Home Depot vs. Lowes Executive

Home Depot vs. Lowes executive compensation

Compensation and Executive Compensation

Across the world, executive compensation is undergoing extreme instability. Lower market positions and a slew of corporate scams have resulted in apprehension among the shareholders over every type of executive compensation, inclusive of cash, stock and other added benefits. While growing executive compensation levels comes under scanner along with sliding profits of companies and shares prices, it invites the wrath of shareholders and they insist corporate action from the board responsible. If we delve deep into the bleeding issues of corporate governance and their insulations on executive compensation, we discover that corporate scams in USA that have revealed the arbitrary basis on which executive pay is doled out that have led shareholders to doubt if executive compensation given out in the form of stocks was the culprit for the distortion in the accounting of profit and loss. Besides, in some instances, shareholder apprehensions stems from the proof that rise in an executive compensation package was not a great deal of a reward for enhanced company results, rather it is just a manifestation of market forces like a rise of stock indices. Moreover, investors are suspicious of companies which create the danger of significant earning loss by having a bigger stock "overhang." Dilution levels received from stock options award have been going up progressively among the bigger U.S. companies in the last decade. (Board matters: Rethinking Executive Compensation)

Figures bear testimony to all these. Compensation awarded to the CEOs at the biggest U.S. continued its upward march last year. CEOs at the helm of affairs of the public companies listed on the Standard & Poor's 500 took home a neat $4.1 billion during 2006. While Yahoo's Terry Semel became the highest paid CEO receiving a phenomenal $71.17 million in pay, stock options and compensation in other forms, 50% of the companies surveyed by Associated Press netted in excess of $8.3 million. The highest paying industries were investment banks and energy companies. The second and third spot for highest CEO compensation were occupied by Bob Simpson of XTO Energy with a kitty of $59.5 million and Ray Irani of Occidental Petroleum with $52.8 million respectively. Excluded from the calculation are amount of monies which the executives received through exercising stock options that they received in the earlier years. The 2006-year figures underline the persistent contribution which stock options and other types of stock option make in augmenting executive compensation. (U.S.: CEO pay climbs to 'stratospheric heights')

In case of Yahoo CEO Sernel for instance, the bulk was in the form of compensation that cater to link the interests of executives to the short-term performance of the company's stock. On the flip side, while too much CEO pay has forced some objections from investors, these are comparatively taciturn because of the persistent rise of the U.S. stock market. As long as the value of the company stock goes on rising, huge executive pay does not seem to be a problem for bigger investors, as everybody in the apex 1% of the population is receiving his share. In the interest of the large investors, the work of the CEO is to guarantee sufficient returns on capital investment by way of driving down wages, constricting worker benefits, executing stock buyback programs, and restoring to other methods for enhancing profits of the company. (U.S.: CEO pay climbs to 'stratospheric heights')

Analyze whether Executive Compensation (CEO possibly other high ups) in the context of a specific industry align the company's long-term performance with shareholder interests. For example: Answer the question "Does CEO stock options and other compensation align the company's long-term performance with shareholder interests"

The Positive Side:

In American corporations, employees are always regarded as important stakeholders and of late are emerging as an important shareholder chunk. A lot of individual studies are pointers to the steadily expanding phenomenon of Employee Stock Options -- ESOPs since the past twenty years. Two recent changes in corporate governance have augur well for employee share ownerships helping to align the company's long-term performance with the interest of the shareholders. The first was the findings by business managers that companies were less prone to hostile takeovers in the event of a sizeable chunk of their holding in the form of shares was held by the staff or held for them in ESOPs or in the shape of other employee benefit plans. Executives justified that employees as well as employees benefit plans were secure shareholders who would not possibly sell their shares in the event of hostile takeovers. Even though employee-shareholders are able to vote against management and ESOP trustees can sell out in favor of a corporate raider, they hardly ever do it. Therefore, in case 15% or exceeding that of a company's shares is held in an ESOP, it will nearly be impossible for a hostile bidder to acquire an 85% stake. (Worker Capitalists: Giving Employees an Ownership Stake)

Maybe this might be the reason behind a lot of large corporations initiated ESOPs during the late 1980s. By 1991, oil major Chevron, energy company Enron and others like Fairchild Industries, Lockheed, Lowes Companies all had chunks of shares netting 15% or higher comprising outstanding shares held by or on behalf of employees. Share ownership by personnel has even risen through corporate restructuring in which employees received shares in their companies in as a replacement for remunerations and cuts in perquisites. Sometimes, total employee buyouts have been essential to check lockouts. However corporate restructuring that hands over employees a sizeable block of shares to determine labor disputes or provide takeover immunity might persist, predominantly in industries where there is labor union. Nevertheless, it might not augment employee share ownership to a large extent. (Worker Capitalists: Giving Employees an Ownership Stake)

Going a little back we witness in the past decade or so that the corporate world has been reconsidering the association between bigger companies and their workforce. Although in the absence of any social contract between large employers and their staff prior to the 1980s, powerful business concepts resulted both of them to suppose that employees would remain in the rolls of the companies for a considerable time, enjoy promotions through the ranks, take home a tidy remuneration and get certain benefits like pensions, paid vacations, and healthcare. Following the downsizing witnessed during 1980s and early part of 1990s saw old time employees laid off and some suffered cancelled healthcare benefits and converted pension plans to defined-contribution plans, thus transferring the investment risk on the shoulder of the employees. The situation metamorphosed during the mid-1990s with young workers in their 20s and 30s as also a lot of older workers who came to consider a lifetime tryst with a single company out of vogue. (Worker Capitalists: Giving Employees an Ownership Stake)

Similarly, and prominently, they even shunned the idea that they might owe their employer any loyalty. Some of the sectors of the economy such as high-tech new companies, software companies, financial services, consulting and other business services where attrition have been the most happening thing. It is roughly these sectors that have witnessed the use of ESOPs and other equity-based compensation schemes. Compensating the workforce, at least to some extent with ESOPs is believed to cater to several objectives that are lucrative in the present business settings. To begin with it helps to match employee's interests with those of the shareholders. Secondly, equity-based compensation sops can be conveniently engineered to encourage employees to stick to the company, although other pressures might urge changing jobs. The third point is that the equity component of the employee compensation is a variable component which implicitly reduces the fixed-cost component of compensation expenses. Besides, as a type of non-cash compensation, stock options assist new firms preserve cash. As a matter of fact, paying employees in stock options might help the company bring in cash, as when the employee casts his option, the employee must deposit cash to the company to purchase the stock although at a discount to the market value. Coupled with a skyrocketing stock market and special tax treatment for ESOPs, these factors render stock options distinctly appealing to employees as well as employers. (Worker Capitalists: Giving Employees an Ownership Stake)

The Negative Side:

However there is a downside as well. Two major risks might narrow down the growth in employee share ownership. The first one is the reversal of fortunes on the stock market. ESOPs and other equity-based types of compensation have gained popularity with the employees during a bull or a rising market. Moreover, employees' interest in stock options has been manifested by media attention to secretaries and other employees in case of high-tech companies whose stock grants have turned them into millionaires. However, in a sliding market, employee self-esteem might affect and ESOPs might lose their charm unless the corporate organizations are keen on repricing the options, an initiative that could fuel sharp reaction from shareholders. Employers those who were jubilant to share the good results of equity participation during good times might all of a sudden prefer to choose less risky and more stable types of remuneration during a bear market. Apart from that there is another type of risk which can surface even in case the market continues its upward march. In the event employees exercise their ESOPs in huge numbers, external shareholders could oppose the diluting impact of these option grants on the value of their shares. A situation might crop up that old possible tensions among employee interests and shareholder interests are not all of a sudden resolved by converting employees into shareholders. (Worker Capitalists: Giving Employees an Ownership Stake)

Regardless of various shortcomings, stock options have come to assume a popular means for aligning managers and shareholders interests alike. Benefits from availing stock options gave 70% of median CEO total direct compensation, consisting of salary, bonus, restricted stock, gains from stock option exercise and long-term incentive payouts, and fix the upper limit for the remainder of the firm's compensation system. Adhering with the conventional doctrine of the agency theory, enhancements in CEO stock options, along with effective monitoring, generate sound alignment among the interests of management and shareholders. This implies that CEOs as well as shareholders profit from the spiraling stock prices in the long-term, thus lowering the chances of moral hazard. Besides, favorably valued stock options pose risk for the CEOs. The most important problem in case of corporate governance is not whether a particular agent has integrity or otherwise, a lot of honest CEOs possibly would act in the interests of the shareholders even when given substantial incentive and scope to do something on the contrary. (Do Stock Options prevent or promote fraudulent financial reporting)

Instead, the difficulty lies with the fact whether or not in the existence of a dishonest agent a specific control system will either (i) remove the dilemma by aligning the interests of all parties or (ii) evaluate the unprincipled agent strongly to guarantee that there will be no chance for the self-interested behavior to happen. Preferably as per the principal-agent theory, CEO stock options must remove the moral impasse by aligning CEO interests with those of the shareholders, even if they might not completely do so and thus persistent monitoring by the Board of Directors is essential. A perspective is offered that as against agency theory, stock options can in fact aggravate the ethical risk confronting CEOs by providing added incentive for self-interested behaviors. This implies that when there is a chance, ESOPs will raise the chances of vested behaviors by devious CEOs, affecting the shareholders in the long run. (Do Stock Options prevent or promote fraudulent financial reporting)

The light of argument is steady with research in accounting investigating the general hypothesis that compensation plans is able to encourage CEOs to make beneficial or also deceptive decisions. For instance, evidence was found by Barton in a sample of Fortune 500 firms that cash compensation was directly linked to the application of earnings management method, whereas the value of stock owned by the CEO and the number of options held by the CEO was linked with the interest rate and foreign currency derivatives. It was Barton who arrived at the decision during 2001 that managers were deliberately managing earnings to augment their cash compensation and applying derivatives to raise the value of their stock-based compensation. Also in a research of firms readying for an IPO, it was reported by DuCharme, Malatesta and Sefcik that managers doctored the earnings to raise the amount from the IPO at the cost of investors. (Do Stock Options prevent or promote fraudulent financial reporting)

It was demonstrated by Guidry, Leona and Rock during 1999 that earnings management is linked with CEO bonuses, whereas Healy found more that the bonus plan adoptions and alterations to bonus plans are linked with modifications in earnings management. It was proven by Hirst in 1994 that bonus plans make incentives in such a manner that their bonuses would be become the greatest. Besides, even though it was found by Gerety and Lehn during 1997 that no distinct association between the application of accounting-based management compensation plans, like profit sharing, bonuses or stock options, and cases of accounting swindles, they found out that large stockholdings by a sole executive lowered the chances of deception. Therefore the accounting literature gives proof that executives might arrive at company decisions that have been designed to raise their individual wealth at the maximum point. To put it differently, managers might 'engineer' the incentive system due to lack of information symmetry and act in ways that augment their own rewards whereas lower the performance of the firms. Hence the extent and value of CEO stock options is directly linked with the chances of fraudulent financial reporting. The power of the proposed competing relationship between the value of the CEO stock options and the occurrence of fraudulent financial reporting is possibly impacted by two more factors viz CEO duality and Board of Directors -- BOD stock compensation. (Do Stock Options prevent or promote fraudulent financial reporting)

In cases where the CEO also functions as the BOD chair, persistently has been identified as a disagreement of interest in corporate governance, as this is also seen as a pointer of CEO power. Even though members of the board are responsible with ruling the company and guaranteeing higher levels of company performance, they might be unsuccessful to perform effectively in the situation of CEO duality. In situations where the CEOs serve as the board chair, have the upper hand over the board member nominating process, the compensation-fixation process, agenda for discussion in the board and the like, even if they are not officially serving the committees charged with those responsibilities. This is a serious issue and might undermine corporate governance. Previous research has demonstrated that this duality is linked with higher executive compensation, poison-pill espousal, diversification and takeover premiums. This might be the consequence due to powerful CEOs who also happen to be board chairs bypassing the governance process in an endeavor to tailor the organization according to their preference. (Do Stock Options prevent or promote fraudulent financial reporting)

Therefore CEOs who also are Chairmen of their company's board will have higher power which in the process will render it easier for them to either (i) guarantee that the interest of the shareholders are most important in accordance with the agency theory or (ii) carry on their self-interest unhindered, under the unprincipled agent argument. Therefore CEO duality is suggested to augment the relationship whether positive or otherwise, between CEO stock options and inconsistencies of accounting methods. The common prescription of the principal-agent theory is based on the fact that granting CEO stock options raises their financial interest in the long-term share performance, thus matching the CEOs' interest with those of the shareholder and guaranteeing actions which will be advantageous on the part of the shareholders. However, the unprincipled view remains that the moment stock options becomes exercisable they extend an instant financial benefit for the CEOs and helps them to pump up near-term financial performance at the cost of long-term outcomes. Therefore, CEO stock option grants might in fact impair shareholders as they could resort to fraudulent financial reporting and a lowering in the long-term share performance. (Do Stock Options prevent or promote fraudulent financial reporting)

Mixed results were found as regards the principal-agent theory claim that rising CEO stock options can match interests of the CEO with those of the shareholders; proof of this happens in very restricted situations. It has been found that raising CEO stock options results in reduced chances of fraudulent financial reporting as prophesied by the agency theory only when (i) the CEO also happens to be the BOD chair and the BOD also has stock options or (ii) the CEO is not the BOD chairman and the BOD has no stock options. As against the principal-agent theory, it was deduced that raising CEO stock options results in a higher chance of fraudulent financial reporting in situation when (iii) the CEO is also the BOD Chairman and the BOD does not have any stock options and to a much higher chance of fraudulent financial reporting when (iv) the CEO is not BOD chair and the BOD has stock options. (Do Stock Options prevent or promote fraudulent financial reporting)

With the rise in CEO stock options, regardless of BOD possessing stock options, it has a rising influence on the chances of fraudulent financial reporting. Besides, this impact differs depending on whether or not the CEO is also the chairperson of the board. In situations when the CEO is not BOD chair and the BOD is devoid of any options, the chances of fraudulent financial reporting reduces to its lowest level for the sample with the rise in the CEO options. In this circumstances, the external chairperson and BOD members continue with their monitoring job and seem especially watchful as the CEO options rise, even without additional, agency-based "interest alignment" from their own stock options. In situations when the CEO is not also the BOD chair and BOD stock options are there, the chances of dubious financial reporting rises to a higher degree as CEO options rise. (Do Stock Options prevent or promote fraudulent financial reporting)

Need specific companies in an industry compared to answer this question. I have selected Home Depot and Lowes. Analyze these companies in terms of if stock options helps the long-term interests of share holder of companies etc.

Home Depot:

Home Depot's CEO became infamous after he amassed in excess of $65 million since he joined the company in Dec 2000 through December 2005. Following years of sliding stock price and presently legendry 2006 shareholders meeting in which a haughty Nardelli declined to provide any answers to questions. Home Depot declared the resignation of the CEO on January 3. However, nothing could prevent him from walking away with a package worth $210 million. In the opinion of Barry Henderson who is an equity analyst at T. Rowe Price, Nardelli committed two grave blunders during his tenure at Home Depot. He separated the employers and also invited the wrath of the shareholders. According to Henderson, the separation of the rank and file at Home Depot has overall been ignored by the business press during the analyses of Nardelli's exit. The entire culture of Home Depot stands on the backbone of retail and the company has been very commercial and consumer centric at the time of joining of Nardelli. (Home Unimprovement: Was Nardelli's Tenure at Home Depot a Blueprint for Failure?)

And Nardelli focused on revamping Home Depot's business processes that required to be dealt with, instead he over-concentrated on the processes and eliminated the constituents that rendered Home Depot extraordinary. The pay package that Nardelli took home invited the wrath of the employees. Nardelli's cash salary, plus cash bonuses netted more than $65 million since the period he worked with Home Depot from December 2000 through December 2005. This was more than what his peers were earning. Concurrently, Nardelli was allotted stock options; however they were not tailored in the manner which would associate them with the share price of the company. It did not seem that he possessed great incentive to receive the stock price higher. Home Depot stock price reduced by 8% during the period of his reign which left people dismayed because of that. A lot of attention was directed at Nardelli's $210 million payout. (Home Unimprovement: Was Nardelli's Tenure at Home Depot a Blueprint for Failure?) lot of people raise doubt whether such a huge amount should be doled out to one who failed in his job as a CEO. According to Wayne Guay, who is a Wharton accounting professor whose research concentrates on matters relating to executive compensation and corporate governance; such massive figures are often misinterpreted. The $210 million was not handed over to Nardelli to allow him to quit, rather that amount was negotiated by him and the Home Depot board in 2000 to poach him from his well-paid job at GE. In the opinion of Guav, the severance pay acted as a type of insurance policy in favor of Nardelli. In case matters was not favorable at Home Depot, he decided to leave with sufficient money to insure him for quitting GE and enduring the danger that he would be unsuccessful at his new position and be replaced. He adds that in case Nardelli had become successful at lifting Home Depot's stock price to some considerable extent that would be worth billions of dollars to shareholders, it is possible that very few people would at present be belligerent regarding the package. (Home Unimprovement: Was Nardelli's Tenure at Home Depot a Blueprint for Failure?)

The figures say it all. As per figures released by the Home Depot, the $210 million package comprised of a cash severance payment of $20 million; speeding up of unvested deferred stock awards that are valued at roughly $77 million; unvested options that is valued about $7 million' bonuses and long-term incentive awards close too $9 million; a $2 million 410(k); earlier earned and vested deferred shares whose value comes approximately $44 million' retirement benefits that is valued at $32 millions and close to 418 million in the shape of "other perquisites." Finally, as a matter of fact, Home Depot's board remained in charge for hiring the services of Nardelli and giving him attractive pay packages. Such enormous amounts of money in itself continue to strike a lot of people as very steep. Some of the management specialists consider that boards remain narrow-minded and very obliged to the CEOs they recruit, and that heavy compensation in case of CEOs will not be contained in until boards start to claim their independence. (Home Unimprovement: Was Nardelli's Tenure at Home Depot a Blueprint for Failure?)

In the opinion of Wharton, the Nardelli example is a grim reminder that oversized pay packages put a lot of questions regarding the judgment of board of directors. In his view there are two criteria for finding out if compensation packages are very liberal. It is highly shocking on the face of it that someone can be estimated to be worth $210 million for 6 years of work. This also questions the validity of paying such huge amounts to a CEO as the price of the company's shares come down. On the whole, when the compensation packages are shooting up higher than $10 million per year as a lot of them do now and Nardelli was worth higher than that, there is apprehension in the minds of employees that the CEO under whom they are working is rightfully a person who puts the self-interest ahead of the company's interests. Nardelli's actions paved that concept with both employees as well as shareholders. Even though Nardelli expressed regret at a later stage for his deviant behavior at Home Depot's 2006 annual meeting, his performance at the session will serve as a symbol of the 'tone deaf" CEO who overlooks shareholders and displays an "arrogance of style." (Home Unimprovement: Was Nardelli's Tenure at Home Depot a Blueprint for Failure?)

On the whole there is an evident lack of consistency between CEO Nardelli's pay and the performance of Home Depot. In his tenure as the CEO, he has secured for himself nearly $200 million in cash and equity-based compensation while the shareholders have received cumulative total shareholders returns of nearly 13%. Besides, ill compensation design, an attractive employment deal, and debatably hefty compensation practices raise doubts about the fitness of the company's Compensation Committee members to work as Directors. Delving deep into Nardelli's employment deal comes to the forefront some disturbing features which deserve to be stated. (U.S. Proxy Advisory Services: The Home Depot, Inc.)

First of all, the deal had an automatic renewal system so that its term of contract is for three years forever. Secondly, irrespective of the performance of the company, the deal doles out a yearly salary of not less that $1.5 million and a guaranteed annual cash bonus not below $3 million. Nevertheless, in spite of the company's lackluster stock performance, in each of the last three financial years, the Compensation Committee considered it to be sensible to hand out Nardelli not below $5.6 million as base salary with added bonus, and, in the fiscal year 2005, an unprecedented high of $9.2 million in base salary and bonuses. This apart, Nardelli is assured a yearly stock option grant covering not below 4, 50,000 shares of stock, coupled with a Black-Scholes value of nearly $6.8 million. (U.S. Proxy Advisory Services: The Home Depot, Inc.)

In keeping with that arrangement Nardelli received a minimum of $11 million in 'without risk" cash and equity-based compensation annually, in addition to other discretionary remuneration and perquisites. The third, starting on the later of his attaining the age of 62 or expiry of his job, he will be eligible to get a yearly cash benefit in an amount equivalent of half of his then present base salary along with added bonuses. Because of his salary and bonus guarantees in his job agreement, he is eligible to a minimum yearly cash benefit of $2.25 million that will last till his entire life, and based on his financial 2005 base salary plus bonus of $9.2 million, he would be eligible to get $4.6 million every year for his entire life. Besides, on the top of it, in case his job is stopped prior to the age of 62 except for any factor, for any cause within 12 months following a shift in control, he will get some benefits, inclusive of a payment netting $20 million. (U.S. Proxy Advisory Services: The Home Depot, Inc.)

One more thing of interest has been the company's waiver of a $10 million loan received by Nardelli during the initial stages of his job career as CEO in 2000. As a 'long-standing employment incentive' the compulsion to repay the loan, along with the accumulated interest, was waived for 20% per year. Apart from that, in a space of three years, Nardelli got millions of dollars in tax gross-payments as compensation for tax payments connected with this loan waiver that was taxed as compensation by the IRS. It has been seen that Home Depot fared well on some important criteria, but always the question remains as to why such a performance has not converted into positive returns for the shareholders. The facts speak for themselves. Senior Executive compensation at Home Depot has been exorbitant during recent years. In every of the previous three years, CEO Robert Nardelli has been bestowed with a base salary in excess of $1,800,000, which is more than the IRS ceiling for deductibility of non-performance linked compensation. The bonus earned by him in each of these years has been out to at least $4,000,000, and he was given restricted stock that is valued at more than $8,000,000 in 2002, 2003 and 2004. Nardelli has also got an alarmingly huge amount of compensation in the shape of loan waiver as also tax gross-ups connected with that waiver that netted more than $3, 00,000 in each of the last five years. (U.S. Proxy Advisory Services: The Home Depot, Inc.)

The damage unleashed by Nardelli is nothing short of criminal penalty. This is going to put a severe toll and affect a brain drain from public markets towards private equity. Moreover, this exercise will lead to a transfer in wealth away from private shareholders and the general public to an affluent minority who are able to invest in Private Equity -- PE funds. A little elementary math will prove why the wrath of the people for the pay packages Nardelli has secured for himself. This is how things stands: Along with a regular income, stock options, pensions and a golden parachute, Nardelli got for himself $274 million contributing just six years of assignment at the Home Depot which works out to $34,250 per hour. This is nearly 3,000 times the hourly wage of a Home Depot worker. This is $275,000 daily which works out to five times as much daily as the normal American family earns every day. Undoubtedly, excellent management is extremely valuable to the shareholders of a company and highly qualified employees must be well paid. But unquestionably, there is a whole lot of difference between "well paid" and something similar to daylight robbery. (Bob Nardelli: Doing the Math)

The question that is hovering on everybody's mind is that why Nardelli's $274 million siphoned from the company that genuinely belongs to the shareholders is not viewed as misappropriation of funds? The stock price of Home Depot took a dip from $43 to $41 under Nardelli's regime which translates into 21% drop when adjusted for inflation. The CEO is unable to influence the stock price of the company and unnecessarily stresses on the stock price builds for an enticement to manipulate the books of accounts. However it is ridiculous to consider that shareholders can get duped under the watch of CEO for which he pockets a cool $274 million. The Board of Directors of Home Depot presented Nardelli the terms which resulted in $274 million. The Board of Directors have vested interests in excessively paying CEOs as a lot of board members are also CEOs who believe that their own pay will go up in the event other CEOs pay goes up. With Nardelli's $274 million, it is the ultimate levels at which CEO pays can touch and it can be termed as downright embezzlement. (Bob Nardelli: Doing the Math)

Lowes:

Close in the heels of Nardelli's infamous compensation, rival Lowe's Companies was also rocked by similar instances of high executive compensation. With the unfolding of the incident, Lowe's executive compensation, especially the partition packages that it hands out to CEOs, is not devoid of excesses as some shareholders would turn it out to be. As per Lowe's 2007 proxy, present shift in-control or dismissal provisions in case of the company's top ranked five executives could sum up in excess of $88 million which is an amount regarded as exorbitant. While this has been the most arbitrary payout witnessed of late, it is suffice to say that shareholders must be able to review these packages. The company Lowe suggests to vote against the proposal, although it has taken up a plan to place severance packages to a shareholder vote in the event of the cash position becomes more than thrice an executive's base salary along with bonuses. However both Home Depot as well as Lowes is under extreme pressure arising from a softer housing market, guaranteeing that shareholders will be vigilant on the actions of the companies in the manner of financial rewards meted out to the shareholders. (Kapner 4)

The remuneration for Lowe's erstwhile Chairman is just a fourth of Nardelli's yearly pay and Lowe's has surpassed Home Depot in the previous six years. Lowe's previous Chairman Robert Tilman who retired from service last year, pocketed an amount of $2.4 million from 2000-2005 in salary, bonuses and restricted stock which is a shade lower than Nardelli's package for the last year alone. The present Lowe's Chairman, Robert Niblock got himself $7.8 million for the fiscal year ended in February 2006. (Degross 1B) There has been a strikingly contrasting result for Lowe. In case of shareholders who had invested in Home Depot at the time when, and maybe as Nardelli was named to the highest position which was not at all good news. During the corresponding period, Lowe's which is comparatively a much smaller company has witnessed its sales clocking at a broader margin to $36.46 billion from $18.77 billion in 2000, whereas the net income spurted to $2.17 billion in 2005 from $809.9 million in the year 2000. Besides, it is also worth considering Lowe's better ratios. The Return on Equity -- ROE touched 24% from 17.2% in 2000; Return on Capital Employed -- ROCE in 2005 recorded 24% as against 13.8% in 2000. The figures for Gross Profit Margin -- GPM touched 32% the previous year as against 26% in 2000 and it showed a year to year jump from 2004's 31.3%. (Nardelli's on the hot seat at Home Depot's annual meeting)

It was seen that in between 2000 and 2005, the median CEO pay went up 84% in America. The median worker pay went down roughly half of 1%. To discern the fact in another way, in 2005 the last complete year for figures have been calculated, the average person in the U.S. earned nearly $400 less in a complete year compared to the standard big company CEO earned in a single day that was $42,200. At present complains seem to come thick and fast regarding the acute imbalances present in such figures mostly from the stockholders. It is upsetting that executives managing companies in which they have invested funds in the absence of a supportive consequence are being given exorbitant bonuses in spite of substandard performances of their stocks. Home Depot's arch rival Lowes basked in the glory of seeing his stock price become three times within the same six-year period which Nardelli was at the company. However the Lowes CEO had to remain content with just $7.5 million annually. A lot of people had strong reasons to question that are not these bonuses expected to recompense stock performance that was successful? Is it not the cause for the rush of all these contentious and irrational pay-packets? (Hanchette 5)

Contrasting Home Depot with Lowe's, it is observed that Home Depot was not successful in surpassing Lowe's on a lot of measures. While the revenue of Home Depot went up by 78% during Nardelli's administration, Lowe's has raised itself by 130%. Lowe's Return on Asset went up to 12.10% from an abysmal 7.94%. The Return on Asset has hardly progressed rising from 13.42% to inch slowly to 13.98%. In the previous year Lowe's CEO Robert Niblock earned himself a compensation package of $9.3 million as per the data collected by Bloomberg, which is one-fourth of that awarded to Nardelli. (Home Depot's Nardelli, Feeling Heat, May Get Pay Cut)

Lowe's the most potent competitor of Home Depot has been received well by the Wall Street. According to analyst, the stock price of Lowe has risen 185% during the space of last 5 years as against a 7% decline at Home Depot regardless of the doubling of the profits at both the companies during that period. Moreover while Home Depot continues to be two times as big as Lowe's as regards revenue, Lowe's is persistently profiting from its competitor by way of expanding into international markets. Lowe's is also eyeing the markets where Home Depots also has presence. Research reveals that Lowe's customer service ratings are positioned at record levels, whereas Home Depot's have slid to their worst position in years. There are factors which put Lowe's ahead of its competition in the eyes of investors. In the opinion of some experts in the arena of retail, it is the consequence of steady management and an all-round attention on the goals which are most important for the customers. In the opinion of others, the rivalry between the two is overstated and therefore such types of comparisons are unjustified.

Lowe's was not popular in the home improvement circles. During the initial part of 1990s investors preferred Home Depot that had quickly spread throughout the nation given its large warehouse pattern stores selling its Do it Yourself -- DIY home improvements. During that period Lowe's had comparatively small stores which continue to concentrate in hardware. A lot of specialist consent that the biggest advantage to Lowe's success was having the first mover advantage to profit on a vital potential customer i.e. women who were speedily becoming the principal decision makers on home improvement plans in their families. Lowe's in its attempt built stores nearer to Home Depot locations but people felt more comfortable to make their shopping. On the more important aspect, according to the analyst, Lowe continued in their progress to reinvest in their appearance of its outlets as the profits went up. Whereas a lot of retailers normally refurbish their stores in a space of five to six years, Lowe started revamping on a more regular basis. (Home Depot dives as Lowe's thrives)

Home Depot would make huge publicity regarding the amount they are making investment in the store base during a particular year, Lowe's maintained a continuous spree which is a standard business practice. This type of investment also helped Lowe in gaining its stock price, according to Sherry Jarell, asst. Professor of Finance and Economics at Wake Forest University's Babcock Graduate School of Management. Even if earnings are rising, it does not imply anything significant when it does not come to any use. The net income at Lowe's has been going up at an average rate of nearly 28% annually compared to about 18% at Home Depot. Within the year 2001 and 2006, this has pulled Lowe's total profit to nearly 241% to $2.8 billion which augurs well and aligns in the interest of the shareholders. (Home Depot dives as Lowe's thrives)

Findings of a survey by the University of Michigan rated Home Depot and Lowe's on the same footing in 2001 at the time when the two were above industry average. After then, Lowe's position has continually ranked above average and has been going up. Home Depot, nevertheless, saw its rankings falling less than average, clocking the lowest ever during 2005. As regards the CEO pay is concerned, in the opinion of the analyst, shareholders are comparatively content with the pay which the Lowe's CEO Robert Niblock gets compared to that of CEO Nardelli of Home Depot. The shareholders of Home Depot expressed dissatisfaction that the shares of the company took a severe beating during the tenure of Nardelli and that his compensation ought to have been more strongly linked to the performance of the company. (Home Depot dives as Lowe's thrives)

The ESOP woes:

Since the past decade and half, compensation awarded to senior executives has greatly exceeded the pay rises for other levels in the company and for other members of the society. The use of stock options and other added ownership tools are devised to align the interests of the two parties to this economic deal. Besides, the inequitable pay structures emanating from this new compensation philosophy might be responsible for the discordant attitude within the corporation as also within the society. The objective of the stock option though noble means has regularly been misused. The basic objective of the stock option is to make the employee managers of public companies think and behave just like business owners in order to reconstruct the spirit of entrepreneurship and to associate with it as the fundamental motivator of performance in every business. (Entrepreneurship and Executive Compensation: Turning Managers into Owners)