The Weird World Of Economics

How To Get $210 Million Exit Package

In May, in a nearly empty basement ballroom at the Hotel du Pont in Wilmington, Del., Robert L. Nardelli, the chairman and chief executive of Home Depot, stood between huge timers, intended to limit questions from the handful of shareholders present. After dismissing questions about his compensation or the independence of the board, Mr. Nardelli abruptly ended the meeting after only 30 minutes.

Time ran out on Mr. Nardelli on Tuesday, after the board, at a hastily arranged meeting, decided that he should go — with a $210 million exit package.

It was a surprising turnaround for Home Depot’s board, which had publicly supported Mr. Nardelli as recently as two weeks ago even as questions about his compensation, business strategy and autocratic management style mounted.

What ultimately divided the board and its chief executive appeared to have been Mr. Nardelli’s compensation. Over six years as chief executive, he had taken home $64 million and was on track to earn hundreds of millions more. In recent months, people close to the board say, directors sought to rein in the compensation under the terms of his current contract. Mr. Nardelli, these people said, had challenged that effort.

“He was brought down by his compensation,” a person close to the board said. “It was an erosion of relationships over several months. He lost the confidence of the board.”

In the end, the debate over cutting Mr. Nardelli’s pay may not have revolved around large numbers. It would have been possible, for example, for the board to give Mr. Nardelli a minimum bonus of $3 million under the terms of his contract, rather than the $7 million he received in 2005.

A director, however, speaking on the condition of anonymity, insisted that compensation was not the reason for Mr. Nardelli’s departure and that there was no “smoking gun” behind his resignation.

The fall of Mr. Nardelli is the latest illustration of chief executives and boards coming under pressure when rich executive pay yields few apparent returns in the form of a rising stock price or improving profits. Outsize executive pay has increasingly become a flash point for investors, lawmakers and regulators.

Still, critics of executive pay practices were incensed by Mr. Nardelli’s gold-plated exit, the terms of which were largely laid out in his 2000 contract. The pay package includes severance and retirement pay, restricted stock, stock options and other forms of deferred compensation.

The package is “further confirmation of the need to deal with a pattern of C.E.O. pay that appears to be out of control,” said Representative Barney Frank, Democrat of Massachusetts, who will be chairman of the House Financial Services Committee.

When he was hired, Mr. Nardelli was a prized former manager under John F. Welch Jr. at General Electric, running its $15 billion power systems division. Since he became chief executive, however, Home Depot’s stock price has languished and the company has lost market share to its chief rival, Lowe’s.

But the seeds of Mr. Nardelli’s ouster were sown that day in May, according to several people close to the board. The angry outcry over how Mr. Nardelli conducted the annual meeting was compounded by the humiliation board members felt because they had been persuaded to stay away from the May meeting, departing from usual practice.

That discontent grew in recent months as large shareholders threatened a revolt at Home Depot’s annual meeting this spring.

Yesterday, Home Depot, the nation’s largest home-improvement chain, named Frank Blake as its new chairman and chief executive. Mr. Blake, another former General Electric executive, joined Home Depot in 2002 and helped develop business strategy at the company.

Mr. Blake already appears to be distancing himself from Mr. Nardelli and his rigid style. In an address to Home Depot employees over an internal television system yesterday, Mr. Blake advised them to “lighten up” and “have fun again,” according to one worker.

Mr. Blake’s current employment agreement is in force, Home Depot said, and the board is working out details of a new employment contract.

Shares of Home Depot rose 2.3 percent, or 91 cents, to $41.07 yesterday.

Messages for Mr. Nardelli were not returned yesterday.

For Kenneth G. Langone, a director and co-founder of Home Depot, Mr. Nardelli’s resignation carries a particular sting. A onetime member of the G.E. board, Mr. Langone played an instrumental role in bringing Mr. Nardelli to Home Depot. And when it became clear that Mr. Nardelli would come aboard only as chief executive, he persuaded his old friend, Arthur Blank, then the chief executive, to step aside.

Mr. Nardelli was the first chief executive plucked from outside of Home Depot since its founding in 1978. He immediately drew fire over his lack of retail experience.

Inside the company, his hands-on, severe management style rubbed against a more casual culture that gave store managers autonomy.

By contrast, Mr. Nardelli was an obsessive workaholic who rose at 4 a.m., logged 14-hour days and routinely worked through the weekend, splitting his time between Home Depot’s headquarters in Atlanta and shuttling from store-to-store in a chauffeured black Chevy Suburban.

He earned the nickname “general” — and, as if to underscore the point, he hired dozens of former military officers to run stores, a recruitment strategy he introduced at G.E.

Mr. Nardelli never won over the chain’s store managers, current and former company executives said. After touring stores, he frequently inflamed managers by sending critical e-mail messages about cluttered aisles and poorly lighted displays.

The result was a high level of manager turnover. In the last 18 months, three senior merchandise executives — Tom Taylor, John Costello and Carl C. Liebert III — left the company, leaving Mr. Nardelli with very few experienced retail executives in his top ranks.

“The long-term retailers never felt he integrated himself into the retailing piece of the business,” said Harold Reiter, chairman and chief executive with Herbert Mines Associates, an executive recruitment firm.

Outside of the company, many shareholders, angry at how the annual meeting in May was conducted, struggled to embrace the bold strategic course Mr. Nardelli was setting for Home Depot that steered it further away from its bread-and-butter business of selling hammers and nails to consumers.

For instance, Mr. Nardelli was betting big on Home Depot Supply, a new unit that supplied professional contractors with lumber, cement and pipes. He spent $7 billion in recent years to buy about 40 companies, turning Home Depot Supply into a $12 billion business, whose sales now account for 13 percent of the company’s $90 billion in revenue.

Mr. Nardelli also planned to move aggressively overseas, particularly into China, where the company acquired a retail chain in December.

During his tenure, Home Depot doubled its sales and sharply increased its earnings per share.

Yet while the board backed his vision for the company, shareholders were less enthused. The stock has barely budged over his tenure.

Because of that lackluster performance, critics sought to make Mr. Nardelli Exhibit A for chief executives who receive millions and millions of dollars in pay for weak performance.

Many of those critics took aim at Home Depot’s board, which they argued was cozy and tight-knit, with close ties between one another and with G.E. Sitting at the center of Home Depot’s board is Mr. Langone, who has been the longstanding chairman of the board’s nominating committee and who some critics say has loaded up the board with many of his friends and former business associates. A proponent of paying chief executives well for their performance, Mr. Langone has long supported Mr. Nardelli’s generous contract.

As chairman of the compensation committee at the New York Stock Exchange, Mr. Langone also signed off on Richard A. Grasso’s largest pay days as chairman and he remains embroiled in a civil suit over Mr. Grasso’s $139.5 million pay package.

Mr. Langone did not return calls for comment.

The lawyer who represented the New York exchange was the same lawyer who represented the board of Home Depot: Martin Lipton, the takeover lawyer who founded Wachtell, Lipton, Rosen & Katz.

Mr. Lipton, a longtime friend of Mr. Langone, was originally hired to help defend Mr. Nardelli and the board against Relational Investors, an owner of Home Depot shares that has challenged Mr. Nardelli’s strategies in regulatory filings. Mr. Lipton has often found himself in the middle of sticky situations where the chief executive is ousted and paid an enormous golden parachute. Mr. Lipton also worked for Morgan Stanley’s board when Phillip Purcell was fired. He did the same for Disney when Michael D. Eisner was terminated. While many of Home Depot’s critics were elated that Mr. Nardelli was leaving the company, they expressed shock at the size of his departure pay package.

“We’re aghast at the level of compensation that Nardelli is walking away with — this is money directly out of shareholders’ pockets,” said Richard Ferlauto, the director of pension investment policy for the American Federation of State, County and Municipal Employees, whose pension fund owns shares in the company.

Furthermore, if Home Depot is trying to distance itself from Mr. Nardelli, Mr. Blake is a strange choice, some Wall Street analysts said. Like Mr. Nardelli, Mr. Blake has little retail experience. He spent much of his career at G.E. and helped develop the Home Depot supply business.

“There will be some pushback to his appointment,” said Stephen C. Chick, an analyst with J. P. Morgan Securities.

Analysts said the performance of Home Depot’s retail business, which has lagged behind that of its main rival, Lowe’s, for several years, lay at the heart of Mr. Nardelli’s troubles.

Mr. Nardelli’s original strategy of sharply cutting costs — by reducing employees’ hours and hiring more part-timers — alienated loyal customers, who relied on experienced store staff for advice.

“Home Depot was managing the company for Wall Street’s earnings expectations and that came at the expense of the investment needed in their retail business,” Mr. Chick said.

Mr. Nardelli “has to take the blame for that,” Mr. Chick said.

Far from cooling down shareholders angry over Mr. Nardelli’s pay and other corporate governance issues, Mr. Nardelli’s departure seems to have instead inflamed them.

“It’s not enough to shuffle the deck chairs; they haven’t changed their strategy and there isn’t any fresh blood on the board,” said Ralph Whitworth, who heads Relational Investors, which owns about $1 billion of Home Depot’s stock, or about a 1.2 percent stake.

About three weeks ago, Mr. Whitworth notified Mr. Nardelli in a letter that he was intending to call on shareholders to create a committee to study Home Depot’s direction and performance and planned to submit at least two candidates for the board.

Yesterday, Mr. Whitworth said those plans had not changed.

“There’s clearly some big, big corporate governance issues here and I don’t expect that to change without fresh blood on the board,” he said.

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