About Four Years Ago

Fred Whittlesey

Compensation Venture Group, Inc.

I was updating my website this weekend, and revisited some "old" articles I had authored.  Way back in late 2007 through early 2008.

The field of equity compensation has gone through such tremendous upheaval over the past four years, I was ready to delete these links until I pondered for a moment the titles, that could have been written and be relevant just this week:

"Who are your peers?  The SEC Wants to Know"

"The New Era of Equity Compensation:  Performance Plans"

"The Return of Cash Long-Term Incentives"

Because these were all written at the time for Salary.com (now Kenexa) where I was a Fellow, whatever that is or was, I can't update them, per se.

Then I read them, and realized they hardly need updating.  In fact, the premise of each has been strengthened over the past 4 years and there are even more pressures on the three topics. Sure, the data references need to be recent and there are more inputs to the issue - primarily the new Dodd-Frank disclosures (CEO pay ratio and CEO pay-for-performance).

Consider, since 2007/2008:

• Investor, proxy adviser, and SEC scrutiny has extended from how executives are paid versus peers, to which companies are actually in the peer group and how that peer group was determined.
  
  
• Performance plans, somewhat avant garde back in 2007, are fast becoming a mandated approach in the US as we are now in the say-on-pay era - exactly the pattern we saw in the UK with the advent of say-on-pay.  Now this solution has become yet another problem, as I have written and presented on.
  
  
• And cash long-term incentives, still under the radar due to compensation survey firms' and proxy data services' inadequate tracking of them, are growing in prevalence faster than reported, due to the odd combination of shareholder concerns about dilution and many companies with large amounts of cash on their balance sheet.

Taken together, these issues create chaos for trying to understand how much an executive was "paid" so that everyone can chime in on whether the number is just too big, too big relative to the average worker, and/or too big relative to company performance.  When very different forms of compensation are awarded, we run into the issue of "granted" vs. "earned" vs. "realizable" vs. "realized"...and more.

Each of these three written pieces deserves an update, I mean a fresh authoring, which I will do over the next few weeks.  While I'd like to pat myself on the back for being prescient on these issues, I think we all should have seen these three things coming and now we have even more to discuss.

Anyone want to predict what we'll be discussing in 2015?  Yikes.

Equity Plan Design: "How It Works"

Webinar this week:  Behavioral Economics and Equity Compensation, Part I

Steve Jobs said that “It’s not just what it looks like and feels like.  Design is how it works.” He of course was talking about things like Macs and iPods (and, later, iPhones), but the same applies to equity compensation program design.

The current governance environment has drawn excessive attention to how equity compensation programs “look” and “feel.”  And the ever-increasing number of professionals labeling themselves as plan “designers” often focus on the look and feel of plan design.

The “look” part is features like types of award vehicles used, methods for allocating grants to employees, determining and reporting accounting expense, and dilution to shareholders. Increasingly, companies want their plans to look not too different from other companies’ plans.  Many would say that these characteristics, and the process of mimicking other companies’ programs, comprise “plan design” and the work that goes into this must then be the result of the efforts of plan designers.

The “feel” part is the arbitrary standards imposed by various proxy advisors, institutional investors, and other external parties:  overhang of 10% “feels” OK but overhang of “15%” “feels” too high. RSUs feel OK for non-executive employees but do not feel OK for executives.  These external forces have become significant factors influencing the design of compensation programs, becoming indirect plan designers.

It’s time to return our focus to “how it works” not just how it “looks and feels.” That requires a focus on strategy and behavior, not survey data, run rates, and accounting expense.

Since I introduced the concept of behavioral economics to equity compensation professionals during the 2008-2009 financial crisis and as a keynote session at GEO’s 2009 Annual Conference in Paris, I’ve continued my exploration of these ideas and how they can improve the effectiveness of equity compensation programs.  My book chapter in GEOnomics 2009 spurred a global discussion on the topic and resulted in some companies redesigning their program accordingly.

While many have focused on the communication and perception aspects of the behavioral economics concepts, I believe there are proven applications for equity compensation plan design as demonstrated around the world in the design of pension plans, savings plans, and healthcare benefits.

I will be doing a two-part webinar for GEO in September and October; the first on 28-September presents the key concepts of behavioral economics in easy-to-understand ideas and discusses how these concepts have been implemented. Attendees will learn how some program design features that we take as a “given” should be questioned in light of the ongoing research in the field of behavioral economics.  

This discussion will lay the groundwork for Part II of the series on 26-October in which we’ll look at specific program features and discuss both how these influence behavior and how employee behavior actually affects the value of the equity instrument - producing a direct effect on the return on investment (ROI) to the employer.

With the continued and increasing scrutiny of equity compensation as a result of concerns about executive pay, it’s time to understand what plan design is, and is not, and how to understand how to make it work. Maybe we can turn equity compensation from a perceived source of risk and abuse into something cool.  Like an iPhone.

Music Lessons

Fred Whittlesey

Compensation Venture Group

Every Labor Day weekend in Seattle is the Bumbershoot festival.  The format varies year to year, but it’s generally 3 days and more than 100 bands.  There are a lot of other artistic activities as well, but I focus on the bands.  It draws a couple hundred thousand people each year. 

You are guaranteed to see (1) a band you’d loved forever and always wanted to  see (Bob Dylan, 2010) (2) a band you’d heard about but never listened to (Band of Horses, 2008) and (3) a band you’d never heard of and now is your new favorite after seeing them (Thee Oh Sees, 2011).  This has been going on for 11 years for me.

I love Bumbershoot because I can really escape into several days of music festival culture and not think much about work.  Ah, but I do.  There are great lessons about – you guessed it – compensation at Bumbershoot.  Here are a few from this year.

1 – Imagine if you could assemble a team of 50 or so superstar talented people and get them to perform under rigorous conditions, week in and week out.  They are so good at what they do that tens of thousands of people applaud for them every few minutes or so.  (When was the last time that happened with your work?)  As they later mingle they talk about the passion they have for their work, the great people they work with, and so on.  In casual conversation, they also volunteer information about their pay for this demanding role, just as a side comment but also as a part of the passion they have for their role:  Minimum wage.

2 – An individual begins to speak and perform and a crowd gathers.  Dozens of people watch his talents for about 15 minutes.  As he introduces his final task, he explains why the observers should pay, suggests how much they should pay, and why it is reasonable for them to pay for what they have just enjoyed.  His hat is passed and it overflows with cash.  I estimate that he’s made the equivalent of about $200 per hour.  Much better than minimum wage, even in the state of WA with the highest minimum wage in the US.

3 – Another performer quietly displays his world-class talent (he has won multiple international competitions) standing on the side of the path.  Saying nothing to the passing potential audience, and answering questions in a single phrase, he continues with his amazing work.  His hat lies on the ground with no sign or other indications.  His hat overflows with cash.   I sensed that while he surely liked the cash he was there for the adoration of his quirky talent.

4 – A well-known performer finishes up her set on one of the major stages and notes that she will be at the tent adjacent to the stage after the show, inviting the audience to come by and say hello.  The tent also has CDs, t-shirts, and other items for this artist.  People line up, shake hands, and spend.

I spoke directly with at least one person of each of the four examples above, in detail, about compensation.  (OK, I’m a hopeless compensation geek at a music festival.)  In all cases, I didn’t have to ask, the information was volunteered or obvious.  They are all extremely satisfied with their compensation model and results.

Noticeably absent from this year’s Bumbershoot lineup were the mega-acts that are making a lot of money just to play, before t-shirts and CDs, and no hat is necessary  (though Bob Dylan wore a really stupid looking hat last year). 

Much of the compensation delivered this year, like every year at Bumbershoot, was through a voluntary process, or didn’t involve cash at all. 

Pay and Performance.   Compensation plan designers:  Look into it.

#bumbershoot

Everything That Glitters May Now Be Gold

In the 1990's and into the 2000's, employee stock options glittered.  When the glitter faded due to market downturns and increasing volatility, new forms of equity compensation emerged to restore the sheen - option exchanges and repricing and restricted stock units.  This past week's market volatility, economic uncertainty, and the contributing factors took away a bit of the remaining glitter.  

With widespread concern about equity investments, what has been the newest shining light?  Gold.  But we can, and in many cases must, compensate employees with equity and we can't do that with gold...can we?

Beyond the surging price of gold in response to global economic, financial, debt, and currency issues, there are some trends underway not gaining the attention of mainstream media that point to a growing influence of gold as a currency.  Does this open an opportunity for considering gold as a form of employee compensation? 

While this may appear to be a “fringe” idea, such a view would place the world’s most prominent countries, most sophisticated investors, and a dozen US states on this fringe.

This, of course, is all intended to stimulate discussion.

• My accounting and valuation colleagues will point out the technical issues (with pay linked to a commodity)
  
•  My tax colleagues will poke holes in the court cases and cite the Code
  
•  My legal colleagues will undoubtedly identify all of the reasons that this is a poor idea and the possible liabilities resulting
  
• My equity plan administration colleagues will curse me for recommending a non-equity form of compensation (can the software platform handle a ”restricted gold” award?)
  
•  My survey and proxy data colleagues will wonder where gold would be categorized on a data input questionnaire and in the database.  A full value award?  Bonus? Other LTI?
  
• And of course, my corporate governance colleagues will cite the horrendous outcome of decoupling compensation from shareholder value. 

Not unlike issues we’ve faced with other “new” pay vehicles, like cash long-term incentive awards.

I’m providing a few links below that set the stage for what I believe will be a discussion over the next year that will move from what may appear to be a humorous alternative, perhaps even satirical, view to a central discussion point in employee compensation planning – designing, delivering, and measuring pay value if and when the bottom falls out of both the global economy and the US currency. 

Some of these links are on sites that are clearly pro-gold, anti-US currency, and even a bit anti-government, but some are a bit more credible.   All are factually true.  Sources of these excerpts are available at the links.

Winning the Tax Case in 2007…

The essence of the argument is that under the Constitution Congress is obligated by law to mint and circulate such coins as demand requires, and must establish the value of coins as they are used as legal tender, but the coins' market value, arising as valuable personal "property," is a distinct, separate attribute of such coins, and is of no legal consequence if the coins are used as legal tender.

In other words, if a worker is paid with such coins, his taxable "income" (if any) can only be the face value indicated upon the coin money paid -- i.e., $1.00 for a circulating silver dollar or $50 for a circulating gold U.S. coin. Not surprisingly, the IRS has never issued any public guidance regarding this significant issue.

But Losing the Tax Case in 2009…

(Defendant) faces up to 296 years in prison and fines of up to $14 million, Brower said. (Co-defendant) faces up to 71 years in prison and fines of up to $2.75 million.

Note:  The above cases were not just about the use of gold coins as compensation but had a number of counts of fraud and conspiracy related to hiding assets and other tax-avoidance actions.

The Technical Tax and Legal Points

The government called three accountants to testify. The defense asked each one, “What is the proper way to calculate income for purposes of the Internal Revenue Code if you are paid in a gold coin that has a $50 face value on it?” All three of them responded, “I do not know; I’ll have to research that.”  One of them had a masters degree in taxation.

No Federal Court of Appeals has ever ruled that the gold coins in question must be reported to the IRS based on FRN (Federal Reserve Note) market value.

Utah Legalizes Gold, Silver Coins as Current (22-May-2011)

Utah became the first state in the country this month to legalize gold and silver coins as currency. The law also will exempt the sale of the coins from state capital gains taxes.

Earlier this month, Minnesota took a step closer to joining Utah in making gold and silver legal tender. A Republican lawmaker there introduced a bill that sets up a special committee to explore the option. North Carolina, Idaho and at least nine other states also have similar bills drafted.

What Would Have Happened If…?

20-20 hindsight being what it is, I still find it interesting to do a what-if analysis.  For example, what if the typical Nasdaq company 12 months ago had granted gold instead of restricted stock units (RSUs) with a one year cliff vesting date? (based on Tuesday, 16-August-2011 closing prices) – with RSUs represented by the Nasdaq Composite Index and gold represented by the SPDR Gold Trust ETF (click on links to see price charts):

S&P 500 vs, Gold, 1-year

Nasdaq:  +15.66%
Gold:  +45.26%

What about a 5-year view?

S&P 500 vs. Gold, 5-year

Nasdaq:  +22.63%

Gold:  +177.341%

Hmmm.  7.8x. (The 10-year comparison is around 10x).

So What?

Will companies start using gold to pay employees?  Probably not.  Will some company somewhere do it?  Probably so.  We cannot discount the effects of political views of boards of directors, CEOs, and private company owners in the employee compensation decision process. And some people just love a new idea and being the first to try it.

Maybe a company will grant gold (or a gold derivative) as a confidence-builder when inflation returns and employees realize that meager salary increases, like current interest rates,  are really a negative number.

Or as an element of an employee choice program – bonus, stock options, or gold coins?

Or when the stock market crashes again, options go underwater, RSUs represent a fraction of their grant value, and yet another option exchange program loses its luster.

Or maybe a gold coin will replace the holiday bonus, with employers grossing-up for taxes.  Better that than a turkey, which is what the US dollar may turn out to be.

Zoellick Says China Currency To Be Global Player (14-August-2011)

World Bank president Robert Zoellick a gathering of the Asian Society in Sydney on Sunday that the renminbi and other Asian currencies may form a basket of currencies in the future that play the role as the international reserve and trade currency instead of the current US dollar-based global finance and trade system.

Just looking ahead.

A New Generation of Performance Plans?

Over the past few years we have seen performance share units and other varieties of performance-based awards grow in prevalence in response to a series of corporate governance concerns.  What concerns? Stock options, time-vested awards, executive ownership levels, and most importantly the link between pay and performance.

In this first round of say-on-pay in the US this spring, we saw these issues raised as key points in investors’ and proxy advisers’ voting policies and actions.  The new say-on-pay environment has turned the dialogue on these plans from anecdotal comments to a chorus of complaints about the manner in which these plans have been designed and operated over the past few years and the resulting impact on corporate governance.

While performance plans have been adopted to resolve some governance issues, they are creating new governance challenges which are not always apparent or easy to identify and measure.  We have identified TWENTY unique governance issues specific to performance plans and how companies can address these issues before next year’s say on pay votes.  Resolving these issues will result in the next generation of performance plans.

Equity compensation, long one of the list of items considered by investors, has become a central corporate governance issue and equity compensation professionals need to understand and be able to respond.

Here are some resources for learning more about this issue:

Performance Problems?  Addressing Emerging Issues with Performance Plans

 

Solium Transcentive Synergy Conference

12-14 September 2011, Scottsdale, AZ

Panel discussion with Fred Whittlesey, Elizabeth Dodge (Stock & Option Solutions), and Takis Makridis (Equity Methods)

This session will be videotaped for those unable to attend the Conference

The Next Generation of Performance Plans?  Fixing Governance Ups and Downs

 

Global Equity Organization - National Equity Compensation Forum

14-16 September, Scottsdale, AZ

Panel discussion with Fred Whittlesey, Elizabeth Dodge (Stock & Option Solutions), and Takis Makridis (Equity Methods)

The Governance Ups and Downs of Performance Plans (book chapter)

by Fred Whittlesey

Performance Awards

GPS:  Guidance - Procedures - Systems

Performance Awards

Fred Whittlesey, contributing author

Perfecting Perception: The Behavioral Economics Approach to Equity

At the NASPP's Silicon Valley Chapter Annual Conference last week I participated on a panel titled Perfecting Perception:  Understanding Perceived Value; What It Means for Your Stock Program.  The discussion, moderated by Emily Cervino of the CEP Institute with Keith Pearce of Intel and Jason LeBovidge of Fidelity, covered several approaches to the issue.


And what is the issue?  It's that a significant proportion of equity compensation program participants - maybe half or more - don't understand what they've been granted, don't consider the equity as part of their "compensation" for their job, and then not surprisingly don't work any harder or any smarter because of the grants.


If that is true, we have a serious problem, because companies spend millions and billions of dollars in expense and dilution on these programs and should expect a positive return on investment (ROI).  How do we fix this?


A lot of the discussion is around communication but I think there is a serious plan design component to this as well.  My portion of the panel drew primarily on the research and analysis I did for my book chapter in Global Equity Organization's GEOnomics 2009, "Behavioral Economics and Equity Compensation" (with co-author Kiran Sahota).


I'll be doing a two-part webcast on this topic for GEO in September and October that will take the discussion further.  Stay tuned.

New Book: If I'd Only Known That

I contributed to the National Center for Employee Ownership's new book "If I'd Only Known That" and what an interesting experience it was remembering all of the equity plan horror stories I've encountered over the years.

Unfortunately, we continue to see horror stories in the making with the proliferation of performance plans.

At the NASPP's Silicon Valley Chapter Annual Conference last week I moderated a panel titled "Performance Problems: The Governance Ups and Downs of Performance Plans" which detailed 20 different problems we're seeing with the design and operation of these performance award programs.  My portion of the presentation was based on the book chapter I authored in GEOnomics 2011.


I'll be participating on similar panels at both the Global Equity Organization's National Equity Compensation Forum and Solium Capital's Synergy conference in September.

Plenty to talk about.

Debt-based executive pay: a not-so-new solution in search of a problem

Re-blogged from the Hay Group site:

http://blog.haygroup.com/?p=470

Blogging Around

It's been quite a while since I added to this blog...since joining Buck Consultants I have a few constraints on what I can write and where. But there are many new pieces of content you'll find of interest:

On the CompensationStandards.com Advisors' Blog:

Rethinking Equity Valuation

Stop Before You Swap

Counterpoint: Or Might Stock Option Use Go UP?

IFRS: Here Before We Knew It

The Global Equity Organization (GEO) Podcast Series:

Keeping Up with Fred Whittlesey

And a couple of articles of interest:

Published by Stock & Option Solutions:

Differentiating Equity Grants: The Dilution Solution

Behavioral Economics and Equity Compensation

A chapter in GEOnomics 2009

You also an access many of my other articles and conference presentations the Buck Surveys site

Executive Pay: What is Not Said

"You have to listen to not only what is being said, but what is not said -- which is often more important than what they say." — Kofi Annan

There may be daily updates on this issue because I am reading, daily, misreporting of executive pay. This time, it's the Washington Post and it's about what was not said.

Capital One Chief Was Paid $17 Million in 2007
Capital One, the McLean credit card issuer, awarded chairman and chief executive Richard D. Fairbank a pay package it said was worth $17 million last year, almost entirely stock options. That compares with a package worth $18 million in 2006, the company said. Fairbank last year exercised stock options at a gain of $54.8 million, the company said. That sounds heroic, a CEO just getting paid from gains received by shareholders.

They got the "awarded" part right. Of course the $17 million number is likely a significant understatement of the value of those options but that has been in this blog before and will be again, but not right now.

The problem here is what was not said. It is true that he had a gain of $54.8 million on options. But as the media continues to miss the significant change in executive equity compensation packages, this reporter missed a little $18.3 million vesting event on restricted shares, understating pay by about 25%.

Now, there is another complexity here. A footnote indicates that:

"Values reported for Stock Awards are related to the vesting of Mr. Fairbank’s performance shares on March 31, 2007, delivery of which are deferred until the end of Mr. Fairbank’s employment with the Company. Therefore, Mr. Fairbank neither acquired any shares nor realized any value from such shares in 2007." Not true. If someone gives me $18 million in stock but I've told them to just hang onto it until I retire, it is difficult for me to argue that I didn't "realize any value" from that. That is a tax technicality.

This further highlights not only the complexity of executive pay but the need to understand both the tabular disclosures and the voluminous footnotes. And the accounting, the tax, and the other technical nuances.

What was not said here is important: When Capital One's stock price was flat for two or three years their interest turned to giving executives free shares of restricted stock. Now that the stock has lost half its value, how attractive those stock options look again so the executives can participate in the rebound. Flat price, guaranteed pay. Low price, guaranteed participation in the rebound. (See previous posts on Washington Mutual for the popularity of this approach.)

That's the real story, Washington Post. With your reputation for investigative journalism, how about spending a little more time on the shenanigans going on in the financial services industry right now. We are seeing various combinations of fraud, failure, and folly and even the least serious of those is an important corporate governance issue. Directors are paid to prevent folly, and not be a part of it.

New Issue of The Compensation Committee Adviser

Beware the Compensation Headlines: Apples and Oranges

I have often said that when one reads an article about executive compensation in any of the leading business publications – the Wall Street Journal, Business Week, Forbes – one should assume that the pay amounts cited are incorrect. While they are not always incorrect,...

To keep reading, click here: http://compensationcommitteeadviser.blogspot.com/

Those Darn Compensation Consultants

"Mortgage mess CEOs defend pay" - Cnn.com
"Countrywide's Mozilo resisted pay cuts" - WSJ.com
"Wall Street Executives Defend Pay at House Hearing" - Bloomberg.com

In all of the media coverage today, perhaps the most interesting tidbit was not what was said in the hearings but what was learned from some email messages in the course of the investigation. Beyond the left-vs.-right debate, the accusations and justifications, and the election-year posturing, there's this:

"The report says two compensation consultants hired in recent years urged the board to cut back on certain aspects of Mr. Mozilo's compensation. The first...advised Countrywide in 2004 when it was discussing an extension of Mr. Mozilo's contract.

"A second consultant...in 2006 recommended reductions in Mr. Mozilo's compensation, the report says. After the board's compensation committee proposed making those cuts, the report says, Countrywide management hired another consulting firm, Towers Perrin, to review the board's proposal. Though the firm was being paid by Countrywide, Mr. Mozilo regarded the Towers Perrin representative...as his own adviser, emails reviewed by the committee staff suggest.

"'The board made a number of revisions to accommodate Mr. Mozilo and (the consultant)," the report says. Among other things, the board put larger companies into the peer group used to gauge Mr. Mozilo's pay and gave him a $10 million bonus to stay on as CEO longer than planned.
The report cites an email (from the consultant) to Mr. Mozilo expressing disappointment that the board's final proposal "lowers your maximum opportunity significantly."

"According to the report, Mr. Mozilo replied: "At this stage in my life...this process is no longer about money but more about respect and acknowledgement of my accomplishments.... Boards have been placed under enormous pressure by the left wing antibusiness press and the envious leaders of unions...'."

Source: WSJ.com

The consultant expressed "disappointment" at the Board's actions. Wow.

(There was a fourth consulting firm involved as Countrywide's consultant to the Board Committee which is mentioned in their most recent proxy statement.)

"Lawmakers have argued that these consultants are merely getting paid to tell the board and CEO what it wants to hear." - Cnn.com

Apparently the Board was told by two, maybe three, different consultants that Mr. Mozilo's pay was too high. The Company even incurred the additional expense to file an amendment to its proxy statement with nice charts showing how Mr. Mozilo's pay was going to be lower under his new contract than under this old one.

Why does this really matter? Because a few companies with questionable pay practices end up in a Congressional hearing, which then leads to legislation regarding executive pay. That legislation is typically ill-conceived, fails to achieve its objective, and creates additional cost and constraints for all of the other companies. Like Sarbanes-Oxley, a law reacting to a few big companies' missteps penalizes thousands of smaller companies who have done nothing wrong. And that has a negative impact on American businesses, their employees, and our economy. I suppose in an election year I should claim that my position is "patriotic" but it's also one shared by many investors and even some other compensation consultants.

Who ever thought compensation consultants could have such an impact?

Disclosure: I am a shareholder of both Washington Mutual and Countrywide Financial but do not believe my financial interest in those companies influences the opinions expressed here. I do believe, however, that executive compensation practices directly impact shareholder value. I suppose I also should disclose that I once worked for Towers Perrin but never worked for the three other firms cited in the news today.

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.