7 Missteps That Led to Abercrombie's Shareholder Revolt

Pay your CEO more than $36 million while sales are plummeting, and this could happen to you: Abercrombie & Fitch (ANF) faces a shareholder revolt at its annual meeting tomorrow that seeks to replace board members and strip A&F CEO Mike Jeffries of his board chairmanship.

A campaign mounted by the $850 million pension plan of union AFSCME urges a vote against current A&F compensation committee members and the election of an alternative slate of board members in their stead. They've targeted two compensation committee members in particular -- Hollywood agent Ed Limato and former U.S. ambassador Craig Stapleton -- for removal. The points AFSCME cites as the reasons for its proxy fight provide a textbook of what not to do in corporate governance and compensation policy if you want to stay out of hot water with investors, especially in these lean times. It's more than just a high salary. Among the points that got Abercrombie in hot water:

1. Benchmarked compensation to the 75th percentile. This move essentially guarantees your CEO pay will be higher than the norm in your industry.
2. Pay way out of scale with competitors. Jeffries' pay isn't just a little high -- it's fourteen times that of the next-highest paid CEO in apparel, who got $2.5 million, AFSCME's research showed.
3. Big retention bonus. Despite falling performance, in late '08 the A&F board gave Jeffries a new, five-year contract and paid him a $6 million retention bonus.
4. Paid CEO to cut use of the company plane. As the AFSCME proposal notes, "Companies have been ending perks, not paying to end them." A&F paid Jeffries $4 million lump-sum as a sweetener for limiting (not even ending!) his company jet usage. AFSCME notes the payment "has no tie to performance, and it is being paid to end a prerequisite that had no tie to performance in the first place."
5. Soaring compensation while net income falls. In 2007, Jeffries was paid $11.2 million in cash and other benefits, while the company notched an impressive $476 million in net income.
6. Ignoring criticism. Jeffries' pay package has been roasted by everyone from stock analysts to compensation experts. One financial site recently asked, "How clueless is Abercrombie's management and board?" Yet board members turned a deaf ear.
7. Shunning corporate-governance best practices. The trend toward separating the CEO and chairman roles has been rolling for decades and has been demonstrated to help facilitate better company results, but not at A&F. Jeffries has held both posts since 1998.

• Meet the Abercrombie Board That Paid the CEO More as Sales Fell