The Case of Robert Nardelli

In case you don't know, Robert Nardelli is the former CEO of Home Depot. He resigned effective January 2. But don't worry about how he's going to pay the bills. He walked away with a compensation package worth approximately $210 million dollars. Yes that's right. $210 million.

Unlike some people, I don't have a problem if someone is paid a lot of money. If an athlete performs well enough and helps his franchise financially, then he might deserve $30 million a year. If an actor consistently does well and brings people into the theatres, then he may deserve $20 million a picture. Likewise, if a CEO creates value for his shareholders, then he deserves to be paid very well.

But here's the problem in the business world now. Companies have negotiated sweetheart deals for executives that don't deserve it. Bob Nardelli is one of them. Consider the following...

- I couldn't find the exact date that Bob Nardelli took over, but I think it was around December 6 2000. That may mess up the numbers but I'll be using the closing price of December 5. On that day the share price of Home Depot closed at an adjusted level of $41.65. On the final trading day before his resignation, Home Depot traded at $41.07. So in more than six years on the job, he succeeded in basically leaving the company at the same value as he did when he came. Not too good.

-It gets worse. Look at this chart that compares how Home Depot has performed compared to its main rival Lowe's

Home Depot Vs. Lowe's

While Home Depot has traded flat and slightly negative, Lowe's has increased by over 200%.

So the question is...why did he get the package for performing in such mediocre fashion? Well, the pay package was negotiated in 2000, according to The Economist. That was when markets were still high flying (but beginning to slip). So everyone who was in charge of a public company was brilliant because they were all going to go up forever.

This will stir the flames of executive compensation once again. Middle class investors will gnash their teeth, politicians will sponsor official inquiries and so on and so forth. The main problem I see is like other positions I mentioned (great athletes, charismatic actors, etc.) the supply of extremely qualified CEOs is very small. Therefore, companies have to pay an exorbitant amount to entice those they think are the "Chosen One". In this case, Home Depot's board laid an egg.

I don't think Bob Nardelli is necessarily incompetent. I don't know enough about Home Depot to judge him (although I think the statistics I showed conveyed he wasn't on top of his game). But Nardelli did have that aura about him. He was the former CEO of GE Power Systems and he was one of the main contenders for the coveted CEO position at GE. So he was a hot prospect. Unfortunately, in this case and situation, he was more hype than substance.

Companies who choose a CEO need to be more frugal when choosing a leader for the company. Handing out vast pay packages can have brutal consequences for your company's finances and reputations especially if the CEO doesn't pan out. I doubt that this one case will spur other boards to be more conservative with their spending was. However, if excesses like this continue, they may have no choice because the government (especially one with Democrats controlling Congress) might end up getting involved.