Getting Paid to Fly Commercial

Abercrombie and Fitch recently amended the contract of CEO Michael Jeffries “to limit his company-covered personal use of the corporate jet to $200,000 per year.” In exchange, Jeffries will receive a $4 million one-time payment (with a clawback provision if he leaves the company). The CEO averaged $850,00 worth of personal travel on the company jet between 2006 and 2008. “There will likely be a negative reaction to it from institutional shareholders,” said Irv Becker, an expert on executive compensation. Would be interesting to know how much of that $4 million Jeffries ends up spending on airline travel. [%comments]


Nosybear

It's good work if you can get it: He's being paid $4 million to avoid $1.95 million in cost? Were I a shareholder, I'd react negatively. The proper solution? Make him pay for his personal use of the Company jet. Of course, then the "personal travel" would be thinly disguised as required for business. It is really good to be the king.

Mike

Obviously, this is a work around to the negative publicity companies are getting for using or having corporate jets.

Speed

It would be in his best interest to spend the $4mm on chartering jets for business travel. If he spends it on fast cars or vacation homes it will be taxed and his personal benefit will be far less than $4mm. Money spent on travel for company business is deductible and he would personally get the full benefit of the $4mm.

Piotr

The (calculated and presented above) cost of using a Company Jet is probably a mixture of the actual spending (maintenance etc). and cost of capital (be it financing or depreciation of the asset). It is unclear, how the cost was calculated and it probably depends on the amount of flying done by other users. However it was calculated - it can be argued that is is incorrect :-)
It is important, because if the plane is left unused - the company will still bear its fixed/unavoidable costs (which s probably the majority of the amount mentioned).
And the $4M is an annuity - covering all future costs of flying. So it cannot be directly compared with the 2006-2008 costs.

Jim C

He's getting paid a one-time payment of $4 million to avoid a $1.95 million *recurring* cost. I'd be thrilled if I were a shareholder.

I doubt we'll see him on USAir or Delta. $4 million buys a lot of NetJets time.

Eric M. Jones

And yet his performance has been--at best--below average.

Allen

That's a good sign that the compensation is out-of-whack. If you bought Abercrombie & Fitch 5 years ago then this bozo took over, you'd be down relative to the market and to its peers.

http://www.google.com/finance?chdnp=0&chdd=1&chds=1&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1271361600000&chddm=492269&chls=IntervalBasedLine&cmpto=INDEXSP:.INX;NASDAQ:URBN&cmptdms=0;0&q=NYSE:ANF&ntsp=0

teej

Jeez, how about the board just tells him to suck it up and take first-class plane tickets like all the other poor millionaire schmucks. Cuz, you know, he's an employee and should be thinking about the good of the company.

Or is that too much to ask of the poor, embattled CEOs of the world?

David L

This is basically an annuity that has a higher IRR the longer he stays with the company. So they're obviously assuming that he will be with the company more than 4 years (the term of the clawback provision). The minimum IRR is -4% (he leaves after the expiration of the clawback privision). After 6 years, the IRR is 10%, and if he stays 10 years, the IRR is over 19%. (That all assumes a 3% CAGR for the cost of air travel).

So by making this bet, they're implicitly stating that they expect him to be on board for a while.

Andreas Kitzing

Where does the number of $1.95 Million come from?

For me it seems like they invest $4 Million to save $650,000 a year ($850,000 - $200,000). I don't know how long they expect him to be CEO, but it looks like this investment definitely has a negative NPV.