There’s a funny ad in the Washington Post for bespoke suits. Their CFO suit special goes for $1,299 (3 suits, 8 shirts), the CEO special is $1,699 and the Board of Directors special is $2,499. What would the average worker suit special be if it were tied to pay comparatively… $1.69. That’s how much more some CEOs are making compared to their workers.
That seems way out of line but how to determine what’s egregious is part of that debate. Is it pay compared to market cap? Is it pay compared to the company’s average worker salary?
Several CEOs came up in lists of humongous paychecks compared to market cap or worker pay. Are they worth this pay or are they just empty bespoke suits?
Michael Jefferies is CEO of Abercrombie & Fitch Co. (NYSE:ANF) and his name hit the newswires last year for his bizarre requests for service on his private Gulfstream, including rules that male staff wear boxers and flip flops, the playing of Phil Collins, and that “No problem” is the required answer after requests. Jefferies’ requirements are detailed in a 40-page manual.
As an investor that would be a red flag right there (especially playing Phil Collins!). But then according to Bloomberg, Jefferies had the second highest ratio of executive pay compared to the company’s average worker paycheck at 1,640 times. He was second only to Ron Johnson, recently ousted CEO of J.C. Penney Company, Inc. (NYSE:JCP), who received a pay package worth 1,795 times the average J.C. Penney Company, Inc. (NYSE:JCP)’s employee.
Jefferies also made a list of CEOs who were least valuable in terms of pay to market cap. On this list he beat out Ron Johnson with a pay package ratio of $11,450 per each million of market cap as of last November. Compare this to number one on the list of most valuable CEOs Warren Buffett, CEO of Berkshire Hathaway Inc. (NYSE:BRK.A), who makes only $3.00 per million in market cap.
Jefferies is essentially getting paid what amounts to a founder’s premium like number three on the list, David Simon of Simon Property Group, Inc (NYSE:SPG), or Howard Schulz of Starbucks Corporation (NASDAQ:SBUX), both of whom make more than 1,000 times their average worker, but they are founders. Although Jefferies is listed as a founder on the proxy and in his defense was critical to turning Abercrombie & Fitch Co. (NYSE:ANF) from a sporting goods outfitter to a fashion retailer, the company itself has been around for 121 years.
Jefferies’ pay package is partly responsible for the company’s high corporate governance risk rating of 10. Aside from the pay issue Abercrombie & Fitch Co. (NYSE:ANF) isn’t a bad retailing stock. At a PEG of .69 and a forward P/E of 12.15 offering a 1.7% yield, you could do a lot worse. The stock has underperformed the S&P 500, losing 2% over the last year. And an overpaid and demanding CEO isn’t reassuring when a company is struggling to compete with Gap, Urban Outfitters, Inc. (NASDAQ:URBN), American Eagle Outfitters, H & M etc.