When it comes to compensating top CFOs, the game has changed — but the players have not.
Consider James Hance. In CFO magazine’s 1999 survey, based on information by Buck Consultants, the Bank of America finance chief and vice chairman topped our list of the 25 highest-paid old-economy CFOs. That year, Hance’s expected total direct compensation — defined as salary, bonus, restricted stock, and the value of options granted — was $52 million. Hance’s package included $27 million in option grants, as gauged by the Black-Scholes pricing model, along with $22 million in restricted stock.
Hance’s 1999 salary and bonus? A (relatively) puny $2.5 million.
In this year’s CFO.com special report on compensation, based on a survey conducted by Mercer Human Resources Consulting, Hance once again emerged as a top earner among finance chiefs at public corporations with $1 billion or more in revenues.
Times, however, have changed, and Hance’s pay package has clearly undergone a serious makeover. For example, the Black-Scholes value of the options granted to Hance in 2002 was just $2 million, according to Mercer’s calculation. And it’s not as if Bank of America’s performance was middling: The company’s net income grew from $6.8 billion to $9.2 billion in 2002.
In fact, BOA’s board compensation committee amply rewarded executives like Hance for the bank’s stellar 2002 performance. But in a marked shift from previous years, the board tipped the balance of executive pay toward restricted stock and away from stock options. Hance’s $11 million bonus — the biggest bonus in this year’s survey — consisted of $7 million in restricted shares, along with $4 million in cash.
BOA compensation committee members say they’re doling out more restricted stock grants because they want company executives to hold shares longer. Another reason, according to Hance, is the hue-and-cry over the expensing of stock options. Says Hance, “I think it’s a function of the times, when you think of some of the criticism companies have undergone [for their use of options].”
The Bank of America finance chief wasn’t alone in seeing his pay package rejiggered last year. According to the survey, which was based on a sample of 250 CFOs at 350 large public companies that filed proxy statements between July 30, 2002, and April 4, 2003, the median bonus for finance chiefs rose by a hefty 17.5 percent in 2002. That’s the biggest such increase in four years.
Those mounting bonuses fueled a healthy boost in overall compensation for CFOs. While the median salary for the sample group increased 5.2 percent, their realized total direct compensation — salary, bonus, gains on options exercised, and other long-term incentive payouts — jumped a whopping 21.4 percent.
Granted, CFO bonuses may have surged because companies booked more profit last year. But the rise in short-term incentive pay could also mean that the interests of corporate executives and shareholders are finally synching up.
“Bonuses for CFOs need to be tied to company goals, not CFO goals, because you’re a senior officer of the company and you want [your] interests in alignment with shareholders,” argues Joseph Bronson, CFO of Applied Materials, a Santa Clara, California-based maker of semiconductor fabrication equipment. “You don’t get paid for effort, you get paid for results.”