The shares fell 13 percent on the first trading day after Palm said Michael Abbott, senior vice president of Software and Services, had submitted his resignation from the maker of the Pre and Pixi mobile phones.
Abbott, a former Microsoft Corp general manager, joined Palm in 2008 to head development for webOS.
He is expected to leave the company at the end of this week, adding to a growing list of troubles for Palm. Among them, the company's phones are being phased out at RadioShack Corp.
We are concerned by the departure of Mr. Abbott, as he had principal responsibility for Palm's webOS software, one of the company's few remaining assets, said CL King & Associates analyst Lawrence Harris.
WebOS is the main reason, analysts say, more than Palm's patents or relationships with mobile carriers, that a suitor would desire the money-losing smartphone maker that has hired bankers to explore several options, including a sale of the company.
In a regulatory filing on Friday, Palm also disclosed moves to hang on to other executives by announcing a retention program that includes bonuses of $250,000 each for Global Operations chief Jeffrey Devine and Chief Financial Officer Douglas Jeffries. The incentives are only valid if they stay with the company for another two years.
Citing the executive moves, Morgan Keegan analyst Tavis McCourt on Monday downgraded Palm to underperform from market perform, saying that the smartphone maker's recent activities do not inspire confidence about its ability to sell out at a premium valuation in the near term.
Shares of Palm -- which has for years been seen as a acquisition target -- have fluctuated wildly in recent weeks on persistent rumors that it may be on the block. Palm representatives have repeatedly declined to comment.
The shares, which fell 73 cents to $4.86 on Nasdaq at mid-afternoon on Monday, have declined move 40 percent this year on weak sales, and increased competition from Apple Inc's iPhone, Research in Motion Ltd's BlackBerry, and smartphones made with software developed by Google Inc and Microsoft.
In fact, Sprint Nextel said retailer RadioShack will phase out sales of Palm Pre and Pixi phones running on Sprint's network, in favor of other Sprint models.
I understand that the Pre will be replaced by a BlackBerry product and Pixi will be replaced by a messaging-centric device, said Sprint spokeswoman. These are very logical changes to newer models from Sprint.
CL King's Harris, who first mentioned the retailer's apparent shift in a note to clients, said that historically, RadioShack has been an important sales channel for Sprint.
In recent weeks RadioShack was offering both Palm models for free, probably in order to clear out inventory, he said.
Palm declined to comment. A RadioShack spokeswoman said the company does not discuss details about inventory and distribution of specific devices.
(Reporting by Franklin Paul in New York, Sinead Carew in Dublin and Manasi Phadke in Bangalore; Editing by Don Sebastian, Tim Dobbyn and Richard Chang)