Abercrombie & Fitch Co.’s new employment agreement with chairman and chief executive officer Michael Jeffries came with the beginning of a succession process and a lower price of entry for anyone attempting to buy the company, but it failed to placate the activist investor calling for more sweeping change at the troubled teen retailer.

This story first appeared in the December 10, 2013 issue of WWD. Subscribe Today.

Facing the Feb. 1 expiration of Jeffries’ current five-year contract and a recent call for his removal from Engaged Capital, owners of about 0.5 percent of the retailer’s stock, A&F’s board Monday gave him a new contract that can be terminated by either party with 12 months’ notice after its first anniversary in February 2015. The board also began a search for two leaders for its brands, one to oversee Hollister and the other the namesake brand and abercrombie kids’, designed to expand the pool of possible successors to the controversial 69-year-old ceo.

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Perhaps most significant in light of recent speculation about a possible sale of the $4.5 billion chain, the new contract eliminated sign-on and retention provisions which, under the expiring agreement, could have added about $88 million to Jeffries’ severance package in the event of a change of control.

But Engaged, which last week described the presence of Jeffries as a “major stumbling block to a transaction,” was disturbed by both the essence and the haste of the new package.

“This decision appears to be made without any substantive discussion with shareholders — a rushed response, less than one week after receiving our letter,” said Glenn Welling, chief investment officer and managing member of Engaged. “We consider this an outright dereliction of the board’s fiduciary duties. This action is further proof that [A&F’s] board exists to serve one master, Mr. Jeffries, instead of the shareholders that elected him.”

Engaged said it is considering “all options available to it as shareholders in order to hold the board accountable for its decisions.”

Jeffries will continue to receive his $1.5 million base salary while the bonus for reaching target performance levels rose to $2.25 million from $1.8 million. In place of the severance in the old agreement, the new contract provides for a long-term incentive award of $6 million a year if performance targets are met, and keeps in place his $200,000 allowance for personal air travel. Although performance criteria haven’t been set, the board said that at least 60 percent of the target value will be based on performance criteria. Wall Street, which had shown enthusiasm about a possible sale of Abercrombie following public disclosure of Engaged’s letter to the A&F board on Dec. 3, pulled back on the stock Monday, sending shares down 77 cents, or 2.2 percent, to $34.10 in New York Stock Exchange trading.

A&F has seen its shares shed more than a third of their value since they hit a 52-week high of $55.23 on May 22 as it’s been among the teen retailers affected most severely by weak traffic and a highly promotional sales climate that have persisted throughout the struggling sector since before the start of the back-to-school season. In A&F’s last proxy, published in May, Jeffries was listed as the owner of 4.1 percent of its outstanding shares.

Saddled with charges to close its Gilly Hicks stores, the company reported a loss of $15.6 million, or 20 cents a diluted share, for the third quarter. Without charges for Gilly Hicks and other corporate initiatives, adjusted earnings per share were 52 cents, 7 cents above the guidance the firm provided when it said on Nov. 5 it would close Gilly Hicks. Sales declined 11.7 percent to $1.03 billion and comparable sales, including e-commerce, declined 14 percent.

While no other immediate changes in executive ranks were disclosed, A&F said that Leslee Herro will retire as executive vice president of merchandise planning, inventory management and brand senses in spring 2014 but will remain with the company in an untitled executive capacity to provide direction to the leadership team and complete certain projects.

Speaking of the planned divisional heads, Craig Stapleton, lead independent director, said, “These new leadership positions will provide fresh perspectives on brand development as well as deepen our bench of talent at this critical time.” A&F said Herbert Mines Associates has been retained to explore outside candidates for the brand leadership posts.

Wells Fargo senior analyst Paul Lejuez called the modifications in Jeffries’ compensation arrangement positive, but noted “some were hoping for a more detailed succession plan.” And while he considered Herro’s retirement an opportunity to build expertise with new blood in her areas of responsibility, he warned that changes could be “disruptive.”

Engaged had based its argument on the need for a new ceo last week on Jeffries’ shortcomings as a leader.

“We made our initial investment in the company because we believed that ANF was deeply undervalued despite owning two of the strongest brands in teen apparel,” Welling wrote in reference to A&F and Hollister, concluding that the firm’s “perennial underperformance is a result of a failure of leadership.”

While careful to credit Jeffries with the resurrection of the A&F brand, the establishment of Hollister and the company’s dominance over other teen retailers in areas including gross margin, international sales, e-commerce and even Facebook likes, Welling noted ongoing erosion in sales, operating margin, return on invested capital and, in comparison to its peer group, stock performance. The company’s operating margin, at 21.3 percent of sales in 2006, shrank to 8.5 percent last year and is expected to land at about 4.4 percent this year, according to Engaged’s reading of analysts’ estimates for the year.

A&F declined to comment on the moves made Monday.

While its bottom line has remained under siege, the company has registered some victories. Recently, a native advertising campaign over the Thanksgiving weekend produced “encouraging results,” according to Craig Brommers, senior vice president of marketing. Working with established, influential bloggers to reach teen and young adult influencers, the company registered 11 million impressions and 17 million retweets of influencer content.

Throughout the campaign, the retailer picked up 40,000 new fans on various social platforms. “Our main focus was trying to reach new people, and these are now fans of this brand,” Brommers said.