The move, approved last week and disclosed in a
securities filing late Monday, essentially shields the pay of chairman
and chief executive of the thrift, Kerry Killinger, and more than 100
other executives from the continuing mortgage fallout.
Washington Mutual has been hit hard by the housing
crisis. The nation's largest thrift by market cap is exposed to some of
the worst housing markets in the U.S., where home values are sinking and
foreclosures are soaring.
In the fourth quarter, the thrift reported a $1.87
billion loss fueled by a sharp increase in its reserve for loan-related
losses. Loan-loss provisions on mortgages, as well as foreclosure costs,
will be left out of the new formulas.
In the filing, the human-resources committee of WaMu's
board, which approved the compensation targets, cited the "challenging
business environment and the need to evaluate performance across a wide
range of factors." The committee said it will "exercise its discretion"
to determine the exact amount of the cash bonuses for executives covered
by the plan and "subjectively evaluate company performance in credit
risk management and other strategic actions."
In a statement late yesterday, WaMu said, "The success
with which credit costs are managed will unequivocally continue to be a
major part of the Board's final deliberations." The company added that
it will include further information on the company's compensation
philosophy in its proxy statement later this month.
The new formula angered some WaMu investors, who have
seen the value of their holdings shrivel as the thrift's mortgage
troubles worsened. In the past year, WaMu's share price has tumbled
about 70% -- to where it was about 12 years ago. The shares fell 26
cents, or 1.9%, to $13.39 in New York Stock Exchange composite trading.
"They've cost their shareholders a lot of money," said David Dreman,
chairman of Dreman Value Management LLC, which holds 27.9 million WaMu
shares. "Bonuses should be given to the executives who enhance
shareholder value, not destroy it."
In a research report, Frederick Cannon, an analyst with
Keefe, Bruyette & Woods, expressed concern that the cash-bonus formula
"could result in executive focus away from issues, particularly credit
management, that we feel are critical to the success" of WaMu. Mr.
Cannon, who is forecasting a steep loss by WaMu this year largely
because of housing woes, called on the company's directors to "revisit
the 2008 compensation plan and make managing credit a top priority of
senior management with objective rather than subjective measurements."
Compensation experts described the structure of the
bonus program as unusual. According to the filing, 30% of cash bonuses
for WaMu executives will be based on net operating profit, excluding
"loan loss provisions other than related to our credit card business"
and "expenses related to foreclosed real estate assets," the filing
said. Another 25% of cash bonuses will be based on non-interest expense,
excluding restructuring costs and "foreclosed real estate assets."
Top WaMu executives had their bonuses slashed last year
by more than half. WaMu directors wanted to develop a plan that would
not penalize executives for market conditions beyond their control but
would also allow discretion to judge individual performance, according
to a person familiar with the board's thinking.
Last year, WaMu directors gave more weight to whether
the company hit per-share earnings targets. The financial impact of
loan-loss reserves and foreclosures wasn't excluded from calculations of
cash bonuses. As a result, Mr. Killinger, 58 years old, was eligible for
about one-third of his target bonus last year. In January, Mr. Killinger
told analysts that he wouldn't accept any 2007 cash bonus because of
WaMu's poor results.
Mr. Killinger's total compensation for 2006 was $14.3
million, including a $1 million salary. He got a 2006 bonus of about
$4.1 million. His total compensation for last year hasn't been disclosed
yet.
Mark M. Reilly, a partner at 3C-Compensation Consulting
Consortium in Chicago, said it is more common when making changes for
companies to keep an old compensation system in place for the top five
or six officers, but to revamp the bonus structure for midlevel
executives.John Buckingham, CEO of Al Frank Asset Management Inc. in
Laguna Beach, Calif., which holds about 119,000 shares of WaMu according
to FactSet Research Systems Inc., said the board was being realistic by
trying to show that it still is possible for executives to earn a bonus.
"You have to do things to keep them," he said. "It might not be
politically correct, because the captain's supposed to go down with the
ship. But in the real world, that's not how it works."
--Michael Corkery contributed to this article
.
Write to Valerie Bauerlein at
valerie.bauerlein@wsj.com1 and Ruth Simon at
ruth.simon@wsj.com2
