Choice 1 is 100 percent stock options with a four-year vesting schedule and a 10

Question

Choice 1 is 100 percent stock options with a four-year vesting schedule and a 10-year life. Choice 2 is 50 percent stock options and 50 percent performance shares, which are based on the company’s total shareholder return compared with the S&P 500 over a three-year period.

   "The first two choices are catering to people who are willing to roll the dice," Herman says, adding that the payouts are vulnerable to market conditions.

   The third and fourth choices are quite different. They are based on "economic value added," a metric devised by Best Buy that uses an internal formula that changes from year to year. They involve the meeting of one-year performance targets, but employees can’t access the rewards for three years.

   Choice 3 offers 50 percent stock options and 50 percent restricted stock, which is awarded at the end of three years for performance measured against the company’s economic-value-added goal at the end of 2007. Choice 4 offers 50 percent restricted stock and 50 percent performance units, both earned at the end of three years, based on company performance against the economic-value-added goal at the end of 2007.

   It might sound like a lot of delayed gratification, but at the end of 2007, employees can clearly see what they will get three years later, Herman says.

1. why do you think so many of Best buy executives opted for choice 1 or 2? What would you do to encourage more employees to adopt choices 3 and 4?

2. does this best buy compensation program satisfy line of sight requirements? Which of the four choices do you think has the most direct line of sight?

3. what additional compensation elements would you add to the best buy compensation package?

Explanation / Answer

1) A majority of eligible employees opted for Choice 1 or 2, while only 11 percent took Choice 3 and 2 percent chose Choice 4. Herman attributes this imbalance to the difficulty of explaining economic value added to its employees.

It’s hard to get people comfortable with a metric without giving too much information. To address this, the company is sending out quarterly communications about the metric to better explain it and will update employees how the company is faring.

2)since employees only had from October 10 to 28 of last year to make a decision. Also, since Choices 3 and 4 are based on an internal metric, it was hard to explain to employees what that meant without giving away competitive information.

Although only 25 percent of the employees eligible for the plan took advantage of the one-on-one counseling, a majority attended the webinar. By the October 28 deadline, 73 percent had made an election. The rest were defaulted into Choice 2: 50 percent stock options and 50 percent performance shares.

     3)Time will tell whether the new incentive program will help retain the company’s best employees. One pitfall the company may come across is that offering choice could actually create discord among employees.

   But according to a recent survey Best Buy conducted, so far employees seem to feel good about the offer.

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