CHICAGO (AFX) -- Bob Nardelli, the usually feisty chairman and chief executive of Home Depot Inc., will be facing an unusually large group of dogged antagonists at his company's annual meeting on Thursday.
The elephant in the room will be the estimated $245 million pay package -- and that's a conservative estimate -- that Nardelli is receiving while shareholders have lost money during his five years with the home-improvement behemoth.
When Nardelli joined Home Depot as its chief in December 2000, the shares were trading at an average of $43.06. On Wednesday, the stock was changing hands at about $37.82, representing a 12% decline since Nardelli put on the familiar orange apron.
That's particularly rank to shareholders who do the math on shares of Home Depot's biggest rival, Lowe's Cos. During the same period, which also included a changing of the guard, shares of Lowe's have rocketed 187% from an average of $20.89 to $60.66 at Wednesday's close.
'This compensation is egregious in comparison to [Home Depot's] performance,' said Brad Pacheco, a spokesman for the California Public Employees' Retirement System, or Calpers. 'Their performance has declined, they have fallen behind their competitors and it takes away from the pockets of shareholders.'
Calpers, the nation's largest pension fund, will be among other pension funds and shareholder activists protesting outside the Hotel du Pont in Wilmington, Del., ahead of the morning meeting and then gathering inside -- coached and geared up for a full-fledge discourse on this year's proxy.
Calpers is backing a crusade led by the American Federation of State, County and Municipal Employees to single out Nardelli and executives like him who are paid significant amounts of compensation in the form of wages, stock grants and deferred options.
Adding it all up
Nardelli, who got the Home Depot job after losing out in a three-way race for the top spot at General Electric Co., has a compensation package that intertwines his salary and bonuses with attractive stock grants and deferred options, loans and perks.
Brian Foley, an independent compensation consultant who has analyzed Nardelli's package, said that a big bulk of it is gleaned from grants and options. By Foley's calculations -- which he says represent one-third of the face value of the stocks -- Nardelli has been awarded $90 million in grants and $87 million in deferred options.
The rest of Nardelli's pay is made up of his salary, bonuses and a $10 million loan that was forgiven, costing shareholders about $21 million with accrued interest.
'The $245 million is conservative,' Foley said. 'If the stock were actually performing well over a sustainable period of time, his package could be worth considerably more.'
AFSCME thinks that if investors had had a say in that, Nardelli would be compensated more in line with his peers. The government union group's proposal calls for shareholder approval -- as an advisory vote -- of the board's compensation committee's pay packages for senior executives.
In what amounts to a no-confidence vote, AFSCME said on Monday that it will withhold votes from 10 of the 11 directors on Home Depot's board.
In its proposal, AFSCME said that Home Depot's pay policy does not 'give stockholders enough influence over pay practices,' according to the proxy. 'Such a vote isn't binding but it allows stockholders a clear voice, which could help reduce excessive pay.'
Home Depot opposes the measure. Spokesman Jerry Shields said the company has no further comment on that proposal or others in the proxy, nor on Nardelli's pay package, which has become a lightning rod in the days ahead of the meeting.
Richard Ferlauto, AFSCME's director of pension and benefit policy, said that the Home Depot push is part of a broader effort to rein in excessive pay packages for top executives.
'There are different ways to describe who's worst, but Nardelli definitely is the poster child,' Ferlauto said.
The Corporate Library, the independent corporate governance watchdog, called Home Depot one of its 11 'pay-for-failure companies' in a report issued in March.
'Far too much of executive compensation is not tied to performance,' said Paul Hodgson, Corporate Library's senior research associate. 'And what is tied to performance is not particularly effective.'
Mixing metrics
At Home Depot, the performance measurements were rejiggered in recent years, according to Hodgson, from a stockholder return-to-earnings goal to one linked to earnings per-share achievements.
'Total stockholder return at Home Depot is doing very, very badly, but its earnings achievement is actually quite good,' he added.
'The change had been made not to improve the plan, but to make sure that executives received payouts from it.'
Indeed, Home Depot's stock has tumbled under Nardelli, but its sales and profit have not. Just last week, Home Depot reported a 19% surge in first-quarter earnings to $1.48 billion, or 70 cents a share, compared with year-ago income of $1.25 billion or 57 cents a share, notably ahead of the average 67 cents a share consensus reached by analysts reporting to Thomson First Call.
Under Nardelli's leadership -- which has shaken the culture and direction of the company -- Home Depot's sales have grown exponentially to $81.51 billion in 2005 from $45.73 billion in 2000. Net income has done better at $5.83 billion last year from $2.58 billion in 2000.
His reign also has seen steady improvements in most key ratios. The return on total equity has gone from 20.9% in 2000 to 24.2% in 2005.
Return on invested capital rose to 22.5% in 2005 from 19.8% in 2000. Gross profit margin last year stood at 31.73% of sales from 29.9% five years before, though it did fall from 33.4% in 2004.
Those metrics bolster the company's argument that Nardelli has done a stellar job of growing and expanding the retailer's businesses and services, while laying a strong foundation for the future.
But for shareholders who invested in Home Depot when, and maybe because, Nardelli was named to the top job, that's not necessarily good news.
During that same period, Lowe's -- a much smaller company -- has seen its sales grow at a wider margin to $36.46 billion from $18.77 billion in 2000, while net income jumped to $2.17 billion in 2005 from $809.9 million in 2000.
Also consider Lowe's better ratios: Return on total equity reached 24% from 17.2% in 2000; return on invested capital in 2005 was 24% compared with 13.8% in 2000. Gross profit margin reached 32% last year vs. 26% in 2000, and it experienced a year-over-year gain from 2004's 31.3%.
'We want to know why the board continues to lavish compensation on Nardelli ... without regard to performance,' AFSCME's Ferlauto said.
Another proposal, which is similar to one offered in 2003, urges a separation of Nardelli's duties as chairman of the board and chief executive. The proposal calls for the chairman to serve only in that capacity -- with no management duties, titles or responsibilities -- as a means of firmly establishing that position's independence.
That proposal suggests that excessive executive pay 'could be a sign of a more serious problem: that our board has weak oversight of our CEO's performance.
'The pay-for-failure, pay-for-success, pay-for-anything-at-all attitude displayed by our board calls into serious question its effectiveness,' according to the proxy.
Home Depot opposed that proposal too, noting that Nardelli is able to promote communication, synchronize activities and 'provide consistent leadership' as a conduit to both the board and the company.
Besides, Home Depot said in the proxy, Nardelli is not the only source of information to the board.
Ahead of the meeting, it appeared that the proposals would receive a significant amount of votes, though not necessarily enough votes to clear a majority.
Even if they did win shareholder approval, they're still advisory -- meaning that the board could choose to ignore them.
Ferlauto acknowledges that, and even accepts it. 'They don't have to listen to us,' he said. 'We're hoping to embarrass them into doing the right thing.' This story was supplied by MarketWatch. For further information see www.marketwatch.com.