Abercrombie, Compensation, and the Need for Access (Part 2)

What really stands out is not the total compensation or the stock appreciation rights, but the treatment with respect to the personal use of the corporate aircraft. 

The CEO has made extensive use of this benefit.  The proxy statement for 2009 revealed that Mr. Jeffries was assessed under "other compensation" with "$639,439 in aggregate incremental cost of personal use of the Company-owned aircraft calculated."  In 2008, the amount listed in the proxy statement was "$1,115,484 in aggregate incremental cost of personal use of the Company-owned aircraft."  In 2007, according to the Company's proxy statement, the amount was "$656,545 in aggregate incremental cost of personal use of Company aircraft (less reimbursement of certain amounts by Mr. Jeffries)."

What is the reason given by the company for allowing this use?  Safety.  In the proxy statement for 2008, the company gave this explanation: 

• "The Compensation Committee has carefully considered the provision of these benefits, including private air travel and personal security, and approved those benefits out of concern for the CEO’s safety. In approving the private air travel, the Compensation Committee also took into account the CEO’s extensive travel schedule, which, whether primarily for personal or business purposes, nearly always includes a business element (for example, visits to Company stores or potential store locations)."

Perhaps more unusually, the right to use the aircraft for personal trips was not simply a matter of board policy but was ensconced in Mr. Jeffries' employment contract.  In a contract executed earlier in the decade, he received the right to use the corporate aircraft for travel in North America.  See Proxy Statement Filed May 5, 2005 ("In addition, under the Jeffries Agreement, the Company provides to Mr. Jeffries, for security purposes, the use of the Company aircraft for business and personal travel in North America. For travel outside of North America, Mr. Jeffries will be entitled to first class air travel."). 

In December 2008, the company executed a new five year contract (the one that provided for four million SARs) and expanded the right to the personal use of the aircraft.  No longer limited to North America, the employment agreement authorized, among other things,  that "[f]or security purposes, the Executive shall be provided, at the expense of the Company, with use of a private aircraft for business and personal travel, both within and outside North America."

In April of this year, however, the Company announced a modification of the right.  Henceforth, Mr. Jeffies would be limited to personal use of no more than $200,000 a year.  Given that the already executed employment contract provided for unlimited personal use, this represented a meaningful reduction in contractually mandated benefits.  In return for this change, the Board agreed to pay Mr. Jeffries $4 million for the amendment (subject to clawbacks in certain circumstances).  As the proxy statement explained: 

• At the time the CEO's employment agreement was entered into, the Compensation Committee carefully considered the provision of these benefits, including private air travel and personal security, and approved those benefits out of concern for the CEO's safety and his extensive travel schedule. In light of changing compensation practices, the Compensation Committee and the CEO have agreed to an amendment to the CEO's employment agreement (entered into on April 12, 2010), pursuant to which the CEO will, commencing with the 2010 fiscal year, no longer be entitled to unlimited use of Company aircraft for personal travel without reimbursement to the Company.

In other words, the benefit had been given to the CEO out of the need for safety and his "extensive travel schedule."  It was being taken away because of "changing compensation practices." 

We will have some additional thoughts on this in the next post.