The last few years have seen obscene payments made to CEOs. The gap between what the top managers earn and what labourers in their factories earn has never been as wide as it is today (unless you go back to Feudal landlord days). Of course, if these top managers with all the pressures on them were delivering serious financial returns to shareholders on a consistent basis and developing not only short-term, but also long-term capacity and sustainable comeptitive advantage, then they deserve to be rewarded appropriately.
But the trend has been to pay bonuses and perks completely unrelated to performance. Even worse, is when badly performing CEOs leave a company (by choice, or pushed) they are often paid unbelievable severance packages, rather than simply being sent packing in disgrace!
There has been great hope that those fat cat days were a thing of the past, and that the backlash of shareholders would stop this trend. But 2007 has started with the departure of Home Depot’s Bob Nardelli (he had previously been on the GE shortlist to replace Jack Welch, and left when Immelt was appointed to that post). For the last 6 years, he has consistently been near the top of the list of “most overpaid CEOs”. This is particularly true because Home Depot has gone nowhere under his leadership. Under the terms of his contract, his severance package is worth $210m. Not too bad, considering that the share price on the day before his departure (3 January) was slightly less than it was when he took the job in 2000.
This is unbelievable, indefensible and immoral. Simple as that!
Luckily, it appears as if shareholder activism is working, and this hopefully will be one of the last of these sorts of fat cat payouts.
The Economist sums it up this way:
Mr Nardelli reacted to criticism of his pay with defiance. At last May’s annual meeting he declined to give the customary speech and, apparently at his urging, the ten other members of the board did not attend. This outraged many shareholders, notably those seeking improvements in Home Depot’s governance.
Those activists enjoyed their revenge this week, for it seems that Home Depot’s board took fright at last month’s declaration of a war that would culminate at this year’s annual meeting. Relational Investors, an investment firm led by Ralph Whitworth, a legendary shareholder activist, had called on Home Depot’s board to establish a committee to review corporate strategy and management performance, and to explore alternatives, including selling the firm. Relational would also nominate two candidates for election to the board.
With the Securities and Exchange Commission’s new disclosure rules on executive compensation taking effect this year, Mr Nardelli’s fate will surely scare other overpaid bosses, especially those with less lavish severance terms. His successor is Frank Blake who, as is now the fashion (witness Pfizer and Viacom), spent much of his career as a lawyer. Whether his legal skills will equip him to revive Home Depot’s share price remains to be seen. But they should help him do a better job than Mr Nardelli of appeasing shareholders, perhapsâ€”as analysts at Goldman Sachs are musingâ€”by selling Home Depot to the private-equity buyers circling greedily overhead.