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Thursday, January 16, 2014

Dissecting Best Buy’s Ethic: Where There's Smoke, There's Fire


In 2010, Best Buy’s management adopted executive compensation principles that included a provision that “pay is clearly tied to . . . performance.” Frank Trestman, then chairman of the company’s compensation and human resources committee, made this statement with rose-colored glasses. After just two years, Target's board and upper management abandoned the provision amid poor numbers. Even as the management laid off 2,400 employees (1.4% of the total), the board's compensation committee approved cash bonuses of $500,000 and $2 million in restricted stock for four executives. The interim CEO, Mike Mikan, was at the time hauling in $3.3 million in annual total compensation. In the analysis that follows, I subject this "dual strategy" to two criteria: institutional conflicts-of-interest and distributive justice.

The board committee doubtless wanted to retain the executives, figuring that the numbers would be even worse otherwise. Left unstated, however, is why people associated with bad numbers should be retained. The operative assumption that better executives (i.e., without such bad numbers in their respective current jobs) would balk at offers lower than otherwise discounts factors such as the desire to turn around a company and the prospect of greater compensation once the good days return. From an ethical standpoint, the retention argument may often be overplayed simply because it dovetails with the financial interests of the current upper-echelon managers. This is hardly a moot point, as many corporate boards are indeed controlled by managers theoretically to be held accountable. This huge conflict-of-interest is the elephant in the corporate boardroom that few directors have the courage to face head on.


Best Buy's corporate headquarters. (Image Source: Chad Davis)

As for the "dual strategy," the bonuses and stock options going to executives as employees are being laid off presents us with a question of distributive justice. On the one hand, more money can be saved by laying off enough employees than from approving lower bonuses (using break-even analysis). On the other hand, some of the executives may need to go based on the unsatisfactory numbers. Additionally, reputational capital (as well as employee productivity as well as longevity) can take a hit, albeit less than what ethicists typically assume. The perception of unfairness is triggered by not only the asymmetry of the "dual strategy," but also the convenient lapsing of the “pay tied to performance” provision when it would mean no bonuses and additional stock options. 

The sunny-side-only mentality may work with eggs, but otherwise it suggests an underlying lack of fortitude when times get tough. Undue comfort from succumbing to greed and selfishness, whether in oneself or others, violates the virtue ethic wherein a person takes the bad with the good instead of fluttering in the wind. 

As a postscript of sorts, Best Buy’s former CEO, Brian Dunn, resigned in April 2012 amid allegations of an improper relationship with a female employee.  In late 2013, the corporate management mandated that the bags, backpacks, and even coats of store employees be searched. This typically occurs just inside a store's front doors; the prospect of employees feeling embarrassed rather than just distrusted somehow does not make it into the retention argument. On January 15, 2014, stock analysts cited Best Buy's disappointing 2013 holiday season sales revenue as precipitating the stock dropping $10.50 (29%) that day. I submit that such analysis, even as it takes into account the company's lag in mobile technology, remains superficial, as though merely reading the direction of the smoke.

Problems in retaining store customers may point us to the fire below. Once in 2012, a yellow-shirted security person had no qualms in embarrassing me by shouting "HEY, SIR! STOP!" repeatedly before he caught up to me just after I had entered the store (and was still in the front open area). He insisted nonetheless on inspecting my academic book-bag. "I don't understand," I said. "Are you afraid I took something in the parking lot?" I asked in astonishment. I opened the bag because doing so was not a big deal, but you can be sure I made a beeline to the store manager, a guy in his mid-twenties. He informed me in a factual tone that in his experience people carrying a backpack (or, I suppose, a book-bag) are shoplifters. He added, however, that the security person had probably shouted at me because he also works part-time at a prison. "It might not be very good customer service to confuse us with prisoners," I said in extremely dry humor that went right by the manager who felt he could not be wrong. When there is smoke in the stores, there is probably fire at corporate headquarters.

Source:

Bonnie Kavoussi, “Best Buy’s Pay Consultant Quits in Protestof Big Executive Bonuses,” The Huffington Post, July 24, 2012.