September 19, 2006
Nardelli’s Compensation Under Review
By Rick Moss
Ongoing complaints by Home Depot shareholders and poor ratings by watchdog groups may finally be pressuring Home Depot’s compensation review committee to make changes in the
way Chairman and Chief Exec Bob Nardelli is paid, according to a BusinessWeek article. Although industry analysts see a reduction in Nardelli’s package as being but a drop
in the bucket within the overall financial picture, the issue appears to carry considerable psychological baggage and many are insistent that the former GE exec’s pay be aligned
more with shareholder expectations.
Mr. Nardelli ranks among the highest paid CEOs, taking home around $38 million last year, during a time when stock prices have fallen sharply. Presently, based on changes to
his package made between 2003 and 2004, Nardelli’s pay is tied to diluted earnings-per-share vs. total shareholder return, as it was previously. And by those measures, the D-I-Y
retailer is performing quite well, with per-share earnings 147 percent from 2000 to 2005.
Bonnie Hill, the chair of Home Depot’s compensation committee, told Bloomberg News that “it’s a given there will be some changes,” although she failed to provide any details.
If there is a substantial restructuring of Mr. Nardelli’s package, some see it as a possible harbinger of change in many other companies where executive compensation has been
a sore point for investors. At the center of the controversy is the philosophical approach to the way executive performance is measured.
“He is getting entrepreneurial returns for effectively managerial results,” says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of
Delaware. “Something is wrong in the philosophy of the package that creates those kinds of returns.”
Discussion Questions: Do you predict a big change in Nardelli’s compensation package? If so, could it prompt widespread changes in corporate executive
pay?
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In classic form, Nardelli assumed Home Depot could be run like GE.
Turn on the machine and hire drones to watch the dials.
High-touch retailing with a customer base of Do-It-Yourselfers doesn’t work that way.
One must understand that the customer rules and those boots-on-the-ground minions walking around in orange vests are the absolute lifeblood of the organization and collectively more valuable than the management.
Apparently, Nardelli’s $38 million tuition package skipped over the 101 courses….
Senior executive pay is simply out of control. Executives and the Board of Directors have forgotten who owns the company. Proof is in all the back dating of stock options. It is one thing for Bill Gates to become the richest person in the world, but the stock-holders also did very well. This problem has been compounded by the short tenure of many senior executives. First was deferred compensation followed by excessive stock options. All tied up in a golden parachute contract. How many executives have we seen in the industry destroy a company yet receive millions for their poor performance? I predict greater tenure with cliff vesting for senior executives compensation.
I assume his package will go down and that it will have little or no effect on over-compensation as a whole.
Expect some change in Mr. Nardelli’s compensation package. Once the head of the comp committee says the package is under review, the committee has little choice but to come up with some changes. Will those changes be dramatic? Significant, yes, dramatic, no. Professor Elson is correct that Mr. Nardelli is receiving compensation at a level comparable to an entrepreneur or a very fast growing company that is highly profitable. Home Depot is neither (though it certainly is profitable). He had a tough turnaround job and certainly by many financial metrics other than stock price he has done a good job. But, shareholders haven’t been rewarded. So, the comp committee needs to pull back on what he receives for being a responsible steward.
Will changes to Mr. Nardelli’s pay result in changes for other executives? Probably not. Other comp committees may be a bit more reluctant to award large packages going forward, but much of this is driven by the market. And, with the new proxy disclosure rules for compensation many executives will be focused on the “one number” to see how they compare. Unless a lot of highly qualified execs start competing for CEO jobs and are willing to accept low compensation for the positions, expect it to takes something much bigger than a change for Mr. Nardelli to widely affect compensation packages.
Will there be “big” changes in Bob Nardelli’s compensation package? Consider what former Pres. Clinton might say, “describe what the definition of ‘big’ is?” My predicted answer to the question is “no” although the board’s explanation will be “big.” After all, his mighty-nifty package was granted by the well-benefitted people who now plan to review his package.
As for the definition of “big,” it is only as large as the incentives that also accrue to the givers (board members). If anyone expects a widespread correction to occur because of this latest corporate-imposed extravaganza, relax. Excessive avarice is the sphincter of too many hearts.
What I predict is they will simply stop reporting what his salary is the same way they want to stop reporting same store sales.
Bob Nardelli increased profits while Home Depot’s price to earnings ratio declined. Bob’s fans point out that the former is more controllable than the latter, so he is being paid appropriately. Detractors want Bob Nardelli’s compensation to be based on the stock price, regardless of profitability.
Some CEO compensation formulas take both measures into account, profit and stock price. Generally, price to earnings ratio is based upon investor growth expectations compared to the market as a whole. Retailers expected to grow faster than the market achieve higher price to earnings ratios. Home Depot is a fairly mature retailer, so fast growth isn’t expected.
Bob Nardelli made himself more unpopular by declining to state comp sales figures and by hosting a stockholder-unfriendly annual meeting. CEO’s that want to be paid well need good public relations just like their brands need good public relations.
The discussion over the amount of Nardelli’s salary package is surrealistic. If the CEO chooses to implement a strategy that doesn’t work, why should compensation be so high? For accountability, decisions need to have consequences. It appears that Nardelli’s decisions only have the consequence of changing how the money is allocated. Why?
Home Depot’s board and compensation committee will cave into the pressures of the shareholders. However, I believe Robert Nardelli’s compensation will be restructured in a way where he will still be compensated very well, while ultimately making a lot of money based on Home Depot’s success. There appear to be so many new things happening within Home Depot that it’s only a matter of time until the shareholders will see an even bigger return on their shares, and Nardelli will also share in the wealth.
As for changes in other executives’ pay, I believe there will be increased pressure by shareholders to reign in executive compensation packages.
Remember a couple of weeks ago when Home Depot declared proudly that it was committing additional $5 million to customer service store payroll? For those of us looking for help with our D-I-Y projects, this was welcome news.
I didn’t realize that this amount, spread over hundreds of stores, is 1/6th of the chairman’s compensation. What is wrong with this picture?
If I correctly recall my Peter Drucker, the purpose of profit is to create new jobs and to allow for adaptation to new market conditions in order to preserve the jobs that already exist. Drucker was hailed as a great management guru in corporate circles until he suggested that no executive compensation should be more than 20x that of the lowest salaried person in the company. Wouldn’t it be great to have one of those $1.9M stocking jobs at HD?
Having followed Home Depot’s progress since its founding (and knowing Bernie Marcus and Arthur Blank personally), the tragedy is not just the excessive pay Nardelli is receiving but the damage done to customer service when he switched to part-timers, limited employee training and failed to hire qualified help — things that are now supposed to be reversed. Can the company regain its quality service and knowledgeable help? Yes, but how quickly?
If you want a company to grow exponentially, regardless of the size of the base, it makes sense to compensate executives for the risk they take. I’m okay with that.
It also makes sense for those same executives to lose their jobs, and not be given that compensation if they fail to deliver what the customers AND the shareholders want (that would be service/innovative products and EPS respectively).
Nardelli has failed on both scores. I, too, predict he’ll be gone within a year. Along with shareholders and customers, the economy itself is no longer on his side.
The key issue is that, for Home Depot to hire this new CEO, it had to cover his financial treasure at G.E.
In the same breath, he will more than likely not last the year. He misread the consumer, and more importantly, the sales associates who prided themselves in knowing their department’s products, and ways to assist the loyal HD shopper.
The CEO minimized the education of the sales associates, and this brought the wrong message to them. And then, the many shoppers were not happy with the service and knowledge base of HP associates. Lowe’s caught this new HP direction and beat HP at its past competitive advantage. Too bad. Hmmmmmmmmmm