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Earning Their Keep

Finance chiefs’ pay is increasingly aligned with corporate performance, as our report on trends in CFO compensation reveals.

29Jul

In the wake of the financial crisis, Occupy Wall Street protests and the debut of shareholder “say on pay” voting in 2011, investors have ratcheted up their scrutiny of executive compensation at public companies. Not surprisingly, one trend has grown stronger than ever since we last surveyed CFO compensation two years ago: the alignment of pay and performance.

Survey after survey reveals the strength of the trend, including those from Mercer, Equilar, Towers Watson, Kenexa, the Association for Financial Professionals and the Financial Executives Research Foundation. While the evidence is wide ranging, it boils down to a substantial increase in the number of companies now providing long-term, performance-based equity incentives.

According to Mercer, for example, the prevalence of performance-based stock jumped from 61% of companies in 2010 to 71% in 2012. “We’ve witnessed a steady increase in the past number of years in the use of performance-based stock,” says Ted Jarvis, global director of rewards data, research and publications at Mercer. Similarly, FERF found that 80% of public-company CFOs received a form of long-term, stock-based incentive award in 2012. Pay-for-performance alignment is a “key watchword” for 2013, according to FERF, which partners with Grant Thornton on its annual executive-pay survey.

Equilar’s annual CFO pay survey indicates a gradual rise in the awarding of performance shares. “Performance shares in the S&P 500 grew in prevalence during 2012, to 69.1% from 63.4%,” says Aaron Boyd, director of governance research at the Redwood City, Calif.-based executive-compensation data firm. By comparison, 56.7% of the S&P MidCap 400 and 42.4% of the S&P SmallCap 600 award performance shares, says Boyd.

The pay-for-performance trend is good news for finance chiefs, given that the economy and equity markets are on the rise. But it’s not the only tidings from the world of CFO compensation. Below, we report on overall pay levels and the highest-paid finance chiefs; differences in finance pay across company size, industry, and gender; how CFO pay is trending against CEO pay; and more.

A Happy Median

Let’s start with what everyone wants to know: How much did CFOs take home in total compensation last year? (Total pay generally includes a salary, a bonus that is a percentage of this salary, and long-term incentive compensation, such as performance-based stock, restricted stock and stock options.)

The answer depends in part on the size of the companies where they work. For the S&P 500, CFO median total compensation in 2012 was $3.1 million, up 5% from 2011, according to Equilar. Not too shabby, and a ways up from the comparatively measly $2.4 million that S&P 500 CFOs were paid in 2009, the last year of the recession. Median total compensation of CFOs in the S&P MidCap 400 and S&P SmallCap 600 was $1.7 million and $1 million, respectively.

That’s the total compensation. Stock-based compensation was up 11.8% for the S&P 500 CFOs in Equilar’s 2012 survey, increasing from $1.1 million in 2011 to $1.2 million last year. Salaries were 4.8% higher, at $595,000. Mercer’s study affirms this finding, estimating a median base salary of $584,000 for S&P 500 finance chiefs. FERF’s survey shows that public-company CFOs received a 4.0% salary increase last year, while Towers Watson pegs it closer to a 3.2%. Few finance chiefs can be quibbling.

The increases in stock-based compensation and salaries were offset by declines in bonuses, which shrank 3.2%, and stock options, down 11%, according to Equilar. Regarding stock options, Boyd cites the shift to performance-based equity as the major reason for the decline. Last year, 57% of the total compensation for S&P 500 CFOs was equity-based, up from 54% in 2011. “There is a lot of pressure from shareholders emphasizing greater pay-for-performance alignment, which explains the increased focus on performance-based equity,” says Boyd.

As companies move toward more of a performance-based equity model compensating CFOs and other C-level executives, they tend to use total shareholder return as the primary performance metric, says Boyd. “Shareholders want CFOs to have more skin in the game.”

Approval Ratings

Shareholders’ influence on corporate pay decisions has grown thanks to say on pay, the Dodd-Frank Act requirement that public companies hold advisory shareholder votes on executive compensation at least once every three years. “Say on pay has not produced the widespread indictment of pay that many people thought it would, but it certainly has made an impact,” Boyd says.

The results have remained consistent the last three years, with most companies’ executive compensation plans receiving at least 90% approval by shareholders, and only 2% to 3% of plans failing. Boyd comments that this “strong support and the increased engagement between companies and shareholders have improved the pay-for-performance alignment.”

This alignment is evident in the reduced compensation tied to companies’ short-term performance, and the increased compensation tied to salary and long-term equity incentives. “The shift to performance-based stock is obviously an example of how companies are moving toward stronger pay-for-performance models,” Mercer’s Jarvis says. “Certainly we’re moving in a progressive direction.”

Others agree. “Company management and boards have done a good job overall in reaching out to shareholders and fixing problems,” says Deborah Nielsen, director of compensation research at Kenexa, an IBM company. “Say on pay has had a positive impact.” Adds Todd Lippincott, managing director, executive compensation/Americas, at Towers Watson: “There is more evidence that pay for performance is working, and that boards are more concerned and focused on the pay-and-performance alignment.”

Industry and Gender Differences

CFO compensation varies not only by company size but also by industry. According to Equilar’s report, finance chiefs of health care and consumer goods companies in the S&P 500 enjoyed the largest increases in median total compensation from 2011 to 2012—8.1% and 7.6%, respectively. Health care companies paid the most to their finance chiefs compared with other industries, a median total compensation of $3.9 million.

Among the industries that experienced decreases in median total CFO compensation in 2012 were financial services, down 1.8%; technology, down 1.7%; and basic materials and energy, down 0.9%.

Equilar’s report also notes the number of women in CFO ranks, as well as their total compensation vis-à-vis their male counterparts. Twenty-three of the 298 companies surveyed in the S&P 500 had female finance chiefs. Although the median age was the same for male and female CFOs in the survey—54 years—their median pay differed: $3.1 million for male CFOs, versus $2.8 million for female finance chiefs.

The way in which men and women CFOs received their compensation also varied, albeit slightly. For male finance chiefs, 39% of their pay in 2012 was cash and 57% was equity, compared with 38% cash and 60% equity for women CFOs. Boyd chalks up the difference not to gender but rather to the industries that the female CFOs worked in.

While CFO compensation is growing at levels not seen since before the financial crisis, the increase is largely attributable to the rising stock prices of companies, leading to higher grant-date values on awards. The future thus bodes well, says Boyd. “What the executives eventually walk away with will be determined by the stock price and financial performance of their companies several years from now,” he explains. “If the current trends continue, executives can expect to realize strong returns.”

Russ Banham is a contributing editor at CFO.


Raking It In: The Top 10

Apple’s stock may be taking a beating these days, but its CFO, Peter Oppenheimer, can’t complain. That’s because Oppenheimer tops Equilar’s annual list of America’s highest-paid CFOs, taking home a whopping $68.6 million last year in total compensation. Most of that ($66.2 million) came in the form of a biennial award of restricted stock units.

Following in the number-two spot was the previous top earner, Oracle’s Safra Catz, who earned a tidy $51.7 million. That came on top of the $42.1 million she racked up in 2011, when Oppenheimer took home a paltry $1.4 million in the absence of RSUs.

“Obviously, making $68 million in a single year makes up for his previous year’s total pay,” says Aaron Boyd, director of governance research at Equilar. “Then again, he did earn about $30 million in 2010.”

Other returnees from last year’s top 10 list include Google’s Patrick Pichette at number three ($38.7 million in 2012), Michael Angelakis of Comcast at number five ($21.4 million), David Ebersman of Facebook at number six ($17.5 million) and Donald Humphreys of Exxon Mobil at number eight ($15.4 million).

“Most of the individuals on the top 10 list have been with their respective companies for many years,” says Boyd. “These people are key executives who have contributed to the growth of their firms.”

The aggregate total compensation of the top 10 CFOs in 2012 was almost 50% higher than in 2011—$282 billion versus $193 billion. Credit the stratospheric rise to the bull market that roared last year and continues on a stampede, promising Croesus-like riches for many CFOs if 2013 continues in its current form. —R.B.


The Pay Gap

Although finance chiefs are frequently just one step away from the CEO’s chair, they are distant runners-up when it comes to pay. The difference between the total direct compensation of CFOs and CEOs is 40%, according to an analysis by Mercer of 321 companies in the S&P 500 index.

That means for every dollar a CEO takes home in pay, his or her CFO is pocketing 40 cents. The good news is that this amount is 2 cents more than it was in 2011. Still, the pay gap is substantial. Gregg Passin, Mercer partner and U.S. leader for executive rewards consulting, ascribes the difference to the chief executive’s more expansive role. “The CEO is responsible for developing and executing a broad strategy in terms of product mix, M&A, technology enhancements and so forth,” he says. “In this regard, they’re a unique breed of cat.”

This singularity also explains why the CEO’s pay is tethered more directly to long-term company performance. While the CFO’s average base salary was 55% of the CEO’s in 2012, the finance chief’s long-term incentive compensation was just 39% of the CEO’s. “While CFO pay on the whole is substantially lower than the CEO’s pay, it’s also less leveraged,” notes Passin.

Mercer is not alone in this assessment. Generally, “more of the CEO’s pay is being given out in equity, causing it to be more highly leveraged than the CFO’s pay,” says Aaron Boyd, director of governance research at Equilar. “Certainly CFOs are getting more in equity, too—just not anywhere near the CEO’s level.”

He adds, “As stock prices rise, the ones with the most amount of equity are the winners.” —R.B.


The Winner: Assistant Cash Manager

Thanks to the continuing improvement in the overall economy, finance professionals have a bit more money in their wallets these days. Overall, their average base salary increased 3.4% in 2012, on top of the 3.3% hike they enjoyed in 2011.

The figures are courtesy of the Association for Financial Professionals, which charts compensation trends for executive, management and staff positions in finance—20 tracked titles in all. Assistant cash managers received the highest average salary percentage increase (4.7%) last year, earning about $59,140.

CFOs in AFP’s annual survey of more than 2,700 finance professionals took home a base salary of roughly $197,869 in 2012, a 4.3% increase from the prior year. The percentage increase tied them with treasurers; both professionals were well ahead of vice presidents of finance, who received a modest 2.9% raise. Nevertheless, this position earned a base salary of $191,996, just a smidgen lower than the CFO’s.

“In terms of base salaries, we continue to see a pattern of salary strengthening over the past nine to 10 years,” says David Beckoff, AFP manager of survey research. “This sits well with the overall improvement in the economy.”

Other survey findings:

Of organizations that awarded bonuses last year, 98% awarded cash bonuses and 34% awarded stock-option bonuses. The bonuses awarded were equivalent to 23% of the average finance professionals’ base salary.

Operating income or EBITDA targets were the chief factors in determining a performance bonus (cited by 59% of respondents), followed by the completion of specific projects (52%) and profit or increased-profit targets (50%).

The key factor influencing career advancement in the treasury/finance department is increased job responsibility (cited by 63% of respondents), followed by contribution to profitability (51%). —R.B.


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