Human Capital & Careers

WaMu Moves to Insulate Bonuses from Loan Crisis

Mortgage-related losses are excluded from consideration in plan covering top executives, including the CFO.
Stephen TaubMarch 5, 2008

Washington Mutual’s board of directors have found a way to keep bonuses heftier in a year of extraordinary mortgage-related losses: moving the goalposts by excluding consideration of the losses in the bonus calculation.

The board’s Human Resources Committee last week established 2008 bonus targets and performance measures for the company’s executives, including CFO Thomas Casey. Citing “the challenging business environment and the need to evaluate performance across a wide range of factors,” the thrift giant said the bonus formula would not take into account the huge losses the financial services giant has suffered from the housing crisis.

According to a regulatory filing, the bonus plan will consider, among a number of factors, the company’s 2008 net operating profit, calculated as operating profit before income taxes and “excluding the effects of loan loss provisions” other than related to its credit card business, and expenses related to foreclosed real estate assets.

Of course, in January WaMu announced a fourth quarter 2007 net loss of $1.87 billion, or $2.19 per diluted share. The company attributed the loss to the $1.6 billion after-tax charge to writedown home loans goodwill and the higher level of provisioning stemming from the housing market weakness.

According to the filing, Casey is in line to receive 179 percent of applicable base salary. The chairman and chief executive of the thrift, Kerry Killinger is looking at a potential bonus of 365 percent of base salary.

WaMu’s stock is current down 73 percent from its 52-week high and now trades at a 12-year low.

Some shareholders are not happy. “Bonuses should be given to the executives who enhance shareholder value, not destroy it,” shareholder David Dreman, chairman of Dreman Value Management LLC, told The Wall Street Journal.

According to the SEC filing, the 2008 bonus plan will be based on the following performance measures and relative weights:

• The 2008 net operating profit, weighted at 30 percent, calculated as operating profit before income taxes and excluding the effects of loan loss provisions other than related to our credit card business and expenses related to foreclosed real estate assets.

• The company’s 2008 noninterest expense, weighted at 25 percent, calculated to exclude expenses related to business resizing or restructuring and (ii) foreclosed real estate assets.

• The company’s 2008 depositor and other retail banking fees, weighted at 25 percent.

• The 2008 customer loyalty performance, weighted at 20 percent, based upon a proprietary rating system designed by the company and an outside vendor.

“In evaluating company financial performance, the committee may adjust results to eliminate the effects of charges for restructurings, discontinued operations, extraordinary items and items of gain, loss or expense determined to be extraordinary or unusual in nature or infrequent in occurrence or related to the disposal of a segment or a business or related to a change in accounting principle,” the company stated.