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Why Joshua Kennon Has Lost His Mind on Home Depot
Joshua Kennon writes a regular column for About.com titled Investing for Beginners and he recently penned a note entitled "Why Home Depot Shareholders Have Lost Their Mind" (link here). Mr Kennon is a self-styled value investor in the vein of Benjamin Graham and Warren Buffet, so it's interesting to see his defense of what I will politely call the "lavish" compensation scheme of Home Depot CEO Bob Nardelli. One should note that even Kennon doesn't defend the utterly idiotic shareholder meeting performance by Nardelli or the HD Board of Directors, as I had discussed here.
Nardelli has been awarded an incredible $250M in compensation ($125M of it in cash) since he joined Home Depot 5 years ago. During that time period, HD stock has dropped almost 50%, to $37 from $70. Kennon's seemingly rational defense is that it's the stock market's fault since it doesn't recognize that HD is actually a much better company now (see performance graphs here), with a tripling of net income on a lower number of shares & higher dividend, and that he'd be thrilled to see the CEO receive a package twice as large if Nardelli could continue to deliver on those results, stock price movement be damned.
Let's take a look at the pay package to see what motivates Nardelli. In the old days, Fortune 500 CEO's got reasonably large salaries, bonuses and perks, but the criticism was that their compensation didn't align with shareholders. So, following the lead of Silicon Valley, they added a large dose of equity-based compensation to "align shareholder interests" - however, they didn't reduce the base compensation at all, which defeats the entire point. This leads to the current Nardelli package, which is a "Heads, I win, Tails, You Lose" scenario for HD shareholders. If HD stock goes down, Nardelli does incredibly well ($25M a year) - if HD stock goes up, Nardelli makes an even larger sum of money ($50M+)- so where is the performance risk and the resulting shareholder alignment?
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