The missing word in CEO pay: Trade-offs
Posted by Marc Hodak on April 13, 2010 under Executive compensation, Reporting on pay | 
Be the First to Comment
People intuitively understand “you get what you pay for.” People get that, for a given price, you can either get an extra thousand square feet of space or a view of Central Park, but not both. Or, if you’re dealing with Lee Iaccoca, you can get Corinthian leather but not power doors and windows. Persuasive negotiation only gets one so far.
But when it comes to CEO pay, people pretend that trade-offs don’t exist. They presume that CEO pay is arbitrarily high based on the feckless disposition of the board, and that the perks that rile the mob so much, and presumably have value to the executive, should therefore be arbitrarily banished without a second thought. So, they pretend to be surprised when the Abercrombie & Fitch CEO was denied personal use of the corporate jet and, instead, paid more in cash:
The high-priced teen retailer amended the employment agreement of Michael Jeffries, long-time chief executive, to limit his company-covered personal use of the corporate jet to $200,000 per year. The CEO would have to reimburse the company for any use over that amount.
Previously, Mr. Jeffries was entitled to unlimited personal use. From 2006 to 2008, he booked an average of about $850,000 a year worth of personal travel on the corporate jet. In 2008 alone, he tallied roughly $1.1 million worth of personal travel on the jet. In exchange for agreeing to the limitations, Mr. Jeffries will receive a lump-sum payment of $4 million. The agreement requires Mr. Jeffries to pay back a portion of that money should he choose to leave the company before Feb. 1, 2014.
So, why would A&F’s board do this? Because if you take something away from someone you need to keep, you need to replace that with something else, and cash is a useful substitute. Now, keep in mind that when the CEO chooses to fly Delta, the corporate jet is probably sitting idle, so that “$850,000 a year” cost is partly an accounting fiction. Or, if he continues to fly on the corporate jet at the same pace as before, he will simply be paying back about 75 percent of what the company paid him. The other 25 percent equals about half of the extra taxes the executive must pay to have the company funneling this perk through his personal bank account; the shareholders, who would get no deduction for that $4 million expense, would be out well over a million bucks on this deal.*
CEOs get paid to renegotiate their agreements all the time, but the quid pro quo for that cash payment is rarely this obvious because they are normally renegotiating several terms at once. In this case, the CEO was paid to renegotiate one term, i.e., less jet usage.
Alas, this has nothing to do with the shareholders. It has to do with the “public backlash as corporate jets became a symbol of Wall Street greed,” notwithstanding the fact that A&F is not on Wall Street.
Add A Comment