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]
Getting Paid to Fly Commercial
TAGS: airlines
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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.
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.