Home Depot & Corporate Governance- Again: Frank Blake's Compensation Package

Today's Wall Street Journal ran an article detailing the compensation package of Home Depot's replacement CEO, Frank Blake.

I must say, it looks as if Home Depot's board has begun to come to its senses. According to the WSJ,

"Chief Executive Frank Blake didn't just accept a compensation package significantly less than the one his predecessor Robert Nardelli received. He also rejected the big retailer's first offer as too rich.

Among other things, Mr. Blake balked at getting restricted stock, which has value even if the share price declines. So the compensation committee dropped plans to give him restricted shares, according to someone close to the situation.

Mr. Blake preferred equity grants tied to performance measures, a salary of less than $1 million and a total package worth less than what Lowe's Cos. CEO Robert Niblock gets, this individual said.Mr. Blake wanted "to be totally aligned with shareholders," a second knowledgeable person noted.

According to a letter he signed Tuesday, Mr. Blake gets a $975,000 salary this year and could receive a $975,000 long-term incentive award, plus an annual bonus of twice that amount if he meets performance goals. Home Depot gave him, among other things, performance shares initially worth $2.5 million that could pay out even more after three years, based on the company's relative total shareholder return, compared with Standard & Poor's 500 companies. He also gets $2.5 million of options that he can begin to exercise only if Home Depot maintains a 25% increase in its share price above the grant date level for at least 30 straight trading days. He must also wait a year before he can begin exercising these options, which the company said would be awarded next month.

In 2005, as executive vice president of business development, Mr. Blake received $685,192 salary and an $825,000 bonus. He also got $2.9 million in restricted stock awards. Lowe's CEO Mr. Niblock received a salary of $850,000 and a $2.6 million bonus. He received $4 million in restricted stock."

While I applaud the board's restraint, and Blake's sensibility, in the design of his compensation package, I'm now somewhat mystified by how it justified his nearly-equally lavish compensation as EVP of business development. A job, by the way, which he seems to have bungled, given HD's miserable growth record under Nardelli-Blake.

On one hand, Blake's sub-$1MM salary comes close to my own recommendation that CEO's be paid a more modest fixed salary. And I wholly endorse the performance share values being tied to HD's total return performance, relative to the S&P, I don't think the board went far enough on this measure. I think the total amount should be a function of this measure, not just, as the article describes, some amount in excess of the initial $2.5MM.

Let's be clear about something. Blake has failed as EVP of business development. The firm hasn't developed sufficient new business. That's been a key problem. Now, with the departure of the failed prior CEO, Nardelli, the board is paying Blake what appears to be, for three years, approximately $5.5MM for even a poor performance. To me, that's just too much. It appears that Blake has already pocket in the range of $6MM from his time at HD already. Therefore, he now has essentially nothing to lose.

Ask your average US middle-level manager if he'd like the opportunity to earn $6MM for the next three years, even if he fails to meet his objectives. It's a job nearly anyone would want.

I think that means it's too rich of a deal. Given what I've learned about corporate performance from my research, I see the attainment of consistently superior total returns as sufficiently rare, and so valuable, as to merit significant incentive for its achievement. But anything less should just get a 'decent' salary. Something south of $1MM/year, with no bonus.

So, yes, the Home Depot board is heading in the right direction. And Blake is obviously astute enough to avoid the greedy behavior of his predecessor and colleague. But I think the company is still vastly overpaying on the come for performance it has no reason to believe it will realize from its new CEO.

Why is the Home Depot board giving away its shareholders' money so easily in the absence of performance guarantees, or evidence that consistently superior performance is likely under Blake?