January 25, 2007

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MORE ON HOME DEPOT   • Home Depot Faces Deeper Issues1 1/5/07   • Behind Nardelli's Abrupt Exit2 01/04/07   • Business: Failing to Understand New Demands3   • Heard on the Street: The 'Six Sigma' Factor4   • Graphic: Home Depot vs. Lowe's5   • Who's Who: Home Depot's former and current chiefs

Home Depot CEO Takes Stand on Pay

Home Depot Inc. 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.

In the end, Mr. Blake received a package with greater emphasis on rewards tied to the retailer's share price than Mr. Nardelli had. The new CEO will receive a 2007 package worth as much as $8.9 million, little more than one-third of the roughly $24 million, excluding stock options, that Mr. Nardelli earned a year during his six-year tenure at the Atlanta-based home-improvement chain.

Home Depot board members and Mr. Blake began negotiating his compensation shortly after Mr. Nardelli abruptly resigned Jan. 2. The former Home Depot CEO had refused to curb his pay package significantly.

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.

In contrast, Mr. Nardelli, received a $2.2 million salary, a $7 million bonus and $14 million in restricted stock in 2005. His compensation during the more than five years he ran Home Depot was valued at around $245 million, most of it in options.

Mr. Nardelli also received a controversial exit package valued at $210 million. Home Depot won't guarantee severance for Mr. Blake as it did while he was an EVP. And unlike Mr. Nardelli's employment contract, Mr. Blake's new package isn't part of a contract and lacks any guaranteed bonus or supplemental pension.

Mr. Blake's relatively moderate pay deal comes amid other indications that the Home Depot board is trying to be more responsive to shareholder concerns. For instance, it quietly adopted a "clawback" policy this month that says the board can seek repayment of any compensation paid to an executive officer based on operating results the executive knew were achieved through fraudulent or illegal conduct.

Activist investors who had attacked Mr. Nardelli's lavish compensation were pleased by Mr. Blake's pay deal. "This is a vast improvement over the Nardelli package," said Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County and Municipal Employees union.

But Mr. Ferlauto warned that board members "who were responsible for Nardelli's outsized compensation might be targets of shareholder initiatives to remove or replace them."

It is unlikely recent developments will persuade activist investor Ralph Whitworth from seeking a board seat. He declined to comment.

Write to Joann S. Lublin at joann.lublin@wsj.com⁶ and Ann Zimmerman at ann.zimmerman@wsj.com⁷