Friday, January 05, 2007

Don't expect reforms in wake of Nardelli parachute

From MarketWatch:

Experts say large Home Depot packages could continue; others could follow

By Russ Britt, MarketWatch

Last Update: 2:30 PM ET Jan 3, 2007

LOS ANGELES (MarketWatch) -- If there was outrage over the $210 million severance package that departing Chief Executive Robert Nardelli was getting from Home Depot as he resigned from the home improvement giant Wednesday, it was somewhat muted.

The reason: Some corporate governance experts said that Nardelli's pay package was not entirely out of line with other companies of that size that cut ties with top managers, and there could be others like it down the road unless shareholders enact reforms.

Getting investors to take action, though, could be easier said than done.

"It's clearly an outrageous number but one that was preordained from [Nardelli's] employment contract," said Sydney Finkelstein, professor of management at Dartmouth University's Tuck School of Business. "I think it's a sign of the new rule for CEOs."

It's the risk that many companies who hire outsiders will have to take to lure executives they feel are attractive. Nardelli came to Home Depot (HD) in December 2000 from General Electric Co. (GE) , which was considered a breeding ground for top-flight management, where he was one of three top executives in line for former CEO Jack Welch's job. That post eventually went to Jeffrey Immelt.

Outsiders are concerned they may not know all the nuances of an unfamiliar company, and want some insurance should things go awry, said Finkelstein, who has studied corporate governance for 20 years and also authored "Why Smart Executives Fail."

"When things go wrong, they're able to walk away with a ransom," he said.

After six years on the job, Nardelli will get cash severance of $20 million, acceleration of unvested deferred stock awards and options valued at $84 million, vested shares worth $44 million, bonuses and long-term incentives of $9 million, 401(k) payouts of $2 million, retirement benefits of $32 million and $18 million in other entitlements if he abides by no-compete clauses over the next four years.

It is unclear how much of Nardelli's 2006 compensation will be included in the severance, if any.
Nardelli's pay package comes on the heels of a $200 million severance granted to Henry A. "Hank" McKinnell, who left as Pfizer Inc.'s (PFE) chief executive in July and then departed as chairman last month. His pay package was revealed in a regulatory filing.

It also comes after months of rancor at the company that once was a high-flier on Wall Street but has performed sluggishly on the markets ever since Nardelli took over. In the six years preceding Nardelli's arrival, the stock went from a $10 level to a peak of $70 on a split-adjusted basis, before falling to the low $40 range just as Nardelli arrived.

Since then, Home Depot shares never recaptured their earlier magic. They dropped close to $20 in 2003 and now are slightly lower than when he arrived.

Along the way, Nardelli has received what many have said are enormous pay packages that included a guaranteed annual bonus of $3 million, yet Home Depot shares are no better off than when he arrived.

It all came to a head in May, when Nardelli presided over a contentious shareholder meeting in which investors were not allowed to ask questions and board members were absent, unable to be held accountable for arranging the executive's pay.

Jerry Shields, Home Depot spokesman said the severance package for Nardelli was negotiated when he was hired on with the company. It's unclear whether Home Depot will enact meaningful reforms to keep a lid on such expenses going forward, or whether Nardelli's successor, Frank Blake, will receive a similar package.

"That's a good question, but it's still being determined," Shields said.

Paul Hodgson, senior research associate at the watchdog group The Corporate Library, doubts the company will adopt significant changes. For one, the same directors that negotiated Nardelli's package remain with the company. Also, the incoming Blake is a former GE executive.

While Nardelli's package might have been negotiated, it still came as a surprise, Hodgson said.
"It's more than I expected it to be, but the compensation levels at Home Depot have always been more than I expect them to be," Hodgson said.

The Corporate Library has given Home Depot its lowest "F" rating for more than two years in terms of good governance.

There are some corporate governance experts who say, however, that Nardelli's golden parachute could bring action. Even some government officials are expressing outrage.
U.S. Rep. Barney Frank, D-Mass., incoming chairman of the House Financial Service Committee released a statement calling for reining in executive pay. Frank also used the occasion to point out exorbitant executive pay and resistance to a raising of the minimum wage.

Patrick McGurn, executive vice president and special counsel for Institutional Shareholder Services, points out that while Pfizer's McKinnell and other chief executives who recently got a little extra gold in their parachutes, the Nardelli package may outrage more than most.
McKinnell, United Health's (UNH) William McGuire and KBHome's (KBH) Bruce Karatz all were longstanding executives by comparison. With only six years under his belt, Nardelli's per-annum severance is rivaled by only former Walt Disney Co. President Michael Ovitz, who received more than $140 million after little more than a year on the job.

"I think we're going to see a lot of reform," McGurn said. "The worst-case scenario played out at Home Depot."

Russ Britt is the Los Angeles bureau chief for MarketWatch.

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