The New York Times had quite a meaty article on the front page today: With Links to Board, Chief Saw His Pay Soar. If you have any interest in executive compensation, corporate governance, or business ethics, this is an exceptional article to read.

Centered on the astronomical compensation of Home Depot CEO Robert Nardelli, the article touches on many corporate governance issues. One of the particularly interesting topics discussed is the conflicting presence of a sort of CEO’s club at the director level. It seems that many of the individuals on Home Depot’s board are currently, or were in the past, CEOs of fairly large companies. In fact, one of the board members enjoys a higher compensation package than Mr. Nardelli. Apparently many conflicts arise from these kinds of relationships:

“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.

“…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.”

Hmmmm.

Home Depot shareholders are a bit miffed at Mr. Nardelli, and rightly so:

“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 percent…. 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 $7 million.”

Is there a conflict with the CEO’s compensation and in prioritizing shareholder returns? How does this all fit into exemplary corporate governance? The short answer is that it doesn’t. It gets a bit worse:

“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.

“…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 Library.”

There is a lot more juicy content in the article. I highly recommend taking the time to read it.

TAGS: Corporate Governance | Business Ethics | Ethics | CEO Compensation | Executive Compensation | Home Depot | CEO | Board of Directors | Corporation

This entry was posted on Thursday, May 25th, 2006 at 12:14 am and is filed under Business Ethics, CalPoly MBA, Corporate Governance, Corporate Social Responsibility. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.