Best Buy's Dunn May Be Able to Get $3.35 Million Package

Best Buy Co.'s former Chief Executive Officer Brian Dunn, who resigned last week amid a probe into his personal conduct, may be eligible for a severance package of as much as $3.35 million.

Dunn, 52, is entitled to as much as $1.15 million in stock options if his departure is determined to be voluntary, according to a proxy filing last year. He would get an additional $2.2 million in cash if his departure were deemed involuntary. If the board decided he was fired for cause, he could get nothing. The company said Dunn’s departure was part of a “mutual agreement” last week.

Best Buy’s board must weigh the options of providing compensation to the departed CEO or risking legal action if it chooses to pay nothing. Companies typically opt to pay something given the high costs of litigation, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

“It is time-consuming and costly for a company to fight in court,” Elson said in a telephone interview. “The legal fees climb quickly and eat into the savings of avoiding a severance package. It is rare that a CEO gets nothing.”

Greg Hitt, a spokesman for Best Buy’s board, declined to comment beyond saying that the severance agreement will be disclosed when it is completed. Ron Hutcheson, also a spokesman for Best Buy’s board, said the company won’t discuss possible scenarios and that the investigation is continuing. Dunn didn’t respond to two e-mail requests for an interview.

Law Firm Hired

Best Buy’s board has hired Washington law firm WilmerHale for the probe of Dunn’s conduct, with former U.S. Securities and Exchange Commission Director of Enforcement William R. McLucas and former U.S. Attorney for Colorado Thomas Strickland assigned to the case. That probe centers on the possible misuse of company resources while having an inappropriate relationship with a 29-year-old female subordinate, two people familiar with the matter have said.

Companies in such situations may negotiate a deal and deviate from the severance agreement that is stated in public documents, Elson said.

Some severance packages have even been large enough to come under scrutiny in recent years, said Alan Johnson, managing director of New York-based compensation consulting firm Johnson Associates.

Severance Packages

Former Home Depot Inc. (HD) Chairman and CEO Robert Nardelli received about $98.5 million in severance payments as part of his 2006 compensation. FormerHewlett-Packard Co. (HPQ)  CEO Mark Hurd’s severance package has been estimated at as much as $40 million in court documents in a shareholder lawsuit. The severance package for former HP CEO Carly Fiorina was valued at about $42 million in a 2006 lawsuit.

“If they give him an outsize package, employees will be livid,” Johnson said of Dunn.

Director G. Mike Mikan is serving as Best Buy’s CEO while the board seeks a permanent replacement. The company has said that search may take as long as nine months.

Best Buy’s board last year boosted Dunn’s base salary 10 percent to $1.06 million, citing his initiative to spur revenue growth from connecting mobile phones, tablet computers and other gadgets to one another. The board also praised Dunn for “living and teaching company values” and his “maturity” in the role of CEO, according to the filing.

For the year, Dunn’s total compensation fell 51 percent to $5.03 million after he received less in option awards and incentive compensation.

‘Negative Publicity’

The former CEO has “some operating room” because he can drag out negotiations over severance, according to Mark Borges, a principal for San Francisco-based Compensia Inc.

“The question for the company is how much bad or negative publicity is this going to create for them,” said Borges, who’s based in Washington. “They’re asking, ‘At what cost do we prefer to have this settled and behind us?’”

Even if Dunn has some leverage, the board will be under pressure to avoid paying a big settlement because Best Buy’s performance languished in recent years, said David Schmidt, a senior consultant with James F. Reda & Associates, a New York- based executive compensation consulting firm.

Best Buy posted a $1.23 billion loss in its most recent fiscal year, its first since the company’s fiscal 1991, amid competition from Internet retailers such as Amazon.com Inc. The shares have declined 29 percent in the past 12 months, compared with a 16 percent gain for the Standard & Poor’s 500 Retailing Index. The company said last month it plans to close 50 U.S. big-box stores this year.

“Here is someone who ran a company that hasn’t done very well,” said Schmidt, whose firm is a unit of Arthur J. Gallagher & Co. (AJG) of Itasca, Illinois. “For him to have done these things and then get paid on top of it, it doesn’t look good for the board.”