Firms Lure CEO’s With Top Pay
By Andrew Ross Sorkin and Eric Dash New
Monday, January 8, 2007
Robert L. Nardelli’s unceremonious departure from Home Depot may
spell the end of the era of super-size pay packages for chief
executives of public companies, but a new refuge for lavish
compensation and private jets is emerging elsewhere.
Flush with hundreds of billions of dollars, private equity firms
are beginning to offer compensation on a previously unimaginable
scale to the chief executives who run the once-public companies
that the firms have bought out. At the privately held firms,
the executives still get salaries and bonuses, but a crucial
difference lies in the ownership positions they can secure,
which can turn into particularly bountiful riches when these
businesses are sold or go public again.
While executives like Mr. Nardelli are being deposed, other
public company chieftains are deciding that they no longer want
to be judged by their shareholders and regulators, and are going
to work for businesses owned by private equity. The imperial
chief executive is still very much alive and well in the private
“Five or 10 years ago, it used to be that private company CEO’s
wanted to return to the public markets because they wanted to
run their own ship, not have private equity managers
second-guessing their decisions,” said Jeffrey A. Sonnenfeld,
associate dean of the Yale University School of Management.
Now, that pattern has reversed. “You regularly hear public
company CEO’s talk about how they can make two or three times
the money in what they feel is half the effort because they
don’t have the same degree of scrutiny,” Mr. Sonnenfeld said.
David Calhoun, a 50-year-old vice chairman at General Electric
who ran the company’s $47 billion aircraft unit, left G.E. last
year to become chairman and chief executive of privately held
VNU, a $4.3 billion media company whose holdings include Nielsen
Media Research and The Hollywood Reporter.
Mr. Calhoun, who was a contemporary of Mr. Nardelli’s at General
Electric, was offered a compensation package worth more than
$100 million, according to executives involved in negotiating
the agreement. VNU, which up until last year was a public
company, is controlled by a consortium of private equity firms
led by Kohlberg Kravis Roberts & Company.
Private equity investors “think about compensation differently.
They will spend the money to get the right person,” said George
B. Paulin, an executive pay consultant at Frederic W. Cook &
Company . They are “not under pressure to reform the same way
big public companies are,” he said.
This willingness to pay big money may bolster the argument of
defenders of corporate pay practices who have contended that
companies have simply been paying the going rate in the market
to attract top talent. At the same time, however, private
equity may be quicker than a public company to fire an executive
if he is not getting results.
“There’s also huge risk,” said Mr. Paulin, whose firm advised on
some of the richest pay packages for executives at a number of
big public companies. “It’s the classic pay-for-performance
Of course, the great irony is that private equity executives
usually get their biggest paydays when a private company is
either sold or taken public again. Then they again find
themselves in the public view.
Mark P. Frissora is an example of the risk being worth it. Up
until last year, Mr. Frissora was the chairman and chief
executive of Tenneco, the auto parts manufacturer. He was
making only a few million dollars a year at Tenneco when
executive recruiters approached him last year with several job
offers. Among them was one to lead a big public company.
But then he was offered the chief executive’s job at Hertz, the
rental car chain owned by a group of big private equity firms,
including Carlyle Group, Clayton, Dubilier & Rice, and an
investment arm of Merrill Lynch. The public company offers could
Mr. Frissora left Tenneco for Hertz in July and was granted a $4
million “make-whole” cash award and a guaranteed bonus of almost
$1 million for 2006. He also was given millions in stock
options and the chance to buy company stock — both at a very
steeply discounted prices — and a special dividend that would
put another $1.2 million in his pocket.
Less than six months and an initial public offering later, Mr.
Frissora is more than $33 million richer on paper, according to
an analysis by Brian Foley, an independent compensation
consultant in White Plains. He stands to make even more money
if Hertz’s share price goes up.
“It’s nice work if you can get it,” Mr. Foley said. And Mr.
Frissora is not the only one to reap such riches.
Millard S. Drexler made hundreds of millions of dollars and his
reputation as the merchant prince in his 16 years running the
Gap retail chain. Now, four years after the Texas Pacific Group,
a private equity firm, recruited him in to turn around J. Crew,
he has made a princely sum of money: at least $300 million, and
Mr. Drexler took $200,000 in annual salary and received no
bonus, but he was granted millions of stock options and shares
of restricted stock. Those awards are now worth $190 million
after J. Crew’s initial public offering last in June. Over the
last three years, the company also reimbursed Mr. Drexler
hundreds of thousands of dollars for moving expenses, a personal
chauffeur and business use of a personal jet, according to
Even more lucrative was the chance to invest $10 million of his
own money. That investment is now worth at least $120 million
today, and has helped him solidify a 12 percent ownership stake
— a size virtually unheard of for a public company chieftain who
is not the company’s founder.
That kind of money is exacerbating the tension at public
companies, where directors weigh the demands of top officers,
who are aware of the riches elsewhere, against the demands of
shareholders, who expect to see some gains in return.
“You have conflicting pressures where people in the private
markets are driving up the numbers of compensation at public
companies,” said William W. George, the former Medtronic
chairman who serves on the boards of Exxon Mobil and Foldman
It is probably not surprising that some of the best examples of
imperial chief executives of the recent past — John F. Welch Jr.
of General Electric, Louis B. Gerstner of IBM and Lawrence A.
Bossidy of Honeywell International — have all since ventured
into private equity after their retirement as advisors. Even
Mr. Nardelli, who departed abruptly on Wednesday and will exit
with a $210 million pay package, has already received phone
calls, e-mail messages and letters from the nation’s largest
private equity firms all seeking his services and dangling the
possibility of even more money, according to people in private
equity who approached him.
“He will wind up making a lot more money with a lot less grief
in the private equity world,” Leon Cooperman, one of Home
Depot’s largest shareholders, said on CNBC about an hour after
news of Mr. Nardelli’s departure. “I think it will be long time
before Bob Nardelli gets involved in a public company again.”
Some worry that with executives all rushing to take their
companies private, the United States is going to become less
competitive. Last month, the Committee on Capital Markets
Regulation published a report, which was endorsed by Henry M.
Paulson Jr., the Treasury secretary, calling for a lightening of
the regulatory burden on public companies.
Henry Silverman, who spent the last decade building Cendant into
an $18 billion conglomerate — it owned dozens of the nation’s
most prominent businesses like Century 21, Avis, Days Inn and
Orbitz — through a number of stock deals, says being public is
no longer attractive. He broke up Cendant into four pieces and
last month sold Realogy, its former real estate unit, to Apollo
Management, a private equity firm.
“There is no reason to be a public company anymore,” he said.
“You don’t need access to the public market,” because, he said,
of the enormous amount of money sloshing around private equity
and hedge funds.
Like Mr. Nardelli, Mr. Silverman of Cendant had been accused of
being an imperial chief executive with an outsized pay package.
He is estimated to have made $36.6 million in salary and bonus
and reaped $223 million from exercising options between 1998 and
2002. And he will make $135 million more as a result of selling
“Wherever I show up next, it will not be at a public company,”
Mr. Silverman said.