HP pays dearly for their lack of grooming

Posted by Marc Hodak on October 3, 2010 under Governance, Reporting on pay | Be the First to Comment

You have to wonder what the HP board has been doing for the last five years while Mark Hurd was their CEO.  One of the board’s main jobs is to hire a CEO, which supposedly includes succession planning, which supposedly includes the “hit by a bus” scenario where your CEO is suddenly gone as happened with Hurd in August.  The board is supposed to insure that the CEO is developing his or her bench as part of their job.  It has long been shown that CEOs hired from within tend to outperform CEOs hired from outside, especially at firms whose competitive advantage arises, in part, from their corporate culture.  One can argue that the HP Way has long since gone the way of the K-Mart blue light special, but you’d think that in five years the board would have pressed for and gotten Hurd to develop a potential replacement or two.

No.  They went outside, again, and they literally paid for it.  The MSM said they paid to the tune of $51 million, but that’s because that was the biggest number they could wring out of Leo Apotheker’s contract.  That amount may reflect multiple years or maximum amounts based on future performance–it’s not clear which from the story–but my calculation is about half that amount per year in each of the next two years if he achieves target performance.  Alas, $24 million per year is still about $10 million per year more than one might expect for an internally promoted CEO who, if he or she were well prepared, would likely have performed better than Mr. Apotheker, and not created a retention problem with every ambitious HP executive whose path to the top has suddenly gotten more rutted and overgrown.

I understand that sometimes one must go outside of the firm when it’s in trouble or otherwise in need of major change.  I don’t think too many people considered HP under Hurd to be troubled, until Hurd left.  I don’t work with HP’s board, so I don’t know if it was the board’s failure or Hurd’s failure that they couldn’t groom at least one internal replacement, or if none of their EVPs who will now be heavily recruited for CEO positions elsewhere were simply not good enough for the company in which they have performed so well.