WaMu CEO Could Cash In on a Sale

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Washington Mutual's ( WM) new CEO Alan Fishman could stand to make a windfall if his brief tenure ends with an acquisition by JPMorgan Chase ( JPM) or another suitor.

The American Banker reported Friday that JPMorgan is in "advanced discussions" to acquire the ailing Seattle thrift. The article said that "negotiations are ongoing at the highest levels of both companies," which includes JPMorgan CEO Jamie Dimon and Fishman.

While it was widely speculated that Washington Mutual brought Fishman in to replace WaMu's ousted longtime CEO Kerry Killinger to effect a sale, the company has not explicitly said so. But he certainly will be well rewarded if a deal is brokered, according to a Securities and Exchange Commission filing Thursday detailing Fishman's employment agreement.

According to the filing, if Fishman is terminated without "cause" or if he resigns as a result of "constructive termination," the employment agreement also provides for him to receive a lump sum payment equal to 2.5 times then applicable annual base salary plus the annual bonus payment from the preceding year, in addition to certain options vesting.

WaMu will also pay "certain tax gross-up payments" to Fishman if he is subject to "golden parachute excise taxes" related to a change in control, the filing says.

A source familiar with the agreement says the term "constructive termination" is a standard provision in an executive employment agreement that says if a company were to either take away the CEO's authority, reduce his compensation, or move him away from Seattle, without his consent. A sale of the company could be one of several scenarios in which there is a "constructive termination" of a CEO, the source says.

Fishman will receive a "sign-on" cash bonus of $7.5 million this year for agreeing to take the CEO job. He also receives equity awards including options to purchase 5 million shares of the company's common stock that will vest at certain stock price targets between $10 and $18 a share as well as 612,500 of restricted shares for joining the company.

Under the employment contract, which expires at the end of 2011, Fishman will be paid $1 million in annual salary, up to $3.65 million in an annual bonus as well as the opportunity to receive long-term incentive awards of at least $8 million, the filing says.

Fishman will receive "a large share of both cash and incentive compensation if Washington Mutual sells," according to Fred Cannon, the associate director of research and chief equity strategist at Keefe, Bruyette & Woods. " W e applaud the compensation designed in the case of a sale as we believe a sale may well be in the best interests of shareholders."

While most observers would agree that a sale of the struggling mortgage-heavy company would be the best option at this point, a deal seems to be increasingly difficult to do so.

A Bloomberg article on Wednesday suggested that accounting rule changes that require banks to value assets "at market prices instead of deriving values from measures including the purchase price" is hindering bank M&A. The article said that at least three suitors have walked away this year from any agreements with WaMu or National City ( NCC), another troubled bank, because of the rule changes.

A spokeswoman for WaMu declined to comment regarding the renewed rumors. A JPMorgan Chase spokesman also declined to comment.

JPMorgan was rumored to approach WaMu this spring with a takeout offer but was rejected, according to reports. Finding other suitors could be limited, but could include foreign banking outfits such as HSBC ( HBC), some say.

Cannon is less pleased that Fishman could earn close to $20 million in the next 16 months with other parts of Fishman's employment contract "by merely not getting fired," he writes in a note Friday. "We would prefer the cash compensation be more tied to performance measures."

He also worries that Fishman's option-based compensation, which is tied to stock price targets, would give him a "strong incentive" to avoid any further dilutive capital raises, according to the note.

WaMu underwent a $7.2 billion capital raise led by private equity firm TPG and other institutional investors in April.

WaMu's stock is down more than 90% from a year earlier. Shares fell to their lowest level in 18 years this week after investors went on a selling spree of the company's stock on fears that the company would default.

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