Wednesday, March 05, 2008

A Week Late but Never a Dollar Short, in Fact...

A Week Late but Never a Dollar Short, in Fact...
Fred Whittlesey
Compensation Venture Group, Inc.

The U.S. House of Representatives Committee on Oversight and Government Reform will hold a hearing titled, “Executive Compensation II: CEO Pay and the Mortgage Crisis” on Friday, March 7, at 10:00 a.m.

I hope it's on CSpan, even though I have never watched CSpan. But if I wanted to start watching a Congressional hearing at 7:00am Pacific Time, which I probably wouldn't, I'd know that my government is providing such access. These things are always archived on the web for later viewing anyway. No doubt YouTube will have it although I am concerned that explicit discussion of executive compensation could violate their obscenity standards.

The list of those testifying can be viewed here and a little background on the topic here. In the hearings will be CEOs and Chairs of Compensation Committees from Merrill Lynch, Citigroup, and Countrywide. I would add one more to the list but couldn't find a link allowing such suggestions other than the "contact us" link on the Committee's website and who knows who actually reads those.

Because it seems that while they're on the topic of the mortgage crisis they wouldn't want to exclude Washington Mutual, here in Seattle our local poster child for the mortgage crisis, destruction of shareholder value, and continued delivery of lucrative compensation to those responsible for the crisis and destruction. While other banks fired their CEOs, triggering big payouts, WaMu doesn't require them to be fired in order to continue receiving high levels of compensation unrelated to performance. Read on.

The furor had barely died down over the last SEC filing disclosing WaMu's equity compensation grants to executives - hidden beneath the misleading headline suggesting that the CEO had given up his bonus for the year. This, by the way, raised the question of why he should have been getting a bonus in such a disastrous year. The answer: That's how the plan operated - we did the calculations and despite the clear disaster, the plan didn't seem to think it was a total disaster.

Which leads right into the latest controversy with Monday's filing: The 2008 bonus plan pays the executives a bonus if certain parts of the income statement are positive, even if the company loses money. Worse, the plan will allow the Compensation Committee to subjectively override any formulaic outcomes. And, those overrides could be up or down.

And, that subjective discretion costs WaMu shareholders because that renders the plan - which is not a plan but just a fancy discretionary bonus - nondeductible for tax purposes. At the target amounts disclosed that could cost WaMu shareholders about $3 million in lost tax benefits. But I suppose that's not "material" for a company, and management team, that destroyed about $25 billion dollars in shareholder value last year.

And, I could tell you a lot more about the corporate governance issues reflected in these plan designs but I won't. Let's just say that on our firm's Compensation Integrity scoring system that has a scale of 1 to 100, we're exploring how to accommodate negative numbers because we wouldn't want to exclude any companies due to system limitations.

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