of duty” by managers “that could form the basis for a reduction in payment or a clawback of variable compensation already paid out,” the Allianz supervisory board determined when setting bonus pay for 2022.

In fact, supervisory board engineering in the bonus scheme worked to management’s benefit for the 2022 payment. Profit measures underlying the bonus calculation were cleaned of losses from the divestiture of Russian assets which supervisors noted “could not have been foreseen.”

One year prior, Allianz had trimmed 10 percentage points (pps) off the would-be annual bonus payments (which should account for 25% of total compensation) and made parallel cuts to equity grants in the long-term incentive programme (45%) in response to the scandal. Supervisors had said then, as now, that no evidence indicated board-level malfeasance or breach of duty.

Allianz pays annual cash bonuses against a target level, adjusted first by the group's performance vis-a-vis financial targets then further adjusted by a performance measure for each member that can add or remove up to another 20%.

The 10 pps cut in those performance factors, half the max allowable and of which only one ended up notably below the 100% mark, did not translate into year on year cuts in nominal pay sums.

Financial targets underpinning the bonus calculation are based half on operating profits, which exclude the massive legal provisions and beat targets enough to compensate for shortfalls in net income, depressed by the €3.7 billion in pre-tax charges in 2021 and a €1.9 billion top-up in 2022. The upshot: management beat the composite target by 3.47% in 2021 and 5.35% in 2022.

Against rising profits, even the 10 percentage point deduction to individual contribution factors were washed away by pay day.

CEO Oliver Bäte took a 30% increase in pay, bonus and long-term incentive awards in 2021 even as the supervisory board took action vis-à-vis Structured Alpha. Bäte’s annual bonus alone rose 39% that year thanks to the profit rebound after Covid.

Bäte extended his composite earnings gain by another 8% in 2022, with the supervisory board calling out “swift resolution of the Structured Alpha proceedings in the United States” when justifying his individual contribution factor for the year at 16% above target, within four percentage points of the maximum allowed.

Jacqueline Hunt, who had been in charge of US life and asset management oversight, dragged down the average lightly in 2021. She had suffered a larger 20 pps cut in her contribution factor and became the only board member with a nominal decline in total pay and awards in 2021 at 2.6%.

For board members with tenure across the scandal through end-2022, the median gain in that pay and award array came to 7.6% in 2022 after a 16.7% gain in 2021, the year of the would-be pay-cut. Excluding Hunt or other board members whose tenure does not span the scandal, board members had an average +4% mark-up from their individual contribution factors even for 2021.

The rise in nominal payments since the Structured Alpha scandal broke conflicts with the contrition on official display in 2022 as Allianz worked to soften the blow from damages payments and litigation costs yet to come.

Speaking already on February 18, 2022, CEO Bäte had claimed the incident brought “significant impact on remuneration for every board member.”

“Management will carry our fair share of the burden,” Bäte told the mid-February press conference.

Allianz’s US investment unit AGI and three of its portfolio managers were charged with what the American Securities and Exchange Commission (SEC) called “a massive fraudulent scheme” that concealed downside risks of a complex options strategy sold to approximately 114 institutional investors. That programme unravelled with the Covid-19 market crash, causing billions in losses.

By May 2022, Allianz had agreed to pay more than $1 billion to settle charges and, together with its German parent, compensate investors to the tune of more than $5 billion.

The SEC’s complaint had alleged that Structured Alpha’s lead portfolio manager and two deputies misled investors, then tweaked the books, including via simple typos, to conceal the magnitude of value at risk and performance metrics. The group had “failed to implement key risk controls,” SEC chair Gary Gensler said at the time. As a consequence of a guilty plea submitted by AGI during the process, the firm lost its US licensing.

The deal put paid to conflict with US authorities, but work with select investors continues. In its 2022 annual report, Allianz claimed to have paid out a majority of the provisioned funds and expressed confidence that lingering sums will fully cover lingering investors.

Some legal problems could yet linger. US investors are now going after the parent company Allianz plus CEO Bäte in a California court for oversight and reporting failures concerning the Structured Alpha operations from 2018 to 2022. Allianz considers the fresh allegations “unfounded.”

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