The move comes after Deutsche said it would pay $7.2 billion in fines and compensation in the US.
"The management board has decided to substantially limit bonus payments for 2016," chief executive John Cryan said in an email to staff at the Frankfurt-based institution.
The move comes after Deutsche said it would pay $7.2 billion in fines and compensation in the US over its involvement in the mortgage-backed securities crisis of 2008.
It was the largest settlement any financial institution has so far paid for misconduct relating to the crash, but just over half of the initial $14-billion demand from the US Department of Justice.
"Now that we have a clearer idea of the financial impact of the settlement with the DoJ and our performance for the year, we feel that tough measures are unavoidable," Cryan wrote.
Around 25 percent of employees, many high-ranking managers and executives, will see a small or large cut to their "variable compensation," the note continued.
Board members had voted unanimously to waive their own bonuses, Cryan said.
"There is still some way to go to strengthen our bank and make it profitable again," he told employees on Wednesday.
"Other companies have taken similar steps in the past and come back stronger than before. We are convinced that we will too," Cryan continued, adding that he planned to return bonuses to normal in 2017.
Deutsche reported an unexpected profit in the third quarter of last year.
But with the fine outweighing the war chest it set aside to fight its thousands of legal cases, the DoJ agreement will eat into its fourth-quarter result to the tune of 1.2 billion euros ($1.3 billion).
The firm reported a seven-billion-euro loss in 2015, and continues to face headwinds from low interest rates as well as increased regulation and higher capital requirements introduced in the wake of the financial crisis.
Cryan has launched the firm on a harsh restructuring planned to see it shed 200 branches in Germany and some 9,000 of its roughly 100,000 full-time employees.
Shares in the bank fell slightly in Frankfurt by around 1400 GMT Wednesday, losing 0.4 percent to trade at 17.40 euros ($18.56) compared with a 0.2-percent rise in the DAX index of leading German companies.