Best Buy Co. Inc.’s lower-ranked executives who want stock awards should plan to stick around.
The Richfield-based consumer electronics giant recently decided to broaden its noncompete umbrella from senior executives like CEO Hubert Joly and Chief Financial Officer Sharon McCollam all the way down to vice presidents and directors, the Star Tribune has learned.
In exchange for future stock awards, the executives must agree to not work at a competitor anywhere in the world or use any idea or experience gained at Best Buy for 12 months should they decide to leave the company.
Best Buy spokeswoman Amy von Walter said such noncompete agreements are routine at big corporations.
“These are standard provisions to ensure that the shareholders of the company are safeguarded should a senior employee decide to leave and be inclined to take their Best Buy experience to a competitor,” she said.
In a broader sense, the move reflects Best Buy’s continued efforts to restore stability to its managerial ranks after a tumultuous year that has seen two CEO changes, a contentious takeover battle with founder Richard Schulze, layoffs, and scores of executives exiting the company. This time, though, Joly can dangle a carrot not previously available to immediate predecessors: a robust stock price.
But some experts question whether Best Buy really needs such agreements, which companies traditionally use to protect customer information or proprietary technology like software, manufacturing techniques, and medical devices.
“Does Best Buy have a lot of trade secrets?” said Hillary Sale, a professor of corporate law at Washington University in St. Louis. “It strikes me as unusual to sign up people that far down the ladder.”
Since late December, Best Buy shares have more than doubled to Wednesday’s close of $27.09. Before the end of 2012, Best Buy stock price had been in free fall, losing more than half its value in just a few years. A healthy, growing stock price makes it easier for companies to attract talent and convince executives to sign those noncompete agreements, said Marshall Tanick, a lawyer who specializes in employment law for Edina-based law firm Hellmuth & Johnson.
“Had they done this before, employees would have been reluctant because there was no upside,” Tanick said. “They are afraid people will leave. Incentivizing someone to stay, there has to be a benefit, a carrot and a stick. And now the carrot just got sweeter.”
In general, more companies are employing noncompete agreements, especially in Minnesota where the courts are “fairly rigorous” in enforcing them, Tanick said. That’s why some legislators supported a bill this past year that would have eliminated noncompetes in the state but the measure ultimately died.
But noncompete agreements are not bulletproof. What constitutes proprietary knowledge that could benefit competitors remains murky, said Dan Le, a Minneapolis-based employment law attorney.
“Companies want to make noncompetes as broad as possible,” Le said. “There’s a big difference between a CEO and vice president. It also depends on how strict Best Buy will enforce these agreements. Any low-level employee can walk out the door with some sensitive information.”
Over the past year, Best Buy has faced withering criticism on its efforts to remove some employees while retaining others. In April 2012, then-CEO Brian Dunn resigned amid allegations that he used company resources to carry on an affair with a female employee. The board of directors ultimately agreed to award a separation package worth $4 million to compensate him for not working at a competitor for three years.
Analysts suspect the unusual length of the noncompete, about triple the usual length of such an agreement, was little more than an excuse to justify a lucrative pay package that Dunn, given the scandal and poor job performance, did not deserve.
Two months later, the board approved stock and $500,000 in retention bonuses each to then CFO Jim Muehlbauer, international chief Shari Ballard, chief human resources officer Carol Surface and U.S. President Michael Vitelli. A longtime compensation consultant to the board reportedly resigned because the bonuses were not tied to any performance standards. Muehlbauer and Vitelli ultimately left the company.
In a rebuke to the board, shareholders overwhelmingly voted last year to reject Best Buy’s executive compensation practices.
As a result, the board made several changes earlier this year. First, departing senior level executives will be held to a one-year noncompete, period.
Second, the company said executives could lose cash and stock for “voluntary termination without good reason” or “involuntary termination with cause.” In other words, in cases where they quit under pressure or were fired. In the past, executives only lost their stock options.