Most CEOs favor market solutions over regulatory ones and laissez-faire economics over other kinds. Little wonder: When you're the most powerful guy in the market–or the company–things tend to go your way.
Even when they don't go your way, which is the happy conundrum Home Depot CEO Robert Nardelli has found himself in. Under pressure from shareholders, Home Depot's board has dumped Nardelli after six years, deciding he's not the right guy to lead the home improvement chain out of a slump. But to make his departure less painful, Home Depot is handing Nardelli a parting gift worth $210 million in cash, stock, and options. That's about 25 times what the average Fortune 500 CEO earns per year. It's more than the total payroll of the New York Yankees.
Commence bellyaching. Nardelli has been a lightning rod for inflated CEO pay for a while, and the rich exit package will intensify protests. Home Depot has paid Nardelli almost $250 million over the past six years, to reward him for boosting the stock price by ... a lofty 3 percent. Firing him turned out to be more cost-effective; in the three hours following the announcement of his departure, Home Depot's stock rose another 3 percent.
Meanwhile, at rival Lowe's, which has been causing Nardelli grief (pesky competition!), the stock has risen nearly 180 percent since 2001. Lowe's CEO, Robert Niblock, earned about $9.5 million last year–handsome pay for sure, but that followed a 20 percent run-up in his company's share price in 2005.
Has Nardelli been grossly overpaid? Yes. Is it unfair for CEOs to earn double-digit, six- and seven-figure pay raises while many workers barely stay even with inflation? Probably. Is the system working? Actually, it is.
At public companies, boards of directors determine the CEO's pay. At Home Depot and in a few other high-profile cases, directors have been captive to powerful CEOs and have mainly rubber-stamped humongous pay packages. That's an abuse of the system. But as with political corruption, abuses have been leading to long-simmering outrage that evolves into revolt. At Home Depot last month, that took the form of one big shareholder insisting on a board seat, a strategic review of the company, and even a possible sale. The pressure produced one intended result: Nardelli's departure.
More broadly, other companies, such as JPMorgan and Charles Schwab, have put rules in place that prevent CEOs from "pumping and dumping"–driving up short-term performance at the expense of strategic planning, then cashing in their own shares at inflated prices. Investors are free to vote on such reforms with their money: Would they rather invest in straight-arrow companies that are inherently profitable or align themselves with greedy CEOs who might not care what happens to the firm once they're gone?
And finally, competition and the ingenuity of the free markets are forever coming up with better ways to run companies. The boom in private-equity purchases of big companies has led to worries about ... well, greedy managers running companies for their own gain, at the expense of shareholders and employees. Just like–Home Depot! Or maybe not. Can anybody imagine a private owner, with its own bills to pay and investors to satisfy, lavishing half a billion dollars on a CEO who's doing little more than treading water? Highly unlikely. Private-equity deals depend upon promptly producing value that will let you sell a company for more than you paid.
Keep in mind, private equity is a profit game, pure and simple–not a systematic fix for underperforming CEOs and their companies. But it's one market solution when public companies, paralyzed by greedy CEOs and do-nothing boards, become top-heavy and unresponsive. Nardelli's story and others like it will hasten further solutions. Luckily for Nardelli, Home Depot will pay him so much to leave that he'll never have to work again. Once he starts sending his résumé around, there may not be too many companies left that are willing to splurge on an underperforming CEO.