CNBC: Home Depot Feud Spotlights Investors' Role in CEO Pay

Home Depot investors' attempt to block the company's former chief executive from collecting any more of his $210 million severance package raises the broader issue of the role shareholders should play in setting executive compensation.

It also raises questions about when a severance deal is simply too large.

On Wednesday, a group of Home Depot stockholders tried to prevent the former CEO, Bob Nardelli, from receiving any more of his benefits. The request for a temporary restraining order was made by the shareholders as part of a previously filed lawsuit alleging that the Atlanta-based company overpaid senior executives and backdated stock options in violation of their fiduciary duties.

Nardelli's compensation dwarfed the pay received by CEOs at several of Home Depot's retail competitors, reported CNBC's Jane Wells. The most recent filings available indicate that CEO Robert Niblock of Lowe's -- Home Depot's closest rival -- earned $3.5 million in 2005, compared with at least $30 million for Nardelli.

Wal-Mart chief executive Lee Scott earned almost $5.2 million in 2005, and Target CEO Robert Ulrich earned about $6.6 million.

Poor Performance, Generous Severance

To some extent, shareholders do in fact have leverage over the pay their chief executives will be receiving.

"It's important to realize that shareholders do, in some sense, set compensation," David Larcker, of Stanford Business School, told CNBC's "Power Lunch." "They elect the board members, they have to approve equity-based plans and the like. What's interesting about this is it's a very large payout -- a lot of it was surprising, and it raises the question of how much disclosure should there be and how shareholders (should) take a look at this."

And, while a "highly-skilled successful individual will demand high pay levels in a competitive market setting," Larcker questioned why enormous severance packages are doled out to begin with.

"Severance is paid when things don't go as expected," Larcker told CNBC. "It's not clear to me what the role of severance is in something like this, as opposed to paying compensation levels that are quite high, but also have a lot of incentives built into them. The debate ought to turn to not only the size of the severance agreement, but why severance agreements of this size really exist."

However, Stephen Mader, chairman of Christian & Timbers, an executive search firm, believes the marketplace ultimately drives the size of such pay packages.

"Everyone is is competing for leadership talent (and) the market settles out on its own," Mader told CNBC's "Power Lunch." "Nardelli could have done a lot of other things when he chose to go to Home Depot. A lot of (competing offers) could have made him a great deal of money."

There was no immediate ruling on the shareholders' request. Home Depot spokesman Jerry Shields said the company had not received the motion and could not comment.

The company announced last week that Nardelli had resigned after six years at Home Depot's helm amid a furor over his pay and Home Depot's lagging stock price. Nardelli was replaced by vice chairman Frank Blake.

As part of the resignation, the company said Nardelli would receive a severance package worth about $210 million. Some of the benefits have already been paid. Home Depot said Nardelli's departure was mutually agreed upon by him and the company.

In the restraining order request, the shareholders group said the company "will suffer additional irreparable harm if Nardelli is allowed to receive the full benefit" of the severance package.

The shareholders say that if the restraining order is not granted, a trust should be imposed to prevent Nardelli from using the money from the severance package for his own benefit until the lawsuit is resolved.

The lead plaintiff is the city of Pontiac, Michigan's employee retirement fund, which holds Home Depot shares.

Heat from the Hill

Meanwhile, the flap from Nardelli's $200 million golden parachute is getting attention in Washington.

Rep. Barney Frank, the new head of the House Finance Committee, wants to hold hearings as early as February that may lead to legislation that will require shareholder approval of executive compensation plans, sources told CNBC's Charles Gasparino. Other possible legislative options include increasing disclosure on pay packages or even allowing investors to roll them back.

On Monday, Home Depot said its board has voted to require that in the future, two-thirds of its independent directors approve any compensation granted to the company's chief executive. Previously, approval by only a majority of independent directors was required.