In terms of compensation, these are the good old days. A 10 percent spurt in short-term incentive payouts gave a solid boost to compensation packages for finance executives in 1997. The average CFO took home $362,100 in total cash compensation, 6 percent more than in calendar 1995, according to data compiled by William M. Mercer Inc.
Since 1993, CFO compensation has surged by 37 percent. This sounds like substantial growth, and in a climate of low inflation, it marks one of the biggest real jumps in compensation that CFOs have ever experienced.
Strong corporate earnings and the growing influence of incentive programs have enriched CFOs, along with other top executives, in recent years. Short-term incentives accounted for two-thirds of CFOs' 1997 compensation, on average, versus 49 percent in 1993. No wonder variable pay sounds like religion in some quarters. "Seventy percent of our total compensation is pay-for-performance," Allstate Insurance Co. senior vice president and CFO Thomas Wilson declares. "We are heavily focused on pay-for-performance. I think it's absolutely the right thing."
Such faith now faces a jittery stock market and the looming prospects of weaker corporate earnings. Incentives, some happy beneficiaries might remember, are supposed to align the interests of managers and shareholders. That being the case, it's easy to predict skimpier paychecks in the foreseeable future. But our biannual CFO Compensation Survey suggests, instead, that hope springs eternal. The survey asked a sampling of finance executives whether they expect their compensation increases to either match or exceed the heady pace of late. Three out of four answered yes. As good as things are, and despite the recent turmoil in the stock market, our survey respondents believe they are apt to get even better.
High Times at WorldCom
No one is relishing the healthy trend in CFO pay more than WorldCom Inc. CFO Scott Sullivan. Among the 100 largest U.S. corporations in 1997, in proxy statements 41 named the chief financial officer as one of five executives with the richest pay packages. Sullivan topped the exclusive list of the top 25 highest-paid CFOs with a reported $19.25 million before taxes. (Compensation Resource Group, in Pasadena, California, compiled this information for CFO magazine; see "Compensation Champs.") The most recent WorldCom proxy reveals that Sullivan's 1997 take consisted of $4 million in total annual cash compensation plus a whopping $15.25 million in total long-term compensation.
A key role at a dominant company in a consolidating industry clearly gave Sullivan an edge in the compensation sweepstakes. "In consolidating industries, [companies] need people to run an organization that could be three times as big in three years," says Mercer principal Mike Garelik. "That's why you're seeing people being paid a lot of money."
WorldCom has certainly experienced rapid growth since the Telecommunications Act of 1996 became law. Wasting no time, Sullivan and his boss, chief executive officer Bernie Ebbers, soon launched the $14.4 billion acquisition of MFS Communications. With the deal, which closed in December 1996, Jackson, Mississippi-based WorldCom secured a foothold in the hotly contested local telecommunications access market. Winning control of MFS's fiber-optic networks enabled WorldCom to provide local and long-distance services over its own networks. It is one of the first companies to accomplish this since 1984, when the court order that broke up AT&T went into effect.
Catapulting WorldCom into the local telecom business had an equally dramatic effect on the value of Sullivan's stock options, which surged to $15.25 million in the wake of the MFS acquisition, as investors raced to own WorldCom shares. But it was not an overnight windfall, Sullivan claims. The acquisition, and its resulting effect on his net worth, capped a painstaking and lengthy campaign to build revenue growth and improve the company's strategic positioning--two factors that drive his incentive compensation.
Ditto for more recent purchases--Brooks Fiber Properties Inc., CompuServe Corp., and the headline-catching, $40 billion acquisition of MCI Communications Corp. in September. Even if Sullivan's base salary remains the same, higher revenues and more-robust market share should lift his incentive pay still higher.
The Rest of the Top 25
The rest of the highest-paid CFOs did pretty well, too. The average total annual cash compensation for this elite group: almost $1.5 million. The average total long-term compensation: just shy of $5 million. All told, the care and feeding of an average top- 25 CFO required a tidy $6.4 million in 1997.
Companies looking to hire seasoned, top-tier CFOs from outside face "sticker shock," warns Gordie Grand, a managing director at Russell Reynolds Associates, an executive search firm based in New York. CFOs are commanding such high prices because there are a limited number of top CFOs available. "There is a small pool of extremely good financial officers without extremely lucrative packages of stock options," says Grand. "They're dealing with a global marketplace," says Mercer's Garelik. "Talent needs to know global capital markets and how to raise money globally."
Corporate employers must compete with a proliferating group of venture-capital firms, leveraged-buyout firms, and other businesses for financial talent, says Charles Sweet, president of A.T. Kearney Executive Search, in Chicago. Few top finance officers are willing to move without an expensive commitment to make them whole for lavish stock options and restricted stock they would have to surrender.
Risk Has Its Own Rewards
Lucrative offers await CFOs who decide to move, especially if they take on the task of turning around a floundering company. "Whenever you have a new CFO go into a company that needs to be repaired, there's a great opportunity to cut a favorable deal," says Dwight E. Foster, executive managing director of D.E. Foster Partners, an executive search firm based in New York.
In June 1997, V. Ann Hailey traded the CFO post at The Pillsbury Co., a division of Grand Metropolitan Plc, for the CFO post at The Limited Inc., a former high flyer that has struggled lately. Her bounty: total annual compensation (for the five remaining months of 1997) of $204,327 in salary and $258,825 in bonus, as well as 25,000 options worth $226,000 and restricted stock worth $990,925, for total compensation of $1,679,777.
Even if a CFO does not take the risk of switching companies, those who labor to improve the fortunes of a struggling company, like Harry Kavetas of Eastman Kodak Co., are often well remunerated in options, a long-term incentive, while seeing their annual compensation--especially their short-term bonuses--suffer.
With a bonus of zero in 1997, down from $581,561 in 1995, Kavetas's total annual compensation dropped from $1.15 million in 1995 to $625,385 in 1997. But, the setback was amply made up for with a boost in the number of stock options he was granted--from 28,000 worth $518,280 in 1995 to 237,676 worth $7,349,386 in 1997. In addition, he received $885,000 worth of restricted stock (he had not received any in the previous two years), bringing his total direct compensation to $8,859,771, up from $2,524,613. This despite the fact that Eastman Kodak's two-year shareholder return was a negative 5.4 percent and net income declined an average of 48 percent between 1995 and 1997.
If you have a company going through dramatic strategic change and it hires a great CFO to help with the transformation, you can expect that eventually the CFO will be compensated handsomely for the lean years, says Garelik.
Operations, Especially Overseas
Besides close-up exposure to turnarounds and high-risk situations, which take a measure of luck in addition to judgment, operating experience can boost compensation. Oren G. Shaffer, executive vice president and CFO of Ameritech Corp., credits his extensive operating experience prior to joining the company in 1994 with helping garner his ranking as No. 14 on our list of top earners. Before becoming Ameritech's CFO, he founded and was president of Virgo Cap Inc., an investment firm based in Tampa, and was chairman and CEO of Goodyear's operations in France. His total Ameritech compensation of $4,392,850 included 370,000 stock options worth nearly $3.4 million.
"Most CFOs do benefit from operating assignments," says Shaffer. "CFOs are more and more true business partners with the CEO. CEOs are not just looking to CFOs to be financial specialists. CFOs are usually in much-expanded roles in the operating area. If they have experience in operations, that is much easier to accomplish."
Moreover, operating experience can propel finance executives up the corporate ladder. Teresa Beck of American Stores Co., for example, was one of the highest-paid CFOs in the country, with a total 1997 compensation package of $5,560,444, including 520,000 stock options worth nearly $4.7 million, before she was promoted to president in March.
Domenico Cecere, who is now Owens Corning's CFO but came to the company in 1994 as corporate controller, also cites the value of operating experience. After his initial job at Owens Corning became routine, he persisted, despite being turned down several times to run one of the company's four major businesses. Finally, in 1996, he was made president of Owens Corning's $1 billion roofing-systems business. And in December 1997, he was promoted to CFO of the company when David Devonshire left to take the CFO post at Ingersoll-Rand Co.
"Now companies want operational CFOs with the potential to become COO or CEO. So, their compensation would recognize the fact that they've run a business," says Cecere. "Running a business puts someone closer to the customers and gives them an understanding of a business instead of just knowing financial operations." In 1997, Cecere's total compensation was $609,392, including 10,000 stock options worth $230,000, $67,000 worth of restricted stock, and total annual compensation, including salary and bonus, of $311,667.
For Shaffer, Cecere, and other CFOs, international experience is another means of gaining greater clout at the bargaining table. Since Shaffer joined Ameritech, the company has led a consortium that bought almost 50 percent of Belgacom SA, of Belgium; and has acquired nearly 30 percent of Matav, the Hungarian national telecommunications company that has recently been privatized, and 42 percent of Tele Danmark, the Danish telecommunications company.
Shaffer says he played a significant part in all of these acquisitions. The company claims now to be the largest foreign investor in the European telecommunications industry.
Cecere, meanwhile, says he gained invaluable experience as assistant controller and then corporate controller of Honeywell's Brussels- based European operations before coming to Owens Corning. That experience has been especially useful at Owens Corning, which has made several international acquisitions, and whose corporate strategy is to further build sales through international acquisitions.
Among the most highly compensated CFOs, Barry D. Romeril of Xerox Corp. and James Stewart of Cigna Corp. also saw actual declines in their bonuses but received considerable increases in their long-term compensation. Romeril's salary went up 9.5 percent between 1995 and 1997, but his cash bonus declined 0.8 percent, from $336,912 to $334,062. As a result, his total annual compensation grew a modest 4.9 percent, from $750,253 to $786,750. At the same time, however, his long-term compensation rose from $1.3 million to more than $9 million. That resulted from an increase in stock options, from 37,900 shares worth $1.3 million to 86,779 shares worth $2.29 million, and the addition of restricted stock worth $4,226,565.
Romeril, like Kavetas, declined to be interviewed for this story, so it is not clear what triggered his jump in long-term incentives or his decline in cash bonus. The long-term incentive increase could, however, be linked to a turnaround from a 1995 negative net income of $472 million to a positive $1.2 million in 1996.
Similarly, Cigna's Stewart saw his cash bonus fall from $800,000 in 1995 to $725,000 in 1997, according to Compensation Resource Group. At the same time, his base pay rose from $501,900 to $558,300. His long-term incentive rose from $1.3 million to $8.2 million, as the result of a big jump in the number of stock options he was granted--from 30,000 to 105,000.
Stewart also declined to be interviewed. But, his boost in overall compensation may be tied to a substantial increase in the company's stock price, resulting in a total shareholder return of 74.8 percent for 1995 through 1997, and a rebound in net income from $211,000 in 1995 to $1 million in 1996.
CFOs who did discuss compensation were unanimous in their enthusiasm for an increasing portion of it coming in variable pay. They also said they were untroubled by the fact that a growing proportion of that compensation was in stock options. Indeed, WorldCom's Sullivan said he elected not to get a pay increase this year, but instead opted for the chance to get a larger cash bonus. "I'd prefer that any day," he says. "I'm willing to lay it all on the line in terms of performance."
"If you're a successful operations-type CFO, if you're close with the CEO, if you believe you're good, you ought to have 15 percent earnings growth. And if you're highly leveraged with stock options, it's a lot of money," says Cecere.
Having their variable pay linked to some combination of revenues, profits, cash flows, and earnings per share, as all these CFOs did, aligned their interests closely with shareholders. This, they add, is as it should be.
Their enthusiasm for variable pay, and ever more of it in equity, was unflinching, even though at least some of them, when interviewed, had just seen the value of their options drown in the recent stock-market plunge, and suspicions were growing that the long bull run had come to a halt.
"On paper, I was worth a lot less at the end of the week than at the beginning," says Ameritech's Shaffer, recalling that first week of September. "But, if you're in the system, you're in it and you've got to believe in it."
And if the bull market does not disappear indefinitely, then there has never been a better time to be a finance executive.
"If I were a good CFO right now, if I were young, ambitious, and energetic, I'd be feeling very good about my future," says A.T. Kearney's Sweet. "I'd be a happy person."
----------------------------------------------- --------------------------------- Major Details: How the Survey Was Done
We relied on several sources to provide 1998 compensation data. William M. Mercer Inc., a leading human-resources consulting organization, supplied information based on its 1998 Finance, Accounting & Legal Compensation Survey. This information was supplemented by a survey questionnaire sent to executives who replied to the Mercer survey, in addition to a sampling of 1,500 CFO subscribers. Compensation Resource Group, a leading executive compensation and benefits consulting firm, in Pasadena, California, supplied our top-25 ranking of individual CFO compensation in the 100 largest U.S. firms. These rankings were based on proxy statements of 41 companies whose CFOs rank among the five executives with the biggest paychecks.
All told, the 1998 Mercer Finance, Accounting & Legal Compensation Survey (FAL) reports data collected from 1,188 responding organizations. The CFO extract from this database reports compensation for 520 chief financial officers. Charts reporting the Mercer survey results use either mean (average) data or regression analysis to estimate compensation levels, as noted. Single regression analysis was conducted using the data sample to define the relationship between compensation and organization revenues.
Companies that Mercer surveyed reported median revenues of $647.4 million. Roughly half the respondents (49 percent) work for parent organizations, the rest hold CFO positions in divisions or subsidiaries. The largest single industry category is manufactured nondurable goods (15 percent), followed by banking and financial services (12 percent), retail and wholesale distribution (11 percent), and insurance (10 percent). Professional services, health care, hospitality/media/entertainment, and utilities each constitute from 5 percent to 9 percent of the group, with the next rung consisting chiefly of durable-goods manufacturers, nonprofit services, computer software services, telecommunications, and energy-sector companies.
Our faxed survey was sent to 700 human- resources executives who supplied information to the Mercer Survey and to 1,500 randomly selected CFO subscribers. We received approximately 120 responses. We learned that the median age of these CFOs is 53. One third have been in their CFO posts for one to three years and another third for longer than seven years. One in 4 has held the same CFO post for four to six years, while fewer than 1 in 10 were rookies in 1997. About 55 percent of CFOs who reported total cash compensation work for public companies; private companies employ about 25 percent of this group, and the rest work for companies classified as not-for- profit. Almost 53 percent of CFOs in our faxed survey work in the services sector, while 41 percent reported that they work in manufacturing, and about 7 percent say their companies straddle both sectors.
Just under 16 percent of survey participants report experience in finance overseas. Not surprisingly, most overseas postings took these executives to Europe (58 percent). Asia was second (23 percent), next was Latin America (12 percent), with the balance going to Africa and the Middle East.
Mercer's Finance, Accounting & Legal Compensation Survey supplies a full range of authoritative data on the compensation of salaried employees in finance, accounting, and legal functions. The price of the survey is $575 for participants, $950 for nonparticipants. To obtain a copy, contact Mercer's National Compensation Survey Group at (800) 333-3070, or E-mail to: email@example.com.