Does Abercrombie’s emperor have any clothes?

It’s probably best not to think too hard about how things work at Abercrombie & Fitch (ANF) without plenty of coffee. Even then, good luck making sense of it all.

The most obvious question, of course, is why a company that sells clothing features models who wear little (if any) of its fashions. We wrote about that last year, footnoting on the company’s 67-slide PowerPoint presentation, in which 20% of the slides featured shirtless guys flexing bare muscles. The company seems committed to this strategy: Even now, the investor page on the company’s website features — yes, you guessed it — a muscular dude who doesn’t appear to be any wearing clothes.

However, that’s a relatively minor contradiction when compared to the topic of Chairman and CEO Michael Jeffries’ compensation. On paper at least, according to the proxy that was filed last Friday, Jeffries received more than $48 million in total compensation. Whether Jeffries will realize anywhere near that number is doubtful, though, if the company stays on its current, not-so-profitable course. In addition to his $1.5 million salary, he got a $1.2 million cash incentive bonus, an increase of $1.46 million to his retirement plan, and $719,182 in “Other” compensation. The remaining $43.2 million in compensation was awarded in Stock Appreciation Rights (SARs) and Restricted Stock Units (RSUs), as further explained in an 8-K (and amended employment agreement for Jeffries) filed on May 9.

This kind of largesse has clearly attracted attention. Even before the company’s Say on Pay measure barely squeaked by with 56% approval at the 2011 annual shareholders’ meeting, Abercrombie noted on page 44 of the proxy, the company

“…held a significant number of face-to-face and telephonic meetings with our largest stockholders (and other stockholders, regardless of size, who requested a meeting). These meetings were with members of management and, in several cases, with members of the Compensation Committee and the Board. In connection with the 2011 Annual Meeting of Stockholders and recognizing that the CEO’s employment agreement was entered into in 2008, we made a commitment to our largest stockholder at the time (and now), FMR LLC (Fidelity), to recommend to our Compensation Committee that it review the CEO’s employment agreement in light of the current landscape and current practices. We also agreed to consider adding objective criteria in determining whether equity awards would be made to other NEOs and to enhance the disclosure in the proxy statement to add transparency to the Compensation Committee’s decision-making process for equity awards.”

Those discussions continued, and they resulted in the board convincing Jeffries to amend his employment agreement so that 80% of his semi-annual equity grants would be awarded in the form of Stock Appreciation Rights (SARs), and the other 20% in the form of Restricted Stock Units (RSUs).

But Jeffries’ SARs are currently not worth much, as explained on page 43:

“As of April 25, 2012, both of the semi-annual equity grants of SARs earned during Fiscal 2011 were underwater, since the exercise prices of the SARs are higher than the closing market price of the Company’s Common Stock on that date of $48.93. Mr. Jeffries will only realize monetary value from these grants if the market price of the Company’s Common Stock appreciates substantially beyond the respective exercise prices after the grants have vested.”

Moreover, Jefferies didn’t get equity grants in September 2010 or March 2012, because Abercrombie’s share price had declined over the previous six months. We have to wonder why the board thought Jeffries should get $43.2 million in SARs and RSUs, since the stock price is trading at more than 37% below where it was a year ago, and the expectations for this Wednesday’s earnings report aren’t high.

We’re not the only ones who have commented on Jeffries’ compensation from time to time. A few years ago, CNNMoney dubbed Jeffries one of the “5 Most Overpaid CEOs.” In 2010, we footnoted the Board’s decision to pay Jeffries a lump sum of $4 million so that he would limit his personal use of the company jet to a paltry $200,000 a year, a post that became a contender for the Worst Footnote of 2010. (A day after our post, ran a good article which explained why the board’s decision made no sense.)

It all strikes us as the corporate equivalent of the emperor having no clothes — which means he fits right in at Abercrombie & Fitch.

Image source: The emperor’s spring collection, via gfpeck on flickr