Ouch!
The Atlanta Journal publishes in Home Depot's hometown.
I'm a 7 year HD associate and today was the best day I've had in years. You shoulda heard the cheers!
Nardelli benefits grossly from appalling standard
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Published on: 01/04/07
Bob Nardelli was, by almost any measure, a failure in his job.
As chairman and chief executive officer, Nardelli led Atlanta-based Home Depot for six years, and during that time the company's stock price declined almost 8 percent. In that same time frame, the stock market as a whole rose almost 17 percent, and the stock price of the company's prime competitor, Lowe's, soared, as did its market share.
Nardelli's real failure runs still deeper, though, in ways less easily measured. Home Depot's once sterling reputation - among customers, shareholders and employees - also plummeted under his leadership, a critical failing for a retail company whose dominance in the home-improvement sector was once built on customer service.
So on Wednesday, Nardelli paid the price for his failure, just as football coaches and others do, with the company announcing his resignation. And as part of the deal arranged for his departure, Nardelli will take with him a package of benefits totaling $210 million.
That buyout, combined with his previous compensation, means that for his six years of failed leadership at Home Depot, Nardelli will have reaped several hundred million dollars from company shareholders.
Ladies and gentlemen, that's obscene.
Typically, criticism of soaring executive pay is dismissed as mere envy or class warfare. Successful people - the producers in society - ought to be rewarded, the theory goes. If CEO pay is now several hundred times that of the average worker, well, market forces must be allowed to play out, and the only ones who complain are the losers.
Well, not only the losers. Warren Buffett, the head of Berkshire Hathaway and by most accounts the world's savviest investor, has also been highly critical of runaway CEO pay. In his company's 2005 annual report, he discussed the problem in terms that seem to describe Nardelli perfectly.
"Too often, executive compensation in the U.S. is ridiculously out of line with performance," Buffett wrote. "That won't change, moreover, because the deck is stacked against investors when it comes to CEOs' pay. The upshot is that a mediocre-or-worse CEO ... all too often receives gobs of money from an ill-designed compensation arrangement."
In Nardelli's case, there was no accountability built into the system, only guaranteed "gobs of money," to borrow Buffett's description. If Nardelli succeeded at Home Depot, he was going to be a very rich man, which is fair enough. But if he failed, he was also going to be a very rich man, and there's the rub.
Adam Smith, the 18th century Scottish philosopher, is revered as the founder of capitalist theory; among many other ideas, he contributed the concept of market forces operating as an invisible hand, guiding the economy with far more wisdom than government or anyone else could ever manage.
However, Smith was not naive about the ways in which the "invisible hand" could be manipulated and thwarted by those with the power to do so. And he was particularly harsh about the impact of guilds, the associations of tradesmen and artisans who joined together to insulate themselves from competition and basically set the price for their labor and skills artificially high.
That's in essence what corporate executives have become in this country, an informal but highly effective guild. As Buffett and others point out, it is a closed system in which CEOs, retired CEOs and future CEOs sit on boards of directors and compensation committees, setting each other's pay with no incentive whatsoever to keep that pay within bounds of decency or justice.
In fact, for a CEO or other board member to actually object to another CEO's pay package, Buffett once wrote, "would be like belching at the dinner table." Members of the guild just don't do that to fellow guild members.
As the Home Depot case demonstrates, there is no economic explanation for such ludicrous arrangements, only greed allowed to play itself out with no force to countervail against it. Smith, writing more than 200 years ago in his classic "Wealth of Nations," explained it all quite well when he wrote: "All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind."
=B7Jay Bookman is the deputy editorial page editor. His column appears Thursdays and Mondays.