$210 million to step aside
Corporate pay critics were prepared to cheer the abrupt departure of beleaguered Home Depot Inc. chief Bob Nardelli on Wednesday -- but then they got a look at the bill.
Nardelli, who was one of the nation’s best-paid chief executives, will get a severance package valued at $210 million. That dismayed some corporate watchdogs who have seen a string of departing CEOs collect high-dollar payouts in recent months.
“This board should be ashamed of themselves,” said Nell Minow, an expert on executive compensation at Corporate Library, a research firm. “I would like to see several board members leave in acknowledgment of their utter failure.”
Atlanta-based Home Depot, the nation’s biggest home-improvement retailer, gave no reason for Nardelli’s departure, which it said was “mutually agreed” upon. Nardelli, however, had become a lightning rod for criticism on several fronts.
Shareholder activists said he was a preeminent example of runaway executive pay, while investors saw the value of their Home Depot stock sink 12% in his tenure. One Wall Street analyst faulted him for an “autocratic” management style.
Despite disappointment over the severance pay, the surprise resignation counts as a win for shareholder advocates who zeroed in on pay packages that provided Nardelli more than $140 million since he took over in December 2000.
“It shows how focused shareholder groups can get results,” said Ralph Ward, publisher of Boardroom Insider, an online newsletter that follows corporate pay and related issues. “It may not be quick, but eventually they can wear away a company’s leadership by keeping up the pressure.”
Daniel Pedrotty, director of the AFL-CIO’s office of investment, said he also was distressed by the size of Nardelli’s severance, but agreed that the resignation showed that shareholder activists could have an effect.
“I think the tide is beginning to turn,” Pedrotty said. “We are extremely encouraged that boards are beginning to assert their independence, but there are miles to go before we are satisfied.”
A spokesman declined to comment on the severance package other than to say it was included in the employment contract Nardelli signed when he came to Home Depot from General Electric Co. at the end of 2000.
Some experts said the timing indicated that the Home Depot board might have grown tired of the criticism directed at the 58-year-old Nardelli by shareholder activists, union leaders and pension fund managers.
Nardelli was the only director to attend the company’s annual meeting last May in Delaware, where he provoked critics by refusing to answer questions about his pay.
As recently as Dec. 18, Home Depot’s board expressed full support for Nardelli and his management team after San Diego investment firm Relational Investors said it planned to submit a shareholder proposal calling for a review of the company’s strategic direction.
“It must have been that the board reached a high level of frustration,” said Edward Lawler, a professor at USC’s Marshall School of Business, “probably starting with the criticism surrounding his compensation and followed by the controversy surrounding the annual meeting.”
Home Depot’s board includes Angelo R. Mozilo, chairman of Calabasas-based mortgage lender Countrywide Financial Corp., and Lawrence R. Johnston, CEO of supermarket chain Albertsons Inc.
Nardelli’s resignation comes amid a wave of executive departures. Through the end of November, U.S. companies had announced 1,347 CEO changes, more than for all of 2005.
A portion of that increase stems from a stock option backdating scandal, but it also is a sign that executives are under greater scrutiny, said John A. Challenger of the outplacement firm Challenger, Gray & Christmas, which tracks the trend.
“We will likely see more and more shareholders revolt based on compensation issues, even if the executive is accomplishing his or her goals,” Challenger said.
There was no indication that options backdating played a role in Nardelli’s departure. During an internal investigation late last year, Home Depot found that stock options were routinely backdated at the company during the 1980s and 1990s, but the practice ended after Nardelli took over.
Over the six years that Nardelli was CEO of Home Depot, he took home $143 million in cash, stock and other compensation. In addition, he was granted stock options that would have been worth $469.7 million if the company’s stock price had appreciated at the market’s historical 10% average annual rate.
By comparison, the average compensation for Fortune 500 CEOs was $13.5 million in 2005, according to a study by Corporate Library.
Lofty executive pay levels have been a target for corporate reformers for several years. But it’s been severance packages that have drawn much of the attention recently.
KB Home CEO Bruce Karatz, who resigned under pressure from the L.A. home builder in November amid questions about stock option grants, could collect as much as $175 million under his severance agreement.
Henry A. McKinnell, the former CEO of drug maker Pfizer Inc. who was ousted in part because of investor anger about his rich retirement benefits, will get a package totaling more than $180 million.
Nardelli’s $210-million deal tops both of those, but is far from a record. For example, former Exxon Mobil Corp. CEO Lee Raymond’s retirement package was valued at $400 million when he stepped down last year.
A substantial amount of Nardelli’s severance pay was included in the employment agreement that he secured before joining Home Depot. The company promised him at least $4.5 million in annual salary and bonus, plus at least 450,000 stock options each year.
In addition, the company loaned Nardelli $10 million when it hired him and forgave $2 million of that loan each year.
To woo him from GE, Home Depot also gave Nardelli an initial option grant of 3.5 million shares, which would have been worth $285 million if the company’s stock price had appreciated at 10% a year. And it promised a pension equal to 50% of his pay and bonus.
Rep. Barney Frank (D-Mass.), incoming chairman of the House Financial Services Committee, called the severance package “further confirmation of the need to deal with a pattern of CEO pay that appears to be out of control.”
Some analysts noted, however, that much of Home Depot’s poor stock market performance occurred during the first two years of Nardelli’s reign, when he was struggling to turn the company around.
Over the last four years, Home Depot’s stock price rose more than 67%, beating the 61% turned in during that period by the benchmark Standard & Poor’s 500 index of big U.S. firms.
In addition, the company’s annual sales doubled to $81.5 billion during his tenure, and profit nearly doubled as well.
Home Depot has struggled as the housing market slowed -- its stock fell almost 1% last year -- but so has its well-regarded competitor Lowe’s Cos.
“I think there was some unfair criticism” of Nardelli, said Stephanie Hoff, an analyst at brokerage firm Edward Jones & Co.
That said, Wall Street seemed pleased that Nardelli was being replaced as chairman and CEO by Frank Blake, who had been vice chairman. Home Depot’s stock rose more than 2% Wednesday, adding 91 cents to $41.07.
Richard Ferlauto, director of pension and benefits policy at the American Federation of State, County and Municipal Employees, said the resignation took the heat off Nardelli but not the Home Depot board.
“It’s Round One,” Ferlauto said. “We are not sure who won. We are happy that he’s gone, but it’s the board that we hold responsible.”
kathy.kristof@latimes.com
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(BEGIN TEXT OF INFOBOX)
Cash depot
Highlights of former Home Depot CEO Bob Nardelli’s $210-million severance package:
* $20 million in cash
* Stock-based compensation valued at $128 million
* Retirement benefits valued at $32 million
* Lifetime health and life insurance valued at $18 million
* $9 million in owed but unpaid compensation
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Source: Home Depot
