A&F comp smackdown

Posted by Marc Hodak on June 9, 2010 under Executive compensation, Reporting on pay | Be the First to Comment

Abercrombie & Fitch lost the shareholder vote for approval of their long-term incentive plan.  It wasn’t close. The two comp committee members up for re-election narrowly won with only 57% and 52%  of the vote, i.e., 43% and 48% withhold votes.  This loss on the plan and closeness of the director election were largely the result of “negative” recommendations by ISS combined with a major union campaign against the proposal and directors.

A&F, in fact, has a lousy compensation plan.   One of its main defects is well-encapsulated by this item from their proxy:

Relative to the competitive market data, the Compensation Committee intends that the overall total compensation opportunity for the executive group for the achievement of target performance will be approximately equal to the 75^th percentile of identified comparator companies. This same market positioning is used for other professionals within the Company. In view of the Company’s competitive industry, its high profile, its need for highly-qualified individuals in creative areas, and its geographic location, the Compensation Committee believes that this top quartile positioning is both necessary and appropriate. Furthermore, the Company has a history of setting challenging performance goals, and the top quartile target compensation levels are consistent with this goal-setting.

In other words, they feel compelled to pay more than the likes of Coach, Polo Ralph Lauren, The Gap, etc., (most of which are headquartered in much more expensive areas than New Albany, OH) if the company achieves at target level of performance.  They assert that their performance targets are “challenging,” but not necessarily any more challenging than those of their competitors.  When some or most of their competitors assert the same rationale for above-average pay, we end up with the “Lake Wobegon effect” whereby everyone’s management should get above average pay, and everyone’s pay subsequently gets ratcheted up year after year.  So, ISS was objecting to this Lake Wobegon method of setting total compensation targets, right?  No, that wasn’t it.

Perhaps they objected to the fact that A&F is giving 75th percentile total compensation while actually providing 25th percentile total shareholder returns.  ISS did mention a vague “disconnect” between pay and performance, but they didn’t offer such a detailed objection.

Perhaps ISS was objecting to the fact that this peer-based method of determining “competitive” pay has nothing to do with actual competition for this executive talent, or that A&F’s CEO in particular was not going anywhere this year or next, or ever, with or without his “retention” bonuses.  Nope, no mention of that either by ISS.

ISS was apparently concerned that by giving equity to employees throughout the company, this plan “would dilute equity too quickly.”  I don’t get this objection.  If you have to pay someone $100K, does it really matter if you pay them in cash now or the promise of shares later?  And if you have an objection that $100K is too much, then what difference does it make whether it’s too much equity or too much cash?  Aren’t shareholders “diluted” the same either way?  ISS must understand that investors ought to be neutral about promises of equity vs. cash–that one is just as “dilutive” as the other–because they essentially made that same argument in favor of requiring companies to expense stock options based on their grant-date value.

In fact, $33 million of the CEO’s $36 million in 2010 compensation is derived from exactly such a grant-date option value, a value that ISS vociferously (and quite properly) argued should be disclosed, precisely because shareholders care just as much about the expected value of equity as they do about the certain value of cash.

ISS also seemed irked that the comp committee paid the CEO cash now to forever give up most of his free flights on the corporate jet.  Again, if you’re going to pay someone, what difference should it make to the shareholders if that compensation is in the form of cash or use of the company jet?  I think it should make little difference to the shareholders.  But it makes a huge difference to the unions that campaigned hard for the “Withhold” votes.  Unions don’t believe that their Comrade CEO should have a bourgeois perk such as flights on the corporate jet for the petty schoolboy reason that one person shouldn’t have bubble gum unless they brought some for everyone else.

Shareholders should have objected to A&F’s compensation plans, and they probably should have replaced the movie agent and the real estate broker on the comp committee with a pair of business persons who could stand up to a strong CEO and with, “If you don’t think $10 million is enough, go ahead and work for Ann Taylor.”  But the fact that the shareholders registered this objection with such a crude mechanism as a “No” or “Withhold” vote based on arbitrary ISS standards and union envy does not bode well for the future of public companies when all of their pay plans become subject to the politics of “Say on Pay.’