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Originally published Thursday, March 6, 2008 at 12:00 AM

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WaMu rewrites execs' bonus plan to dodge subprime damage

Bank will exclude the cost of soured real-estate loans and foreclosure expenses when it calculates net operating profit, according to a filing.

Times deputy business Editor

WaMu has revised its bonus plan for nearly 3,000 top executives so continuing damage from the subprime-lending collapse won't crimp their annual awards.

The struggling Seattle-based lender said in a regulatory filing Monday it will exclude the cost of soured real-estate loans and foreclosure expenses when it calculates net operating profit, the biggest component of executives' 2008 bonuses.

Other changes to the bonus plan also appear to reduce the impact of troubled parts of its business, while giving a bigger role to factors that are less problematic.

"We are perplexed by the incentive created by the 2008 compensation scheme," wrote Keefe Bruyette & Woods analyst Frederick Cannon in a note Tuesday. "This management-incentive structure could result in executive focus away from issues that we feel are critical to the success of Washington Mutual in 2008."

He said the incentive plan "surprisingly excludes the costs of credit," meaning the cost of loans gone bad.

WaMu stock has been hammered in the past year by large losses from real-estate loans, and more losses are expected this year.

Sizable amounts of annual compensation are at stake: Chairman and CEO Kerry Killinger has a "target bonus" of 365 percent of his base salary, but the actual bonus "may be up to 150 percent" of that target, the plan says.

After WaMu's disastrous 2007, the company announced in January that Killinger would forgo last year's bonus of nearly $1.8 million — 33 percent of the target level of $3.65 million. But the bonus amount will still count in his retirement-pay calculations.

Among the changes WaMu's board approved for 2008 is abolishing earnings per share as one of the four weighted factors used in calculating bonuses. In last year's bonus plan, earnings per share represented 40 percent of the potential bonus.

The 2008 bonuses will be based on these criteria:

• Net operating profit, 30 percent — with loan losses and expenses related to foreclosed real estate excluded.

• Noninterest expense, 25 percent — again, excluding expenses related to business restructuring and foreclosed real estate.

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• Fees from retail banking — a new factor, weighted at 25 percent. Many banks including WaMu have been increasing fees for services such as ATM withdrawals by noncustomers to compensate for losses in other areas.

• Customer-loyalty performance, 20 percent — an increase from 10 percent in the 2007 bonus plan.

Bank statement

In a prepared statement, WaMu said, "The success with which credit costs are managed will unequivocally continue to be a major part of the board's final deliberations."

Further information on the company's compensation philosophy and the board's annual compensation-review process will be included in the company's proxy statement scheduled for release later this month, the statement said.

Spokeswoman Libby Hutchinson said the bonus plan covers almost 3,000 people in WaMu management, many of whom are not directly involved in lending.

Consultant's question

But Fred Whittlesey, a Bainbridge Island compensation consultant, questioned why awards for Killinger and the three other top executives named in the plan aren't tied directly to earnings.

"If (they) are not responsible for bank profitability, who is? There's no reason they should be insulated from expenses they created," he said.

The bank has said bonuses, long-term stock awards and other parts of its compensation plan are important to retaining executives.

In January, WaMu said Killinger would receive 3.2 million stock options to vest in coming years, providing him "a strong incentive to restore shareholder value."

But Cannon said WaMu's highest executives shouldn't require such incentives.

"We are somewhat surprised that top management needs extra compensation in order to be retained," he wrote.

"While for lower-level executives ensuring retention is certainly important, for the top four executives named in the 8K (regulatory filing), including CEO Kerry Killinger, we would think that restoring the value of their existing stake in Washington Mutual, as well as the reputation of themselves and the firm, following the downturn in performance in this period would be incentive enough to stay with the firm."

WaMu shares closed Wednesday at $12.80, down 59 cents or 4.43 percent. The stock is down 69 percent in the past 12 months.

Rami Grunbaum: 206-464-8541 or rgrunbaum@seattletimes.com

Copyright © 2008 The Seattle Times Company

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