The Home Depot’s stock price fell 8 percent under the six-year tenure of former CEO Robert Nardelli. During those same six years, he received more than $240 million in compensation. In January 2007, Robert Nardelli resigned, but not before taking an exit package worth approximately $210 million.
This huge exit package was made possible thanks to an employment agreement, which Nardelli entered into when hired in 2000. Such employment agreements are binding legal contracts that are difficult, if not impossible, for companies to break and are common among many corporations. Employment agreements spell out what an executive receives and sometimes guarantees payment regardless of an executive’s performance.
For example, among other benefits, Nardelli’s contract called for an annual salary of at least $1.5 million, an annual bonus of at least $3 million, an annual stock option grant of at least 450,000 shares and a grant of deferred stock units corresponding to 750,000 shares of stock, regardless of performance. His employment agreement also stipulated how much compensation he would receive in each possible termination scenario.
In the case of Nardelli’s recent resignation, part of his agreement stated that he would receive $20 million in cash severance. The agreement also called for accelerated vesting of options and deferred stock awards that he received throughout his employment. Thus, 40 percent of Nardelli’s $210 million exit package, or $84 million, was due to accelerated vesting in options and stock awards. Some of this amount consists of the annual compensation guaranteed by his contract.
Making matters worse, Nardelli received a grant of stock options during the brief market slide shortly after the terrorist attacks on Sept. 11, 2001, which broke Home Depot’s regular pattern of issuing options. Granting stock options during a temporary decline in stock prices can result in a windfall profit unrelated to company performance.
The Home Depot revealed in June 2006 that the U.S. Securities and Exchange Commission initiated an informal inquiry in connection with past stock option grants. Backdated stock options from 1981 to 2000 resulted in $200 million in overstated earnings. The backdating ended the month before Nardelli became CEO. Though an internal review concluded there was no wrongdoing by any current management or board members, it does not state who was responsible.
At Home Depot, the Leadership Development and Compensation Committee of the Board of Directors reviews and recommends the compensation of executive officers and makes grants of stock and option awards. John Clendenin is the only member of the board who has served on the committee during part of the period in which Home Depot backdated stock options. He also was chair of the committee when Nardelli began as CEO and was a member when Nardelli resigned.
Board member Kenneth Langone, chairman of the New York Stock Exchange's compensation committee in 2003 when then-chairman and CEO Dick Grasso was forced to resign over a $140 million compensation package, was on the Home Depot Stock Options Committee during part of the period in which Home Depot backdated stock options. He also recruited Robert Nardelli to be CEO of Home Depot.
Both Clendenin and Langone, as well as the rest of the Home Depot board of directors outside of Nardelli, were noticeably absent from Home Depot’s 2006 Annual Shareholders' Meeting.
