HP Needs a Higher Bar for Whitman

This may be news for the board of directors at {complink 2376|Hewlett-Packard Co.}, but shareholders are feeling too mangled right now to care whether new CEO Meg Whitman is getting $1 or $20 million in annual salary. They just want the mess at HP cleaned up quickly.

If they still don't understand this, here's another fact: Even analysts are getting mad, and you know these are a generally amiable bunch.

Last week, HP said it will pay Whitman an annual salary of $1 following the abrupt firing of her predecessor, Léo Apotheker. I understand the message HP's board of directors wants to send, but the step sounds more like a publicity stunt at a time shareholders and customers want much more fundamental and reassuring actions that will revive the company's fortune. The move mimics the payment {complink 379|Apple Inc.} gave former CEO Steve Jobs when he rejoined the company years ago, and it demonstrates clearly that HP's directors don't understand how deeply disappointed investors are with their leadership or comprehend that such actions won't burnish their soiled reputation.

It also doesn't portray Whitman in a good light, notwithstanding her possibly genuine desire to let shareholders know she's aligning her future with HP's by accepting — in lieu of a fat salary — bonuses and options to purchase the company's shares in the future. In a filing with the Securities and Exchange Commission, HP also detailed the terms of separation given to ex-CEO Apotheker (severance of $7.2 million, “an annual bonus of $2.4 million,” relocation assistance, “accelerated vesting” of restricted stocks, etc.).

Apotheker has become a part of HP's history, so we won't waste too much virtual ink on him here. Instead, let's focus on the terms of Whitman's engagement and what this means for the company's future. The board of directors clearly wants Whitman to focus on pushing up HP's valuation, which has taken a terrible pounding; the shares closed on Friday at $22.45, down more than 50 percent in the last year. In addition to the $1 annual salary, Whitman will receive “a non-qualified option to purchase 1,900,000 shares of HP common stock.”

In order for Whitman to exercise the options rights, HP's stock must “increase by at least 40 percent over the price on the grant date of the option.” In addition, she will receive “a target annual bonus for HP's 2012 fiscal of $2.4 million, with a maximum bonus opportunity equal to 2.5 times target.” This means she could get as much as $6 million in cash bonus for fiscal 2012.

These goals are easily achievable, in my opinion, and don't represent the highest hurdles that should have been placed before Whitman. HP's stock price fell after Whitman's appointment, showing investors weren't too happy with her selection. Furthermore, the shares have been sliding since the company announced its intention to purchase {complink 549|Autonomy Corp.} for $10 billion. I guarantee HP's stock price would climb strongly if the board were to simply announce it would walk away from that deal. Of course, it might have to pay a hefty break-up fee, but that may be better than continuing on the current course. (See: HP’s Board Adds to Its Errors With Whitman Appointment and Muddled Thinking Sinks HP.)

It may not be possible for HP to dump the Autonomy transaction, but investors would certainly be interested in an exhaustive, viable, and quickly implementable plan for the company's future. Just announcing such a plan alone will bump up HP's stock price significantly. Over the next six months, if HP's new management rolls out strategies for making it a viable competitor — and a definite plan with actual timeline for spinning out the PC division — the shares would probably surge past the 40 percent level required to satisfy the terms of Whitman's stock options.

I am not a shareholder in HP, but if I were I wouldn't care if Whitman is getting $1, $5 million, or even $20 million in annual salary; that's chump change for a company of HP's size, and it wouldn't make a dent in its SG&A anyway ($0.4 billion in only the July 31 quarter). What matters most is how the company performs over the next few years, and that's where the stock options would have mattered most. Simply moving HP's stock price back to where it was one year ago does not represent a challenge — especially as Whitman was a member of the board that slept while Apotheker bumbled about.

HP is stuck with Whitman now. I wish her and the company well, but she also should know that investors aren't happy at all, either with her selection or the board's performance. She has a lot to prove, and HP can't afford the luxury of another failed CEO.

5 comments on “HP Needs a Higher Bar for Whitman

  1. Anand
    October 3, 2011

    Simply moving HP's stock price back to where it was one year ago does not represent a challenge — especially as Whitman was a member of the board that slept while Apotheker bumbled about.

    @Bolaji, I agree with your observation. But why did HP place such a small challenge infront of Whitman ? Is it because board is pessimistic about future ? Or is it wants to play safe by choosing a small deadlines so that the investors confidence is not shattered ?

  2. madpeanut
    October 3, 2011

    My opinion is several fold.

    Why low bar it?  Becasue just as the last CEO the board is out of touch with technology and more importantly what the business is actually supposed to do.  HP started as a hardware company, Compaq too was a hardware company.  They took the best of both and merged them but over the years like most of the PC industry they have become stagnant and haven't keep up with the times. Look at HP over the last several years.  They've purchased software, lots and lots of software.  Yet they have not cultivated any of it, tied their software portfoloio together, they're all still very seperate, disorganized and all over the place (i.e. Opsware, WebOS, even some others but none cheap). I think this was communicated by Apotheker with spinning down WebOS, looking at pawning the desktop segment and then looking to focus more on services. 

    Regardless of Whitman with a board so out of touch with technology how will they find an adequate replacemen that is passionate about tech?  If I were in their shoes, first, with a board election in march and the poor perforamnce so far of HP, multiple CEO's etc, what is there to lose by taking a risk on an unknown in this role (versus more of the same a la Whitman, she doesn't strike me as someone in tune with technology) and second, get the company back at its roots and find out where their future is with the software they have before they make yet more attempts at acquisitions (take care of what you have before buying more junk you're going to toss).

    HP still have not addressed the big items from my perspective.

    • Server Hardware – How is HP going to compete with Dell who is giving them a run for their money?  In my role and in talks with others in similiar roles in the industry people are leaving HP for Dell for cost reasons, we got a Dell server for $3k less than an equal class HP server, our HP reps couldn't match the cost.  It makes no sense why HP is so much more expensive, they dont make their own ram, or disks, or processors, or HBA's etc, so…”what do you actually make??” especially for $3k more?
    • Desktop Hardware – Their desktop models are not sexy, they are plan and ugly and unimaginitive.  How will this attract the consumer who is in love with Apple who has, sleek, sexy devices?  Compare with Dell, well, Dell is cheaper here too.
    • Tablets – spending so much focus matched with a half hearted attempt, WebOS was going to fail, I wish HP would have given me BILLIONS instead!!  The right path is that of Nokia in many ways (including fostering a Droid marketplace too) is to build hardware agnostic of the OS, not providing an OS no one wants or needs instead focusing on the Apple alternative and making some really awesome devices.  The WebOS hardware as well as HP Slate 500 was not sexy, when the bar is iPad you need to pony up to compete, which they haven't.  In this space you have some interesting challengers now, Samsung, Asus, not to mention Apple and anyone else (i.e. Amazon) droid gets on board.

    I could go on and on with items but…that's Whitman's new job to fix they aren't paying me to help them out lol. 

    Right now, HP is in trouble in a serious way its like the position I view Microsoft in but at least Microsoft has some areas that can carry them for a lot longer while they try to dig out of their hole (on the consumer side) but meanwhile and for the foreseeable future they can rely on the backend (i.e. Windows Server and those tools and apps).  Windows 8 is looking mighty fine…but its a year late when it will release so Microsoft needs the likes of HP and Samsung and others to counter Apple but then end up fighting for the pie left for Droid which is the new age Linux. 


    At the end of the day, Whitman is just a replacement and will by recycled next year for another “tried and true” CEO regardless of whether or not the baord is also recycled for a new one.

  3. bolaji ojo
    October 3, 2011

    @Madpeanut, Did you read my mind? Were you a fly on the wall in HP's boardroom or are you a secret dissenter on HP's board of directors? Whoever you are, HP should be listening to you. I wanted to dissent but how could I when I was busy nodding in agreement?

    In case you didn't know, and to drive home your point, HP announced today it had closed the Autonomy acquisition. And you know what? The division will be managed as a stand alone business, meaning no integration with all of the other software businesses HP has purchased! HP's shareholders need to wake up and demand some strategic direction for the company. I can't wait for CEO Whitman to announce one that finally gets the company on a growth path.

  4. elctrnx_lyf
    October 3, 2011

    I'm completely astonished with your analysis. Its just about right first meeting discussions of whitman probably. They should drop some in the hardware and make remaining cheaper and better looking and performance. And in the software, yes they should acquire but only small and promising acqusitions.

  5. jbond
    October 5, 2011

    I would have to agree that the bar for Whitman was setup more like a limbo bar, than a hurdle. The fact they are paying her $1 with hefty bonus potential seems like a publicity stunt and a lower bar means Whitman will still get paid nicely.

    HP needs to focus on their business and continuing in the field that made them a leader, computers. If they focus on their current business and stop trying to become the next Apple they should remain successful and profitable.

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