Home Depot CEOs Departure Might Mean Payday for HR Chief

Anyone who may have questioned whether Dennis Donovan, executive vice president of human resources at Home Depot, really has a seat at the table need only refer to his employment agreement to find the answer.

    As first reported last week on Workforce Man­agement’s Web site, Work­force.com, Donovan’s 2001 employment agree­ment makes him eligible for a multimillion-dollar severance package, should he decide to leave, because he no longer reports to president and CEO Robert Nardelli.

    Nardelli resigned from Home Depot January 3.

    According to Home Depot’s April 15, 2006, proxy filing, “cessation of a direct reporting relationship with Mr. Nar­delli” entitles Donovan to leave the company “for good reason” and receive “all cash compensation accrued but not paid as of the termination date and certain additional benefits, including salary and target bonus continuation for 24 months and immediate vesting of all unvested equity-based awards.”

    Consultants who reviewed the proxy statement, which includes Donovan’s past compensation, estimate that if Donovan leaves he could receive $15 million to $20 million, plus retirement benefits, stock options and compensation already earned.

    Despite this windfall, Tony Wilbert, a Home Depot spokes­man, says that for now Donovan will stay on board. “Dennis is focused on fully supporting the new chairman and CEO in his transition,” he says. Wilbert declined to elaborate. A call to Donovan’s office was not returned.

    It’s extremely unusual for an executive’s employment agreement to tie a direct reporting relationship to a specific individual, says Jack Dolmat-Connell, CEO of DolmatConnell & Partners, an executive compensation consulting firm in Waltham, Massachusetts. Sometimes contracts will allow direct reporting relationships between positions, but won’t name the people, he says.

    This shows how much Nardelli wanted Donovan to join Home Depot, analysts say. Nardelli and Donovan worked together at General Electric, where Nar­delli was president and CEO of GE Power Systems and Donovan was vice president of HR. Nardelli tapped Donovan to be Home Depot’s HR chief in 2001.

    Donovan is the third-highest-paid executive at Home Depot, making $6.6 million in 2005. He has topped Workforce Management’s yearly list of the highest-paid HR leaders in publicly traded companies for two years in a row.

    “I’m curious about Home Depot’s business reasons for tying one person to another,” Salary.com chief compensation officer Bill Coleman says.

    Coleman notes that this kind of arrangement would never have been approved by a compensation committee today, given the intense scrutiny around corporate governance.

    “That contract is six years old,” he says. “The world has changed.”

    If new Home Depot president and CEO Frank Blake, another GE alumnus, wants to keep Donovan on board, it’s possible the company may offer the HR chief even more money to stay on, Dolmat-Connell says.

    “Donovan could cut a deal,” he says. “If they want to keep him, it could cost Home Depot a lot more money.”

    That’s not going to happen, because HR was “part of the problem” at Home De­pot, says Michael Watkins, founder of consulting firm Genesis Advisors and a former Harvard Business School professor.

    Before Nardelli and Donovan came on board, Home Depot had a decentralized culture in which store managers were completely autonomous, he says. Nardelli and Donovan, however, took the corporate culture to the opposite extreme, and “they didn’t hit the right balance,” Watkins says.

    “It used to be that you had people in the stores falling all over themselves to help you because it was an entrepreneurial culture at each store, and that has been killed,” he says. “Home Depot now has to regenerate that culture, and that goes to core HR issues like creating incentives. That’s why there is no way that this guy is going to stay.”

Workforce Management, January 15, 2007, p. 1,3 — Subscribe Now!