With Links to Home Depot Board, Chief Saw Pay Soar as Stock Fell
By JULIE CRESWELL
Published: May 24, 2006
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
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
"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
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
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
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
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
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
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
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
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
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
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
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