Washington Mutual Inc.'s annual shareholder meeting April 15 will be no love fest.
Last month, an investor group targeted the Seattle company's risk committee directors with a "no" vote campaign, claiming that their failure to manage mortgage-related risk cost shareholders $28 billion in 2007, as shares lost 70% of their value; they currently trade at close to a 12-year low.
Now that group is considering adding to its hit list the board's human resources committee, which recently chose to protect executives' 2008 bonuses by rejiggering its pay formula to exclude the effect on profit of any further housing-related loan losses — a maneuver that has further enraged shareholders, coming on the heels of the bank's $1.87 billion loss in the fourth quarter.
"It's like a brazen daylight robbery," said Richard Clayton, research director at CTW Investment Group, a New York- and Washington-based advisory firm for union-sponsored pension funds that is orchestrating the "no" vote campaign. "The idea that performance bonuses ought to be exempting the consequences of irresponsible lending practices is not only astonishing, it's unjust."
The board's revised bonus plan protects WaMu chief Kerry Killinger and nearly 3,000 other executives by linking their pay to targets based on such factors as "customer loyalty performance" and non-interest expenses, according to last week's regulatory filing with the Securities and Exchange Commission.
Furthermore, the company switched from using earnings per share as a target for a bulk of the bonuses to net operating profit minus the effects of loans gone bad (except those related to its credit card business) and expenses tied to real estate foreclosures. Under the plan, Mr. Killinger could earn a bonus equal to 365% of his $1 million base salary if all board-set targets are met — even if home-lending losses continue to mount.
To be fair, Mr. Killinger received no cash bonus for 2007 due to the company's poor performance; other executives got about 33% of the bonuses for which they were eligible in 2007, and their stock awards were cut, according to a regulatory filing earlier this year. Total 2007 compensation for him and other named executives won't be disclosed until later this month.
Nevertheless, analysts were puzzled by WaMu's moves considering that the housing market crisis remains one of the thrift's greatest challenges this year: The company has forecasted that up to another $8 billion will be needed to cover future loan losses.
"We are perplexed," Frederick Cannon, an analyst with Keefe Bruyette & Woods Inc. of New York, wrote in a note to investors last week. "This management incentive structure could result in executive focus away from issues we feel are critical to the success of Washington Mutual in 2008."
In a statement, WaMu said that the "success with which credit costs are managed will unequivocally continue to be a major part of the board's final deliberations." It added that more details about its compensation philosophy will be fleshed out in its proxy statement later this month. A company spokeswoman did not return calls seeking -comment.
The decision by WaMu's board is all the more baffling considering the fact that an increasing number of its Fortune 100 peers are adding shareholder-friendly compensation recovery policies, or so-called clawbacks. Late last month, American Express Co. of New York joined 40 other big companies with such a provision — more than double the number in 2005 — that allows boards to recoup money doled out to employees if misconduct or negligence leads to a financial restatement, according to Alexander Cwirko-Godycki, research manager at Equilar Inc. of Redwood Shores, Calif.
WaMu, in fact, adopted a clawback policy last year, but it applies only to former staff members soliciting the firm's employees or customers for a period of time after their departure.
"Every compensation committee I talk to is asking about this; it's really tops on their lists," said David Wise, a consultant at the management consultancy Hay Group Inc. of Philadelphia. "It's the right thing to do for every company out there because it adds an extra measure of protection for shareholders."
A top concern for the five directors on WaMu's HR committee, which devised the new bonus policy, will most certainly be defending themselves at next month's shareholder meeting. WaMu is one of 11 companies, including Citigroup Inc., Morgan Stanley and Countrywide Financial Corp., currently targeted by "no" vote campaigns for directors so far this proxy season, according to Scott Fenn, managing director of policy at Proxy Governance Inc., a Vienna, Va., advisory firm.
"[The shareholder meeting] is going to be an absolute zoo," said Richard Bove, a banking analyst at Punk Ziegel & Co. of New York. "Everybody is going to ask, "Why have you made such stupid decisions? You owe me money.'"