Monday, January 08, 2007
210 Million Bucks For A Rotten Orange
In case anyone still believes that CEOs invariably deserve that vast sums of money they, ahem, "earn", here is the story of Bob Nardelli, who recently left Home Depot with a $210 million severance package after six years of abysmal failure. During his tenure, Home Depot's stock price fell 8 percent - even while the average stock price rose 17 percent - and the company was eclipsed by its rival, Lowe's, whose stock price tripled over the same time period. Nardelli also behaved arrogantly with shareholders, and under his incompetent leadership customer service - the hallmark of retail customer satisfaction - actively declined. Home Depot should have known better than to hire Nardelli to begin with, since his management experience was solely in the manufacturing sector, not in retail, which is a whole different animal. A GE alumnus and a protege of downsizer par excellence "Neutron Jack" Welch, Nardelli exhibited little imagination of the sort that drove the ascendancy of Lowe's, such as better store design and "female friendly" product lines. Instead he simply acquired (and gutted) smaller companies, and replaced experienced staff with low-paid part-timers. His cost-cutting mania alienated customers and employees alike.
Nardelli himself may have suspected he was an unsuitable candidate because he made sure that he would be paid a fortune regardless of his performance. As USA Today says, "Payouts such as Nardelli's dispel the argument that executive pay is rational or fair...Nardelli got so much largely because he negotiated a deal when first hired in 2000 that guaranteed him lavish pay if he got the boot. Such deals are all too common in corporate America and make a mockery of the notion that there is a functional labor market for senior executives...The perverse logic of these deals goes something like this: A CEO must be paid a fortune because that is what he is worth; yet, if he loses his job for any reason - poor performance or something more benign, like a merger - he has to be amply compensated because he is unlikely to make that kind of money anywhere else." Since Nardelli was regarded as a corporate superstar, he was a given a blank check. According to The Toronto Star, Nardelli is the beneficiary of a corporate culture that overvalues the worth of CEOs. Its features include "the cult of the celebrity CEO; the mistaken view that outside CEOs are ideal 'change agents' to revitalize tired enterprises; cronyism among board members, and the ease with which they succumb to the pitches made by executive-pay consultants for steadily more outlandish compensation packages; the conviction mistakenly held by boards that managers with CEO potential are as rare as Hope-sized diamonds; and autocratic, insular CEOs who grossly exaggerate their importance in overseeing organizations employing tens of thousands of people."
Let us hope that "Bob The Dud" Nardelli becomes the poster boy for a fresh look at the inflated value of chief executives.
"Our view on CEO compensation: When failure's worth $200M, something's out of whack" from USA Today
"Need a cart, Bob?" from The Cleveland Plain Dealer
"Win-win gifts for CEO losers" from The Albany Times-Union
"A $210 million parachute" from The Toronto Star