Deutsche Bank has been hit with over 9 billion euros ($9.8 billion) in fines and settlements in the past three years, including a record $2.5 billion settlement with U.S. authorities for its involvement in manipulating the Libor benchmark interest rate.
The bonus freeze affects all members of the management board except new Chief Executive John Cryan, new Chief Financial Officer Marcus Schenck and new retail bank head Christian Sewing, one of the people said, adding that the move would also hit former top managers entitled to 2015 cash bonuses.
Deutsche Bank declined to comment on the bonus freeze.
Combined with a similar freeze in 2014, a total of 16 million euros ($17.7 million) would be held back, the source said.
Cryan criticised staff in a memo on Thursday, saying performance was "nowhere good enough" after Germany's largest bank said its turnaround was at risk from heavy legal charges.
The bank has set aside a fresh 1.2 billion euros ($1.3 billion) for fines and settlements as of June 30 and said it might not reach its 2020 performance targets.
According to the person familiar with the bank, Deutsche Bank pays its in-house lawyers 150 million euros a year to work on the swathe of cases, and spends another 350 million euros on external legal advice.
Germany's financial watchdog has found shortcomings in the way several of Deutsche Bank's senior managers went about investigating the wrongdoings of bank staff. Deutsche Bank has disputed the allegations.
Separately, Deutsche Bank is trimming its overseas activities as a first step under the new CEO to revamp the lender.
Deutsche is planning to pull out of countries such as Finland, Norway, Denmark, Malta, New Zealand and Peru where it has only a small presence, the source said, adding discussions were ongoing on a potential retreat from six further countries.
Investors want to see Cryan, who has a reputation for swift action and straight talk, tackle a long list of problems which have depressed its share price.
Deutsche Bank was shaken after its two co-chief executives quit following a string of regulatory run-ins, failed promises and a shareholder vote of no confidence.
The new CEO has vowed to close down business lines with poor prospects or standards.
When asked about the cutting back of Deutsche Bank's activities, a spokesman said the bank would not comment on speculation, and that the lender would give details about its new strategy at the end of October.
(Writing by Arno Schuetze; Editing by Maria Sheahan and Elaine Hardcastle)
By Kathrin Jones