How Two GE Vets Make Out as CEOs
from
March/April 2002
by Julie Connelly
As J. P. Morgan used to say, when you pay a lot for the priceless
you’re getting it cheap. Robert Nardelli, 53, and James McNerney, 52,
the two finalists who lost out to Jeffrey Immelt last year in the
competition to succeed Jack Welch as chairman and CEO of General
Electric, hit the job market and, within days, signed on at companies
that wanted them as CEOs. Nardelli nailed down the top job at Home
Depot, and McNerney taped himself to 3M.
The cover story, which begins on page 28, points out that the cost of hiring outsiders can come high. It certainly did in the case of these two summa cum laude graduates of GE’s management-development program, as the tables below make clear. Of course, if the new CEOs galvanize two somewhat tired companies over the span of their contracts—McNerney’s is for three years, Nardelli’s for five—the directors who hired them will have met the Morgan standard and gotten them cheap.
JAMES McNERNEY, 3MAnnual salary: $1.3 million
Annual bonus: A target bonus of $2.2 million annually, and a minimum for fiscal 2001 of $2.4 million: $1.44 million in cash and $960,000 in unrestricted or restricted stock
Options:
- 400,000 shares as an initial option, vesting in increments of 20% over five years (recent 3M stock price: $115.05)
- 200,000 shares as a make-whole option for foregone General Electric benefits, vesting in one-third increments over three years
-
A grant in May 2001, valued by the Black-Scholes calculation method at
$7 million
10,000 units vesting in December 2003, valued between a minimum of $100 and a maximum of $200 per unit
Make-whole restricted stock:
110,000 shares vesting in 10% increments over 10 years, with dividends payable in cash on all shares, whether vested or not
Supplemental retirement benefit:
On completion of 10 years of service, a supplemental retirement benefit equal to the hypothetical prior-employer pension benefits, minus the sum of actual prior-employer pension benefits paid or payable under any other employer’s pension plan
Severance:
- A lump sum in cash equal to the accrued base salary, annual bonus, pro rata bonus, and other accrued benefits
-
A lump sum in cash equal to three times total annualized
compensation (calculated on his 2001 salary and bonus, that would
be a minimum of $10.5 million)
A tax gross-up payment to cover any excise tax imposed by the IRS code or similar tax triggered by the employment agreement or any other payment or benefit from the company
ROBERT NARDELLI, HOME DEPOT
Annual base salary: No less than $1.5 million
Annual bonus: No less than $3.0 million
Lump sum: $50,400 as reimbursement for certain payments related to the forfeiture of restricted stock from his former employer
Options:
- 1 million shares at $40.75, exercisable immediately (recent Home Depot stock price: $51.10)
- 2.5 million shares at $40.75, exercisable in 500,000-share increments on the date of the grant and on annual anniversaries of the grant date
-
Beginning in 2002, an annual option grant of no fewer than 450,000
shares (value to be determined)
$10 million at 5.8% annual interest, with principal and interest to be forgiven in 20% increments over five years
Deferred stock units:
Deferred stock units corresponding to 750,000 shares, vesting in five equal installments
Deferred compensation:
A cash payment equal to 50% of his then-current salary and bonus at age 62 or the termination of employment (whichever comes later)
Severance:
- $20 million lump payment
- Immediate vesting of unvested equity-base awards and deferred compensation
- For each year prior to 2006 for which an annual option award has not been granted, a fully vested stock-option award in accordance with the agreement
-
Immediate forgiveness of any outstanding principal and accrued interest
on the loan
Reimbursement of income taxes applicable to certain benefits and payments received, and of excise taxes if any payments or benefits trigger “parachute payments” under the IRS code
