In the name of financial emergency, should public company directors abandon good governance principles? That is essentially the question posed by recent turmoil at Best Buy (NYSE: BBY). We rarely see the aftermath of a consultant or auditor resign from an engagement with a publicly traded company. Such matters are usually handled quietly, and parting is usually amicable because no consultant or auditor wants to burn bridges or be seen by future clients as difficult to work with. This dynamic is what makes the resignation of the Best Buy compensation consultant, reported earlier this week, so interesting.
To make a long story short, Don Delves, the independent pay consultant who had worked with the compensation committee of the Best Buy board for the last seven years, resigned earlier this month. The disagreement reportedly focused on retention bonuses not tied to performance that were paid to over 100 Best Buy managers and executives. The retention packages were said to contain payments of about $500,000 each. The executives also were to receive $2 million in restricted stock. A lucrative payout in light of the steep decline in Best Buy’s stock price from $30 to $18 over a 12-month period. “Pay for performance” or just “sticking around”?
I can see Best Buy’s dilemma here. The retailer is going through a Peyton-Place leadership change, its industry is shrinking as more customers buy items online or directly from Best Buy vendors (like Apple), and the majority owner of the company is said to be contemplating whether to take the company private or sell his roughly 20 percent stake. This is a circumstance where continuity and certainty are critical; a company has to protect its remaining talent pool.
Yet, giving 100 executives and managers $500,000 each for not abandoning ship, with no link whatsoever to performance goals, is a very big, red flag for investors. This is clearly not “Visionary Board” leadership we’re seeing from the Best Buy board. But maybe it’s a matter of survival.
It is interesting, in any event, to witness a company consultant standing on principle. By resigning the Best Buy gig, Don Delves may receive some of the best free publicity a compensation consultant could ever want in terms of having a reputation as an “independent” expert. Many compensation committees should be looking for just such a person as they struggle with ever-growing concerns about executive compensation practices. So here is today’s bonus (pun intended) question: A year from now, which will be higher: the number of new clients at Don Delves’ consulting firm, or the number of Best Buy managers who took the bonus and left the company anyway? I know which one I am hoping for.