updated 3/5/2008 6:36:47 PM ET 2008-03-05T23:36:47

The U.S. housing crisis slashed Washington Mutual Inc.'s earnings, but it won't drain executives' 2008 cash bonuses.

WaMu's board will exclude costs related to mortgage defaults and real estate foreclosures when it comes time to calculate executive compensation for the year, the thrift disclosed in a Securities and Exchange Commission filing made Monday.

The move protects WaMu Chief Executive Officer Kerry Killinger and about 3,000 others from ongoing effects of the housing market downturn, even as that fallout remains the biggest challenge to the thrift's finances.

Soaring loan loss provisions — the amount WaMu socks away to cover bad loans — helped drag the country's largest savings and loan to a loss of $1.87 billion in the fourth quarter of 2007. Executives said fallout from the mortgage crisis would continue to slam the thrift's finances through 2008, and forecast up to $8 billion more will be needed this year to cover future loan losses.

Killinger said he wouldn't accept his 2007 bonus after WaMu reported abysmal annual results. But bonuses in 2008 won't reflect the expected mortgage defaults, or the costs of real estate foreclosures, that are expected to weigh on the thrift.

The board will also exclude some restructuring and business resizing costs. In December, WaMu announced plans to close offices and lay off more than 3,000 workers, the majority related to its home loans business.

In the filing, WaMu said the board will "exercise its discretion" to determine final payouts for executives, and review factors such as credit risk management.

In a note to investors, Keefe, Bruyette & Woods analyst Frederick Cannon wrote that the new compensation formula could have the opposite effect.

"In our view, this management incentive could result in executive focus away from issues, particularly credit management, that we feel are critical to the success of Washington Mutual in 2008," he wrote.

Shares of WaMu dropped 59 cents, or 4.4 percent, to close at $12.80 Wednesday.

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