Stocks may fall, but execs' pay doesn't

"It's only in the wacky world of CEOs where you get severance for failing," adds Minow.

There's another way to treat CEOs who lead their companies into a sea of red ink.

At Washington Mutual wm, a leading mortgage provider that went from a $3.6 billion profit two years ago to a $67 million loss last year, CEO Kerry Killinger took a 21% pay cut. He was paid $18.1 million in 2006, $14.4 million in 2007.

It was worse for investors, who saw WaMu's stock drop from $46 in early January to below $14 at the end of the year.

In February, Washington Mutual's board changed the design of the company's bonus plan by de-emphasizing the importance of foreclosure-related write-downs. The company's top executives still have to meet specific performance criteria to qualify for bonuses, but the new plan allows the board to pay bonuses even when non-performing mortgages overwhelm the bank's other businesses.

"Our board felt this was an appropriate way to determine bonuses," says spokeswoman Olivia Riley.

This week, the company announced it had been forced to seek a $7 billion cash infusion from outside investors, predicted a $1.1 billion quarterly loss and said it would have to eliminate 3,000 jobs.

Down with the ship

The majority of CEO pay plans are built around the 12-month model: If the chief executive meets certain goals in the course of a year, he or she is rewarded accordingly. Most companies also have some form of long-term incentive plan, designed to reward chief executives who succeed over a three-year period.

The problem with these plans, says Harvard Business School professor Jay Lorsch, is that many businesses, such as pharmaceutical companies, depend on products that take years to develop.

"Every company in America thinks that the 'long term' is three years," says Lorsch. "That's nonsense."

On Wall Street, banks pay bonuses in part with restricted stock that can't be sold for several years, but the bonuses themselves are calculated on the basis of what happened during the previous 12 months.

Thus, the CEOs of Wall Street banks that plunged into the subprime mortgage pool were richly rewarded in 2005 and 2006, when profits from these risky securities juiced earnings. But when the subprime market tanked last year, blowing holes in the balance sheets of these banks, Morgan Stanley ms CEO John Mack and Bear Stearns' bsc then-CEO James Cayne announced they wouldn't take any bonuses for 2007.

But they kept their bonuses from the previous years, leading some critics to call for "clawbacks" of the CEOs' prior years' earnings.

"They're right about the clawbacks," says Alan Johnson of Johnson Associates, a compensation consulting firm. "There should be a longer timeline for such financial rewards. If you make it in the first three years but lose most of it in the fourth, you should have to give most of it back."

In the case of Bear Stearns, the CEO gave almost everything back. The investment bank's stock price had topped $170 early in 2007, making Cayne, who owned more than 5% of the stock, worth more than $1 billion.

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