PERVERSE INCENTIVES UPDATE….The Economist reports this week on problems at Home Depot: slowing growth, new competitors, and bad demographics. Apparently Home Depot’s boss, Bob Nardelli, is getting increasingly desperate to fix the problems, and shareholders are worried that he might go too far:
The biggest worry is that, in a last-ditch gamble to justify his pay and past promises, Mr Nardelli may take some really stupid gambles. His contract could reward him more generously if he wrecks the company and is fired than if he settles for slow or no growth. With market saturation approaching, his share options are probably worthless?unless they are repriced much lower. On the other hand, Mr Nardelli would collect a $20m lump sum and tens of millions more in accelerated salary, bonuses, forgiven loans and other goodies if he were fired ?without cause?.
The idiocy of corporate compensation packages never ceases to amaze me, and severance packages top the list of abuses. The only reason to fire a CEO ? other than “for cause” ? is because he’s doing a lousy job. So why would any board agree to pay tens of millions of dollars in severance to a CEO specifically because he’s doing so badly that they have to fire him?
The mind boggles.