The Price They’re Paid

Even without stock options, top finance chiefs are changing in hefty pay packages.

When it comes to compensating top CFOs, the times have changed even if the players have not. Consider James H. Hance Jr. In 2000, the Bank of America (BoA) finance chief and vice chairman topped our list of the 25 highest-paid Old Economy CFOs, and graced the cover of CFO magazine. The previous year, Hance’s expected total direct compensation (TDC)—defined as salary, bonus, restricted stock, and the value of options granted—hit $51.7 million. Of that, salary and bonus accounted for only $2.5 million; the rest consisted of $26.8 million in option grants, along with $22.4 million in restricted stock.

In 2002, Hance once again emerged as a top earner among finance chiefs at public corporations with $1 billion or more in revenues. But according to CFO.com’s annual report on the highest-paid CFOs, based on a survey conducted by Mercer Human Resource Consulting, Hance earned a relatively puny $12 million. (Mercer’s measure of total direct compensation includes gains on exercised stock options, rather than the value of the options granted.) More tellingly, Hance’s pay package has undergone a serious makeover, and he did not exercise stock options last year. (See our special report on compensation for all the numbers.)

It’s not as if BoA turned in a mediocre performance: the company’s net income grew from $6.8 billion to $9.2 billion in 2002. But in a marked shift from previous years, the board tipped the balance of executive pay toward restricted stock. In fact, Hance’s $10.8 million bonus—the biggest in this year’s survey—consisted of $6.7 million in restricted shares, along with $4.1 million in cash.

BoA compensation-committee members say they’re doling out more restricted stock grants because they want executives to hold shares longer. Another reason may be that recent financial scandals have tainted the granting of lavish 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].”

Proxy Music

The BoA 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, the median bonus for finance chiefs rose by a hefty 17.5 percent in 2002—the biggest increase in four years. And those mounting bonuses fueled a healthy boost in overall CFO compensation. In fact, although the median salary increased only 5.2 percent, the TDC jumped a whopping 21.4 percent.

Granted, 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 executives and shareholders are finally getting in sync. “Bonuses for CFOs need to be tied to company goals, not CFO goals, because [as a senior officer of the company, your] interests should align with those of shareholders,” argues Joseph Bronson, CFO of Applied Materials, a Santa Clara, California-based maker of semiconductor equipment. “You don’t get paid for effort, you get paid for results.”

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