It's a rough time to be associated with banks. Shareholders and employees alike have faced a barrage of trauma in the past year that's shown little mercy to anyone standing in its way.

Almost anyone, that is.

Washington Mutual (NYSE: WM), the nation's largest thrift institution, announced a new compensation plan Wednesday that would protect its top executives' annual bonuses. Specifically, performance targets used to evaluate executives' performance will be calculated without factoring in some of the damage mortgage losses and foreclosures have caused.

Remember all the fuss surrounding the mortgage market in the past year? When calculating the top execs' bonuses, just pretend it didn't happen.

You've got to be kidding me
Wait a minute. Is this the same Washington Mutual that:

  • Slid 70% in the past year amid mortgage and foreclosure headaches?
  • Canned 3,000 employees and shuttered 190 of its 336 loan centers last year, in the wake of an ugly real estate mess?
  • Announced a $1.8 billion quarterly loss related to losses in its loan portfolio?

Yes, it is.

Please, enlighten me
Washington Mutual justified the plan by acknowledging the "challenging business environment and the need to evaluate performance across a wide range of factors." Apparently, that "wide range of factors" doesn't include evaluating management members whose jobs include ensuring the feasibility of the company's loan portfolio in the first place.

This determination stands in stark contrast to Wall Street's take, where a growing fraternity of bigwigs have been shown the door in the wake of mounting credit concerns. Last year, Merrill Lynch (NYSE: MER) head Stan O'Neal was ousted after disclosing record losses. Chuck Prince of Citigroup (NYSE: C) took a bow after his firm was hit hard with credit writedowns. Longtime Morgan Stanley (NYSE: MS) exec Zoe Cruz was forced to resign after overseeing a debt capital division that went haywire.

More to the point, WaMu's move came after trying to find a compensation solution that wouldn't penalize executives for market conditions that fell outside their control. At first glance, that might make sense: If there's any hope of a turnaround, management needs to be properly motivated to make sure the job gets done.

Sure, but doesn't everyone want that kind of protection? Don't the thousands of General Motors (NYSE: GM) workers who've been let go because of "market conditions outside their control" wish they had that kind of leeway? Don't executives from the 230-plus mortgage lenders that have gone up in flames in the past year wish they had such an opportunity?

And what kind of motivation does management have when they know that no matter how great their loan losses, their cash bonus will be waiting for them at the end of the year?

In January, American Express (NYSE: AXP) -- another finance company dealing in the credit market, mind you -- made headlines with a compensation plan for its CEO that put shareholders first. Without top-notch performance, CEO Ken Chenault would be left with a handful of worthless stock options after six years. If he could deliver a performance that should be expected from the head of a Fortune 500 company, he'd be smiling all the way to the bank.

Yes, it is possible to keep management around in turbulent times. Yes, management has to be properly motivated to get the job done. But when incentives don't follow a rational path of performance, you have to question how effective they'll be.

In the real world, people are rewarded and penalized in correlation to how they -- or their division -- perform. When the boat sinks, the captain shouldn't be the only one given a life jacket. If anything, it's his or her job to make sure the ship is evacuated safely.

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Fool contributor Morgan Housel doesn't own shares in any companies mentioned in this article, nor does he make millions per year delivering billions in losses. Washington Mutual is an Income Investor recommendation. The Fool's disclosure policy is all about investors writing for investors.