Are CFOs overpaid? And how does a company determine what to pay its chief financial officer?
Look at what it shells out for the chief executive. Or at least that’s the conclusion of a study of CFO pay conducted by veteran compensation expert Graef Crystal.
Crystal, a self-styled executive-pay gadfly who for years has irked, jabbed, and enraged corporate managers over their compensation, these days uses a column for Bloomberg as his stage.
In a review of 73 CFOs of U.S. companies with 2001 revenue of at least $8 billion, Crystal concludes that if a CEO is overpaid, then it’s likely the CFO will be overpaid as well.
“Big companies pay CEOs more, but according to regression analysis I did for these companies, the most important factor in determining whether a CFO was overpaid or underpaid was how much his boss earned,” writes Crystal.
Crystal says he defined pay as average annual compensation over three years and included base salary, annual bonus, free stock grants, the estimated present value of stock option grants, other long-term incentive payouts, and miscellaneous compensation. He mostly looked at the period from December 31, 1998, to December 31, 2001.
Crystal notes that differences in company size, as measured by three-year average revenue, accounted for 19 percent of the variation in CFO pay. Interestingly, though, he claims differences in company performance didn’t change anything.
One key factor pushed that 19 percent figure to 76 percent, however. The culprit? The percent by which a company’s CEO was overpaid or underpaid, based on Crystal’s prior review of pay for CEOs of 180 major U.S. companies for the same three-year period.
Crystal also states that the CEO study concluded that the only explanation for the way CEOs are paid is that board compensation committees appear to give them whatever they want.
Take Mark Swartz, the former CFO of Tyco International who was recently indicted for fraud. Crystal argues that based on Tyco’s three-year revenue, the “going rate” for his job was $4.1 million a year. However, Swartz’s three-year pay worked out to $59 million a year, putting him 1,052 percent over the market rate.
His former boss, Dennis Kozlowski, earned 619 percent over the market rate. Crystal points out that if Kozlowski’s pay overage is used to explain Swartz’s pay overage, then Swartz turns out to be overpaid not by 1,052 percent, but by a mere 273 percent.
“So, if the CEO is overpaid, then the CFO is apt to be overpaid, too,” Crystal concludes. “But not quite to the same extent.”
Here is Crystal’s list of the 15 most (relatively) overpaid CFOs for the December 1998 to December 2001 period studied. The list includes the CFO, company, average annual total pay, and percentage above the market norm. Four of the 15 finance chiefs are no longer with their companies—Swartz, WorldCom’s Scott Sullivan, Sun Microsystems’s Michael Lehman (retired,) and Verizon’s Frederic Salerno.
- Mark Swartz, Tyco International, $59 million, 1052 percent
- Jeff Henley, Oracle Corp., $10.8 million, 281 percent
- Larry Carter, Cisco Systems, $13.9 million, 231 percent
- Scott Sullivan, WorldCom, $16.5 million, 179 percent
- Richard Kelson, Alcoa, $10.6 million, 149 percent
- Michael Rose, Anadarko Petroleum, $4.7 million, 143 percent
- David Viniar, Goldman Sachs, $11.4 million, 117 percent
- James Stewart, Cigna Corp., $8.4 million, 105 percent
- Jack Wyszomierski, Schering-Plough, $5.5 million, 101 percent
- Arthur Krause, Sprint, $8.7 million, 90 percent
- Charles Golden, Eli Lilly, $5.4 million, 85 percent
- Michael Lehman, Sun Microsystems, $6.4 million, 77 percent
- Thomas Chewning, Dominion Resources, $4.2 million, 64 percent
- James Daley, Electronic Data, $6.8 million, 63 percent
- Frederic Salerno, Verizon, $12.9 million, 59 percent
And the 10 most relatively underpaid CFOs for the same time period and sample group?
- Marvin Quin, Ashland, $1.1 million, -54 percent
- Edward McIntyre, Xcel Energy, $1.4 million, -56 percent
- William Stivers, Weyerhaeuser, $1.5 million, -57 percent
- John Gibbons, Valero Energy, $1.3 million, -59 percent
- Jeffery Howells, Tech Data, $1.6 million, -60 percent
- Richard McCook, Winn-Dixie Stores, $1.3 million, -60 percent
- Richard Galanti, Costco Wholesale, $1.9 million, -65 percent
- Fred Corrado, Great Atlantic & Pacific Tea, $1 million, -66 percent
- James O’Donnell, Conagra Foods,$1.7 million, -66 percent
- Jack Liu, Schlumberger, $948,000, -68 percent