January 8, 2007

Disarming Nardelli’s Defenders: Part 2

Part 1 went into what the Wall Street Journal’s Alan Murray had to say in partial defense of recently-departed Bob “Mr. $210 Million” Nardelli of the Home Depot, noting several of Nardelli’s more important business mistakes.

Meanwhile, the Journal’s editorialists (requires subscription) attempted on Friday to defend Nardelli’s compensation:

….. someone needs to rebut the claim, which is almost as rampant as the Schadenfreude at his fall, that Mr. Nardelli is getting a $210 million “severance” package as a reward for having failed.

The truth is that nearly all of that $210 million isn’t severance at all but was part of Mr. Nardelli’s original employment contract. In other words, it was part of the package that the Home Depot board offered to lure him in the first place. Keep in mind that when he was hired in 2000 Mr. Nardelli had been a star at General Electric, one of the three executives competing to succeed Jack Welch as that company’s CEO. When he lost out to Jeff Immelt, Mr. Nardelli was a hot executive property in a world that isn’t exactly full of them.

….. This may be unpleasant for reporters and other egalitarians to hear, but it’s a fact of the marketplace. Public-company CEOs face the harshest scrutiny because their pay packages are disclosed, but some of the largest compensation deals these days are being offered by private-equity recruiters. We doubt Henry Kravis or the Carlyle Group are parting with big chunks of their equity because they don’t think their CEO hires are worth it.

Oh, spare me. The point isn’t that people like Nardelli don’t deserve to be paid grandly if they succeed. I for one don’t have much of a problem with ExxonMobil’s Lee Raymond walking away with $400 million at retirement, because ExxonMobil’s financial performance has been world-class — AND, as I understand it, if the company hadn’t done well during his tenure, his walkaway would have been relatively small.

The point is that HD, and every company hiring a CEO with guaranteed money, is betraying their public-company shareholders, who have every right to expect and demand pay-for-performance (PFP) ONLY. But for some reason, the institutional investors who control the boards and the shareholder voting aren’t insisting on this. They are flat-out wrong not to. Since the Journal brought up the private-equity people, how much do you want to bet that their CEO pay packages have a lot less guarantee, and a lot more PFP? Even if I’m wrong, at least there’s usually not the misalignment between the board and the shareholders in the private-equity situations that you see at public companies, because at private companies they’re essentially one and the same.

Any CEO with the right stuff wouldn’t hesitate to take on a generous offer if it’s contingent on performance. If they insist on anything but that beyond a few mil a year “to live on,” it should be a red flag that something is wrong with the potential CEO. Bob Nardelli is just the latest proof that company boards and the major institutional investors have not learned the hard lessons of Jill Barad, Carly Fiorina, Jac Nasser, and myriad other failures who walked away with unconscionable exit packages after taking their respective companies down.

A third somewhat-defender of Nardelli, or at least a publication that gave him more of a break than he deserved, is Business Week (or Biz Weak, as it’s referred to around here). Their coverage will be critiqued in Part 3, which starts immediately below if you’re on the home page.


Previous Posts:
- Jan. 3, 2007 — Bleep You, Bob Nardelli. Bleeeeeeeeep You.
- July 11, 2006 — Home Depot wants to own a bank (1st item at link)
- June 14 — Three Months from Hero to Goat? (first item at link)
- June 12 — Home Depot’s Arrogant Annual Meeting (fourth item at link)


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