U.S. BANK EXECS REWARD THEMSELVES .

WaMu: Skip customers; save the execs
As U.S. mortgage holders face foreclosure and shareholders take a bath, troubled Washington Mutual takes action -- to protect executive bonuses. It could be a trend.

By Michael Brush
March 19, 2008
Around the U.S., Washington Mutual (WM.N) regularly plays the tough guy with homeowners who fall behind on mortgages. This as foreclosure filings across the U.S. overall rose 60% in February.

And its involvement in the subprime mess has been tough on stockholders. Since last summer, the company's shares have lost nearly 80% of their value.

But the bank is a softy when it comes to bonus pay for top brass.

After CEO Kerry Killinger and other top executives missed all or a big part of their bonus pay last year, Washington Mutual wasted little time taking steps to apparently make sure it won't happen again -- even if the U.S. mortgage market and the company remain in the tank.

The board decided in February to use different performance yardsticks that could make it look like Killinger and other top executives were doing great jobs -- and all but ensure them millions of dollars in bonuses for 2008.

Those huge losses piling up because of subprime loans and foreclosures? At bonus time, the bank will ignore them.

"I would love to be able to do that," says Judy Lederman, a single mom in Scarsdale, N.Y., who won't be able to ignore the financial consequences of a potential foreclosure. She recently lost her job as a regional public-relations manager for a major retail chain. Washington Mutual handles her mortgage."I'm stupefied at the prospect of losing my home and scared stiff of the financial implications," she says .

She'll be held to the rules in her mortgage agreement. Washington Mutual execs will collect bonus pay under new, easier-to-satisfy rules:

-Bonuses are now linked to achievements like growth in retail banking fees. That hardly seems a strenuous hurdle given the way ATM and other bank fees are rising.

-Executive bonuses will be doled out for squishy achievements such as improvements in customer loyalty.

-When the bank does use traditional metrics like profitability, it won't count the impact of mortgage losses and foreclosure costs.

"This throws the whole concept of pay for performance out the window," says Rich Ferlauto, the director of pension and benefit policy for the American Federation of State, County and Municipal Employees (AFSCME). "Management of subprime risk was central to the obligations of the CEO and other top executives at Washington Mutual. So to take that out of the pay formula isn't a rational approach to allocating rewards. It seems that everyone is suffering except the executives who were directly responsible in some manner for the subprime crisis."

Ferlauto recommends shareholders vote against board members who serve on pay committees that pull such antics.

Little sympathy for U.S. homeowners
The situation seems ironic to at least one financial adviser working in the trenches with American homeowners trying to negotiate flexibility on mortgages because, like Lederman, they recently suffered a job loss, an illness or some other hardship beyond their control.

"I find Washington Mutual the most difficult when I try to negotiate forbearance agreements which are the last hope for people who are about to lose their homes," says Michael Sichenzia of Dynamic Consulting Enterprises, a Deerfield Beach, Fla., company that offers homeowners help in avoiding foreclosure. "I would love to have them recognize that we have available candidates for workouts and forbearance, but they just aren't doing it."

Washington Mutual spokesman Derek Aney responds: "We have been among the leaders in trying to keep people in their homes. We lose and the homeowner loses when the foreclosure occurs. I do not believe that characterizing us in that way is fair."

Aney says Washington Mutual helped 35,000 homeowners avoid foreclosure last year through loan modification and other kinds of assistance.

In its corner offices, Washington Mutual is generous. If the bank meets its watered-down performance hurdles this year, Killinger stands to pocket $3.6 million as a bonus for 2008, or about 365% of his base salary.

Shockingly, he'd get that bonus even if shareholders see more lousy performance at Washington Mutual. Killinger is at least partly responsible, given that he led the bank so deeply into the U.S. subprime morass. The company reported a nearly $1.9 billion loss in the fourth quarter of 2007, and analysts have forecast losses throughout 2008.

That's assuming his base salary this year is the same as the $1 million reported for 2007, the most recent number available. Without a bonus, he got $5.2 million in total compensation last year, according to company filings. That was down from $14.4 million in 2006, including a $4.1 million bonus.

For meeting the new, lowered bonus hurdles, Chief Operating Officer Stephen Rotella would get a $2.8 million bonus, or 304% of his base pay this year. And Thomas Casey, the finance chief, would get $1.2 million, or 179% of his base pay.

"Those are pretty nice jobs, aren't they?" quips Don Hodges, the president of the Hodges Fund (HDPMX), who credits his fund's superior performance in part to the fact that he avoids companies handing out excessive compensation to execs.

"When they start excluding losses from certain sectors when calculating bonuses, it looks like the board thinks officers are there to manage part of the business but not all if it. It would be nice if shareholders could do that, too. It's a further example of boards who are more concerned about their friends in management than they are the shareholders."

Washington Mutual says the fact that executives sacrificed so much bonus pay last year shows the company is committed to pay for performance. Execs lost two-thirds of their 2007 restricted shares due to poor results, and all stock options issued before the end of last year are out of the money. Executives got only about a third of their expected cash bonus, and Killinger declined to accept whatever he might have gotten.

Going forward, the company says, at least half of total direct compensation -- 70% for Killinger -- comes in the form of stock options that won't reward execs unless the stock goes up considerably. Killinger, for example, can cash out half of his options only after the stock trades above $26 a share and the other half when the stock goes above $35, and he has to wait three to four years to do so. The stock recently was trading for about $10.

Though Washington Mutual will exclude real-estate-loan losses and expenses related to foreclosures when calculating bonuses, the board may override those measures and penalize execs if they do a poor job of managing those two costs, bank spokesman Aney says.

Washington Mutual isn't the only company moving up the goal posts on executive bonuses as the mortgage mess unwinds. It's part of an emerging trend that pay experts such as Patrick McGurn of Institutional Shareholder Services think will continue. Here's a look at three others:

Toll Bros.
Shareholders of home builder Toll Bros. (TOL.N) last week voted to jettison its old bonus plan for CEO and co-founder Robert Toll. It's easy to guess why shareholders voted to get rid of the plan: Insiders hold about 25% of the stock; Toll himself owns 17%.

The rules they threw out prevented Toll from getting a bonus last year for the first time since 1991, as the company struggled. Revenue fell 24%, and the company had big inventory write-offs.

Under the new bonus plan, Toll gets bonus pay based on improvements in a long list of soft concepts ranging from employee morale and the company's "visibility" and "reputation" to customer satisfaction. The company will also use traditional measures such as revenue growth and profitability. Toll will also get 2% of the company's income before taxes and bonus.

But here's the sneaky part: The board's compensation committee can now change the mix of bonus yardsticks used each year, giving it the freedom to select any measures it wants without asking shareholders. Toll Bros. won't even reveal which yardsticks it is using, so shareholders won't even be able to judge if the company is picking easy targets.

You know where this is going.

The company says that if its new set of yardsticks had been in place last year, Toll would have gotten as much as $6.5 million in bonus pay, instead of zero.

"It doesn't seem like that bonus is tied to company performance at all because the stock was down over 35% last year," says Jacob Hay of the Laborers' International Union of North America, which owns shares of Toll Bros. "It just gives him a bonus for being a CEO, basically," Hay says. Toll's $6.5 million bonus last year would have been on top of $8.4 million in total pay for 2007.

The company declined to respond. But in filings, it denies it had wanted to revise the bonus plan because Toll got no bonus last year. Instead, it says the change was needed to ensure Toll's compensation could be linked to positive steps taken even in a weak market, like cost cutting or debt reduction. The continuing flexibility means the committee is "better able to tailor the performance component annually to address current issues," which is important because "no two years present the same challenges for the company or the CEO," company filings say.

More generosity
Two other home builders have also moved the goal posts on executive bonuses.

KB Home (KBH.N) chief Jeffrey Mezger missed his bonus last year because the company did not turn a profit. No matter. KB Home's compensation committee simply granted him a "discretionary" bonus of $6 million for 2007. Including the bonus, he made $16.4 million last year in pay and options grants. The company also handed out performance bonuses worth $1.8 million to four other execs.

Hovnanian Enterprises (HOV.N) recently amended its options plan to allow the board to lower the exercise prices on options, making them more profitable for the execs who hold them.

KB Home declined to comment. In a filing, it rationalized Mezger's big "discretionary" bonus by saying he did other good deeds for the company last year. These included strengthening the balance sheet, improving customer satisfaction, cutting costs and selling off its French operations.

Hovnavian finance chief Larry Sorsby responded that options re-pricing may be necessary to keep top execs in the company, since all their options are out of the money. The stock is down almost 70% over the past 12 months.

Sorsby said his company's decision was supported by board members who are independent of the execs who will benefit.

Pay experts find these kinds of excuses galling. They believe companies are really just applying a double standard on "pay for performance" which, after all, helped home builder CEOs rake in tens of millions a year during the good times.

"They are happy to benefit from the upside in pay for performance programs, but they don't want any downside," says McGurn, of Institutional Shareholder Services, "When we see the downside kick in, companies immediately begin a rapid retreat."

At the time of publication, Michael Brush did not own or control shares of any of the companies mentioned in this column.

[link to finance.sympatico.msn.ca]