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WaMu Board Shields Executives' Bonuses
By VALERIE BAUERLEIN and RUTH SIMON
March 5, 2008; Page A3
The board of Washington Mutual Inc. has set compensation targets for top executives that will exclude some costs tied to mortgage losses and foreclosures when cash bonuses are calculated this year.
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." |
