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With Links to Board,
Chief Saw His Pay Soar
Gilded Paychecks |
Ties That Bind
With
Links to Board, Chief Saw His Pay Soar
By JULIE CRESWELL
Published: May 24,
2006
Executive Pay: A Special Report
Correction Appended
Every October, some 50 former Home
Depot managers, calling themselves the
Former Orange-Blooded Executives, after
the home-improvement chain's trademark
bright orange color, gather in Atlanta
to reminisce, chat about new jobs and
pass around pictures of their children.
The discussion inevitably turns to
the changes at Home Depot under its
chief executive, Robert L. Nardelli. A
growing source of resentment among some
is Mr. Nardelli's pay package. The Home
Depot board has awarded him $245 million
in his five years there. Yet during that
time, the company's stock has slid 12
percent while shares of its archrival,
Lowe's, have climbed 173 percent.
Why would a company award a chief
executive that much money at a time when
the company's shareholders are arguably
faring far less well? Some of the former
Home Depot managers think they know the
reason, and compensation experts and
shareholder advocates agree: the
clubbiness of the six-member committee
of the company's board that recommends
Mr. Nardelli's pay.
Two of those members have ties to Mr.
Nardelli's former employer, General
Electric. One used Mr. Nardelli's lawyer
in negotiating his own salary. And three
either sat on other boards with Home
Depot's influential lead director,
Kenneth G. Langone, or were former
executives at companies with significant
business relationships with Mr. Langone.
In addition, five of the six members
of the compensation committee are active
or former chief executives, including
one whose compensation dwarfs Mr.
Nardelli's. Governance experts say
people who are or have been in the top
job have a harder time saying no to the
salary demands of fellow chief
executives. Moreover, chief executives
indirectly benefit from one another's
pay increases because compensation
packages are often based on surveys
detailing what their peers are earning.
To its critics, the panel exemplifies
the close personal and professional ties
among board members and executives at
many companies — ties that can make it
harder for a board to restrain executive
pay. They say this can occur even though
all of a board's compensation committee
members technically meet the legal
definition of independent, as is the
case at Home Depot.
"When you have a situation like this
where it is so incestuous, it creates
uncertainty whether Nardelli's pay is a
reflection of these relationships or
from his performance," said Jesse M.
Fried, a professor of law at the
University of California, Berkeley, and
co-author of a book on executive
compensation, "Pay Without Performance."
A showdown could occur at the annual
meeting tomorrow as firms that advise
large shareholders and activist groups
are urging shareholders to withhold
votes from several directors. The
shareholder groups are also seeking the
right to vote on the compensation
committee's annual report and plan a
rally outside the meeting in Wilmington,
Del., to protest Mr. Nardelli's pay.
None of the current or former members
of the compensation committee returned
calls seeking comment, and the company
would not make Mr. Nardelli available.
In an e-mail statement, Mr. Langone
said: "Each and every board member at
Home Depot is totally independent.
Candidates for service have been
suggested and put through the nominating
process by a wide variety of directors,
myself included. That is why there is
such a diversity of thought, opinion and
experience on the board and why our
discussions are open, robust and
objective."
Mr. Langone was instrumental in
bringing the former G.E. star into the
company. While he is not on the
compensation committee, he has led the
committee that nominates directors for
the last seven years.
No stranger to controversy, Mr.
Langone is currently under fire for his
role as head of the compensation
committee at the New York Stock
Exchange, which granted the former chief
executive Richard A. Grasso a pay
package worth more than $140 million.
Mr. Grasso sat on Home Depot's board
from 2002 to 2004, including a stint on
the compensation committee.
Mr. Langone "created the Home Depot
board in his own philosophical image,"
said Richard Ferlauto, director of
pension investment policy for the
American Federation of State, County and
Municipal Employees, whose pension fund
owns shares in the company. "Arguably,
Langone is the ringleader and the one
who pulls the strings in this network,"
he added.
Riches With Restraint
The co-founders of Home Depot, Arthur
M. Blank and Bernard Marcus, grew very
rich on company stock that soared in
value. But under them, Home Depot
embraced a culture of restraint when it
came to pay, said Paul D. Lapides, a
corporate governance expert at Kennesaw
State University in Georgia. "Bernie and
Art took home a salary of $1 million or
less and refused bonuses. The attitude
was one of 'we're all in this together,'
" said Mr. Lapides, who has never worked
at Home Depot but has studied the
company for years.
Representatives of Mr. Marcus and Mr.
Blank, both retired from Home Depot,
said neither would comment for this
article.
Since hiring Mr. Nardelli, 58, the
board has awarded him more than $87
million in deferred stock grants and $90
million in stock options, according to
an analysis by Brian Foley, a
compensation consultant in White Plains.
Mr. Nardelli's salary, bonuses and a
company loan make up most of the rest of
his $245 million compensation.
Even last year, when Home Depot's
stock was unchanged, the board raised
his salary 8 percent, to $2.164 million,
and increased his bonus 22 percent, to
$7 million.
By contrast, from 2000 until his
retirement early last year, the former
chief executive of Lowe's, Robert L.
Tillman, was awarded less than a quarter
of what Mr. Nardelli was awarded through
the end of last year, according to Mr.
Foley. The many connections among Home
Depot's directors cause some critics to
ask whether the nominating committee is
failing in finding truly "independent"
board members. "The fact that you have
so much overlapping boards here says to
me: what was the nomination process to
get on the board here, how wide was the
net really cast?" asked Eleanor Bloxham,
president of the Value Alliance, a group
that advises companies on corporate
governance issues.
The net may not have been cast much
farther than Mr. Langone's circle of
friends and associates, critics say. For
instance, there is Bonnie G. Hill, who
leads the Home Depot compensation
committee.
The owner of a corporate-governance
consulting firm, Ms. Hill is on the
board of Yum Brands with Mr. Langone.
Until recently, she served on the board
of ChoicePoint, another company with
which Mr. Langone has deep ties,
including serving as a director. Mr.
Langone's statement defending the ties
of board members said the idea that they
could not share friendships was
ridiculous: "It not only sets up a
make-believe standard but it is designed
to please an agenda driven by activists
with ulterior motives."
Ms. Hill is also on the compensation
committee of Albertson's, the grocery
chain, where she is determining the pay
for the chief executive, Lawrence R.
Johnston, who is also a Home Depot
director. "Would Johnston be as eager to
promote strict pay practices on the Home
Depot board, where one of his pay
setters is in a position to apply the
same pay principles to his own pay
package?" asked Jackie Cook, a senior
research associate at the Corporate
Library, an institutional advisory firm
in Portland, Me.
Mr. Johnston was at G.E. at the same
time as Mr. Nardelli, running the
appliances unit.
Mr. Johnston turned to a well-known
compensation lawyer, Robert J. Stucker,
to negotiate his compensation package at
Albertson's when he joined in 2001. Mr.
Stucker had negotiated Mr. Nardelli's
package at Home Depot just months
earlier.
When it comes time for Mr. Nardelli
to renegotiate his own contract, Mr.
Johnston, as a member of the Home Depot
compensation committee, is forced to
negotiate against his own lawyer, said
Charles M. Elson, director of the John
L. Weinberg Center for Corporate
Governance at the University of
Delaware. "By utilizing the same legal
counsel, if there's ever a dispute
between the company and Mr. Nardelli
over pay, it puts a member of the
compensation committee in a very awkward
position," Mr. Elson said. A call to Mr.
Stucker was not returned.
More links to G.E. are evident with
Claudio X. Gonzalez, a board member. The
longtime chairman and chief executive of
Kimberly-Clark de Mexico, a unit of
Kimberly-Clark, Mr. Gonzalez has known
Mr. Langone and Mr. Nardelli for years
as a G.E. director.
Besides Mr. Gonzalez and Mr.
Johnston, the compensation panel
includes three other current or former
chief executives: Angelo R. Mozilo, who
heads Countrywide Financial; John L.
Clendenin, the former chief of
BellSouth; and Richard H. Brown, the
former chief of Electronic Data Systems.
Mr. Brown also has ties to Mr.
Langone, who, as an investment banker,
took Electronic Data Systems public in
1968 and was a large E.D.S. shareholder
for years. Later, at his own investment
bank, Invemed Associates, Mr. Langone
underwrote security offerings by E.D.S.
while Mr. Brown was chief executive. Mr.
Brown is not up for re-election to the
Home Depot board this year.
In his statement, Mr. Langone said:
"Dick Brown is one of the finest
business minds this country has ever
produced and I am proud to call him my
friend. He was not suggested for service
on the board by me but I heartily
endorsed the idea."
This Year's ' Disney'
The ire of shareholder activists was
raised even more with the addition of
Mr. Mozilo to the board in February. Mr.
Mozilo now sits on the compensation
committee.
His pay package, which is bigger than
Mr. Nardelli's, already made him a
target of governance groups. Last year
alone, Mr. Mozilo took home $70 million,
including salary, bonus, stock options,
payments for tax- and
investment-advisory services and country
club memberships. "Good grief," said
Paul Hodgson, a compensation analyst at
the Corporate Library. "He's hardly
likely to be an influence of restraint
given his own pay package."
Shareholder activists are taking a
more aggressive stance toward directors
this year. "Home Depot, I think, is the
Disney of this shareholder season," said
Mr. Ferlauto, referring to the 2004
annual meeting of Disney shareholders at
which 45 percent of the votes cast were
withheld from the chief executive,
Michael D. Eisner, in part because of
his pay. Mr. Eisner later resigned.
At the Home Depot annual meeting
tomorrow, several factions are
recommending that investors withhold
support from most of the directors. The
dissidents include A.F.S.C.M.E.; the
state pension fund of Connecticut; the
California Public Employees Retirement
System, the country's largest public
pension fund; and Institutional
Shareholder Services, which advises
pension funds and mutual funds.
I.S.S. claims there is a "disconnect"
between Mr. Nardelli's pay and Home
Depot's performance. "Moreover, poor
compensation design, a lucrative
employment agreement, and arguably
egregious compensation practices call
into question the fitness of the
company's Compensation Committee members
to serve as directors," the advisory
firm said in a report it issued two
weeks ago.
The board disagrees, saying that it
based Mr. Nardelli's pay and bonus last
year on the company's "outstanding
operating performance," his "continuing
success in developing a new foundation
for long-term growth" and his
"continuing superior leadership,"
according to a statement from the
company.
Mr. Langone concurs. "I have long
felt that Bob Nardelli's abilities are
absolutely first rate," he said in his
statement. "He's doing a great job and
the strong fundamentals he has built
during his tenure are proof of his keen
leadership. There are a whole variety of
long-term indicators I find encouraging
such as earnings growth, sales growth,
equity value in the brand as well as
systematic enhancements put in place
companywide that have dramatically
improved efficiency."
Last year Home Depot reported record
earnings per share, record gross and
operating margins and record sales of
$81.5 billion. Yet, over the last five
years, Home Depot stock has fallen 12
percent, performing worse than its peers
and the Standard & Poor's 500 index,
which fell 4 percent. Mr. Nardelli has
also created a fair amount of friction
since he joined the company, say some of
his critics among the Former
Orange-Blooded Executives, a few of whom
were forced out once Mr. Nardelli took
over. He moved quickly to introduce
G.E.-inspired performance measures;
issued edicts about store displays to
managers who once enjoyed a great deal
of autonomy; and replaced several
longtime Home Depot executives with
former G.E. associates.
Today, two of Home Depot's four
highest-paid executives hail from G.E.,
including its director of human
resources. A third executive, the
general counsel, Frank L. Fernandez, was
a lawyer in upstate New York who was
occasionally hired as an outside counsel
for G.E. when Mr. Nardelli ran its power
systems group in the area.
In his latest moves, Mr. Nardelli is
trying to retool Home Depot, snapping up
lumber and building materials companies
last year in order to push into the
professional contractor market.
"He has made a big decision to get
into the supply business, and Wall
Street has greeted that decision with a
yawn," said Eric Bosshard, a stock
analyst at FTN Midwest Securities who
does not own shares in the company.
Despite these bold moves, Home Depot did
not even know it was looking for a
fix-it man when Mr. Nardelli hit its
radar in the fall of 2000. The chief
executive at the time, Mr. Blank, one of
the co-founders, was actually on the
hunt for a second-in-command, someone he
could groom to take over his job
eventually.
Those plans went out the window over
Thanksgiving weekend that year when Mr.
Nardelli, who had been in charge of G.E.
Power Systems for five years, learned he
had lost out to Jeffrey R. Immelt to
succeed G.E.'s longtime chief executive,
John F. Welch Jr. (Mr. Nardelli may have
lost the battle for the title, but he is
winning in the total compensation wars.
Mr. Immelt has been awarded $108 million
since taking over as G.E.'s chief,
according to Mr. Foley, while the
company's stock has fallen 19 percent.)
Mr. Langone, who sat on G.E.'s board
and had watched Mr. Nardelli's career,
moved fast to avoid losing the executive
star. Hard-charging and ambitious, Mr.
Nardelli was interested, but not in a
No. 2 position. Worried he would go
elsewhere, the Home Depot board decided
Mr. Blank should step aside and Mr.
Nardelli, who had no retail experience,
should take his place.
Luring an executive of Mr. Nardelli's
repute, however, came at a high price.
Despite the fact that Mr. Nardelli had
little incentive to remain at G.E., he
required that he be "made whole,"
meaning he would have to be paid for
what he was walking away from. He was
given a stock option grant of 3.5
million shares. One million of those
shares vested immediately and were worth
$25 million.
That was just the beginning. He also
received perks like use of a company
plane for personal trips; a new car
every three years, one similar in price
to the Mercedes Benz S series; and a $10
million loan with an annual interest
rate of 5.8 percent that would be
forgiven over five years.
That $10 million loan wound up
costing shareholders $21 million after
the board agreed to pay all taxes on it,
a so-called gross-up. Congress banned
loans like this in 2002 after Mr.
Nardelli joined the company.
And when it appeared that Mr.
Nardelli might not hit one of the few
performance goals the board had set to
cause payment of a long-term incentive
plan, the board lowered the goalposts,
according to the Corporate Library.
The target for Mr. Nardelli had been
total shareholder return — share price
increases plus reinvested dividends —
compared with a peer group, and the
company was performing poorly by that
measure in 2003, according to the
Corporate Library. But that year, the
board changed the target to one of
growth in average diluted earnings per
share, which takes into account the per
share earnings decrease that occurs when
stock options are awarded. In a report
released in March of this year, the
Corporate Library labeled Home Depot one
of its 11 "Pay for Failure Companies."
A Question of Incentives
The change in the incentive target
appeared to be "designed to ensure a
payout," rather than provide an
incentive to improve performance, the
report said. Other critics say the new
hurdle is even easier to hit with a
board-approved share-repurchase program.
Since 2002, the company has bought back
nearly $10 billion of its own stock.
The one threat to Mr. Nardelli's pay
is a proposal by A.F.S.C.M.E., the
government workers' union, that would
allow Home Depot shareholders to approve
or reject the report from the
compensation committee. But even if the
proposal is accepted, any future
rejection of the board panel's
compensation report would be merely
symbolic. The board can simply ignore
shareholders and pay executives what
they wish.
So far, similar proposals have been
rejected at two other companies whose
executive pay A.F.S.C.M.E. identified as
a problem: Merrill Lynch and U.S.
Bancorp. The Home Depot board is urging
its shareholders to vote against the
proposal.
Skepticism about Mr. Nardelli's
strategy to move the company away from
its retailing roots and concerns about a
cooling in the housing market have
caused some large investors to move out
of the stock, said Michael E. Cox, a
stock analyst at Piper Jaffray in
Minneapolis, who does not personally own
shares in the stock.
But like the majority of analysts on
Wall Street, Mr. Cox recommends Home
Depot's stock to investors because he
believes that Mr. Nardelli's strategy
will pay off in the long term for the
company.
Furthermore, Mr. Nardelli's
reputation has not been tarnished,
insisted Gerard R. Roche, the
high-profile recruiter who helped bring
Mr. Nardelli to the retailer. "I know he
has been approached by other companies.
There are a number of people interested
in lifting Nardelli out," Mr. Roche
said. "I can tell you there are a number
of companies telling me to get them
another Nardelli."
Correction:
May 25, 2006
A chart in
Business Day yesterday that explained
the relationship of Robert L. Nardelli,
the chief executive of Home Depot, with
the company's lead director, Kenneth G.
Langone, and its compensation committee,
referred incorrectly to Mr. Langone's
tenure as a director at the General
Electric Company. He left the board in
April 2005; he is not currently a
member.
Copyright 2006 The
New York Times Company
http://www.nytimes.com/2006/05/24/business/24board.html
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