Corporate America received a dose of common sense when The Home Depot Inc. said that its new chief executive, Frank Blake, would be paid a fraction of what his predecessor was taking home.
Corporate America received a dose of common sense when The Home Depot Inc. said that its new chief executive, Frank Blake, would be paid a fraction of what his predecessor was taking home.
The biggest news out of the new compensation plan for Mr. Blake is that most of his pay has to be earned through the company’s performance. That is truly a refreshing concept, one which Corporate America should embrace if it wants to win back the confidence of shareholders.
With executive compensation and corporate-governance practices coming under increasing scrutiny, the timing also would be right for other publicly traded companies to follow Atlanta-based Home Depot’s example.
Case in point: Many big businesses recently have been targeted by investors calling for a non-
binding vote on how top executives are paid.
Additionally, a group of 13 institutional investors recently sent a letter to the Securities and Exchange Commission asking it to consider requiring an advisory vote on how top executives are paid in the United States.
Clearly, it is time for Corporate America to get with the program. Corporate boards need to make tactical business decisions to ensure that executive pay isn’t continuously out of whack.
Executive compensation has even caught the attention of President Bush.
In his “State of the Economy” speech delivered last week, he called on corporate boards to “step up to their responsibilities” by paying more attention to the executive compensation packages they are approving.
Although the president rejected a government role in setting executive pay, he said: “The salaries and bonuses of CEOs should be based on their success at improving their companies and bringing value to their shareholders.”
Corporate board members “need to show the world that America’s businesses are a model of transparency and good corporate governance,” Mr. Bush said.
Mr. Blake’s compensation package sends a great message to Home Depot shareholders.
It is comforting to find that the board members at the home-improvement retail giant understand that its previous CEO compensation was a disaster and that they figured out how to fix the problem.
It remains to be seen whether more companies will follow Home Depot’s lead and shell out the big bucks only when the boss actually does the work and delivers solid performance.
Compensation alternative
For the good of investors, one can only hope the Home Depot executive compensation plan becomes a rule rather than an exception among big businesses.
If common sense prevails in other corporate boardrooms, this could be a key step in creating an alternative to super-sized executive payouts.
Mr. Blake, who took over at the firm Jan. 2, gets a base salary of $975,000. He will receive his bonus money, which is about $8 million, only if he meets the board’s profit and stock performance goals.
Additionally, a percentage of Mr. Blake’s bonus is based on the firm’s stock performance compared with that of other companies in the Standard & Poor’s 500 stock index.
What’s more, his contract doesn’t include a severance package.
Mr. Blake’s compensation obviously is a great deal different from that of his predecessor, Robert Nardelli, who resigned recently.
Mr. Nardelli had a base salary of $2.25 million and a $7 million cash bonus, neither of which was tied to performance. Additionally, he walked away with a mind-boggling $210 million retirement package.
Mr. Nardelli was paid $225 million during his six years with Home Depot, while the stock consistently had a poor performance compared with that of its top competitor, Lowe’s Cos. Inc. of Mooresville, N.C.
Home Depot had lost market share to Lowe’s since Mr. Nardelli took the reins in December 2000. And while Home Depot’s shares declined, Lowe’s shares tripled during that period.
The directors at Home Depot reacted to the shareholder outcry that followed their wild spending with Mr. Nardelli. They extended an olive branch in a concerted effort to win back shareholder trust and confidence.
Kudos to the Home Depot board members for using their heads and for constructing a compensation plan that more closely links the chief executive’s success to that of the shareholders.
The move is a first step on the road to control executive compensation. Here’s hoping it is a trend in boardrooms all across this country.
