Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Abercrombie & Fitch Co. (ANF), Urban Outfitters, Inc. (URBN): Outrageous Pay Package Companies to Avoid

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.

Abercrombie & Fitch Co.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?

No problem

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.

Speaking of competitor Urban Outfitters, Inc. (NASDAQ:URBN), its CEO and co-founder Richard Hayne also made that same list of most valuable CEOs, making $8.00 per million of market cap. I’ve liked Urban Outfitters, Inc. (NASDAQ:URBN) for some time and although the P/E is getting stretched at 25.58, analysts thinks it will generate over 15% EPS growth year over year.

Barclays just initiated coverage at Overweight on April 1. Seven analysts have strong buys, seven have buys and 16 have holds on Urban Outfitters, Inc. (NASDAQ:URBN). The name was also featured recently on Jim Cramer’s lifestyle brands index as being”cool.” The stock is up 42.8% over the last year.

While not in the top five Leslie Moonves, CEO of CBS Corporation (NYSE:CBS), also made the Bloomberg list with a $69.9 million pay package worth 1,111 employees’ salaries. Compare him to CEO Vincent Forlenza of Becton, Dickinson and Co. (NYSE:BDX), whose pay equals 185 employees and as the company commented, 75% of Forlenza’s pay was tied to performance. Or we can compare again to Warren Buffett, who is paid the equivalent of 10 employees’ salaries. That’s right, just 10.

Moonves has enjoyed some sweet perks in the past including a NYC apartment that Viacom paid him to sleep at to the tune of $100,000 plus in 2004. At that time his pay package was much lower at $20 million.

Moonves is not a founder like other top names — Ralph Lauren,  Howard Schultz, and Larry Ellison of Oracle Corporation (NASDAQ:ORCL), and that founder’s premium has to be considered. A founder/CEO not only has an emotional tie to the company but usually has a strong tie in the form of accumulated stock. At least Moonves holds stock in the company — 1,268,754 shares to be exact. Not tying a CEO to company stock gives no incentive to perform.

Moonves has helped CBS Corporation (NYSE:CBS) though, with the stock up 38% this year alone. It trades at a 19.18 P/E with a yield of 1.0% and a PEG of 1.07. This compares favorably with competitor The Walt Disney Company (NYSE:DIS) with its 20.22 P/E, yield of 1.2%, and PEG of 1.46.

With similar numbers, does Moonves deserve his premium pay compared to The Walt Disney Company (NYSE:DIS) CEO Bob Iger’s $31 million, making Iger’s compensation equal to 557 employees’ salaries? And whose company’s stock is up 46% over the same timeframe?

Moonves has done wonders at CBS (look at the chart) and so is not an empty suit, but he seems overpaid compared to Iger. I’d rather own Disney anyway for its parks, cruise line, branding business, films, TV, ESPN, ABC, cable content, and radio.

Let’s sew it up

Abercrombie & Fitch Co. (NYSE:ANF) is a name to avoid. Its competitors like Urban Outfitters, Inc. (NASDAQ:URBN) are outperforming them and the CEO is overpaid for what only be described as miserable stock performance (see chart below). CBS, while similarly valued to Disney, doesn’t have that all-important branding business and Moonves is probably overpaid as well.

Disney and Urban Outfitters, Inc. (NASDAQ:URBN) have both run big and if there is a selloff in May one could start accumulating them on pullbacks.

DIS Total Return Price data by YCharts

The article Outrageous Pay Package Companies to Avoid originally appeared on and is written by AnnaLisa Kraft.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.