Don't Blame Nardelli

By Allan Sloan
Thursday, January 4, 2007

When regular people lose their jobs -- often through no fault of their own -- they've got to fight tooth and nail for every penny. Yet here's Home Depot's chief executive, Bob Nardelli, leaving with $210 million despite not having done much of a job for anyone other than himself.

It's tempting to huff and puff about executive pay being out of control, which in many cases it clearly is. What's truly amazing here is that if you read Home Depot's documents, you discover that Nardelli did not negotiate any special exit package. Home Depot, as best I can tell, is paying him nothing more than called for by the contract that he signed in 2000 when the company "won" the bidding war to get him.

The problem isn't what Nardelli's getting to leave Home Depot. It's what he got to join the company when he signed his employment contract on Dec. 4, 2000. At the time, Nardelli was considered one of the two hottest CEO prospects in the country, along with Jim McNerney, who now runs Boeing. Nardelli and McNerney, both longtime General Electric executives, had just lost out to Jeff Immelt in the highly publicized battle to succeed Jack Welch as GE's chief.

Ken Langone, one of Home Depot's co-founders and a big fan of the "it's impossible to pay a good CEO too much" school of compensation, played a key role in signing Nardelli. Langone, you may recall, was also heavily involved in the controversial compensation package of Dick Grasso, the departed chief executive of the New York Stock Exchange. I wanted to talk to Langone about all this but, alas, he wouldn't take my call.

The size of Nardelli's package "isn't a surprise to me," said Paul Hodgson, senior research associate at the Corporate Library, which analyzes corporate governance. "The seeds of this debacle were sown in 2000," he said. "Everything was in his contract."

Though $210 million is a huge amount of money, there are corporate chieftains who've walked away with much more. Lee Raymond of Exxon Mobil got $400 million or so. Jack Welch left GE as a billionaire, and Roberto Goizueta left Coca-Cola in similar fashion. But Raymond, Welch and Goizueta were huge successes who spent essentially their whole careers working for one company. Nardelli, in contrast, is a latecomer leaving under a cloud because the performance of Home Depot's stock has lagged.

By Hodgson's math, Nardelli is actually walking away with less than another recently ousted CEO, Hank McKinnell of Pfizer. Hodgson puts McKinnell's package at $213 million, about $15 million more than the number Pfizer has used. Hodgson cautioned that his number for Nardelli may change when Home Depot (which wouldn't talk to me) releases more details.

It's not clear how much Home Depot is paying Nardelli to leave. The company said $210 million, but that includes stock he already owns and retirement benefits that have nothing to do with his departure. The split seems to be about 50-50.

Nardelli's cash severance is $20 million, which is about three years of his annual salary and bonus. He's also getting what the company described as "unvested deferred stock awards" worth about $77 million and unvested options worth $7 million. That adds up to about $104 million.

The rest of his package includes deferred stock in which Nardelli had vested, his various retirement packages and $18 million of miscellaneous benefits (whatever they are) that he stands to get over the next four years. I'm not trying to minimize Nardelli's swag, or to justify it. I'm just trying to show you how lush his contract was.

The world is full of people screaming about how unreasonable it is to lavish such riches on the likes of Nardelli. But as Hodgson says, the problem isn't Nardelli. It's the contract that Home Depot's board gave him. Under the agreement, he was paid mostly on the basis of how long he stayed, not on how well he or the company performed.

The other thing for which you can fault Home Depot's board is that it felt it had to go outside for a CEO six years ago, rather than feeling comfortable appointing someone from within. Hiring a CEO from the outside is expensive. Nardelli and McNerney, the two "losers" in the Jack Welch succession wars, got far more from their new employers to leave GE than Jeff Immelt got for staying.

Maybe someone will learn something from the Nardelli fiasco and companies will be more careful about what they agree to pay newly hired outsider CEOs. But I'll bet that when the cycle turns, companies will bid up the market for star CEOs again.

Repeat after me: The time to have the debate over CEO compensation isn't when the CEO is fired. It's when he's hired.

Sloan is Newsweek's Wall Street editor. His e-mail address

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