Changing Fortunes: The 2004 Compensation Survey

With stock options tainted, pay packages grow more diverse -- and smaller.

See the 2004 Compensation Survey Tables

The endgame in the decade-long debate over stock options is finally playing out. The Financial Accounting Standards Board has an expensing requirement ready to go, although it may delay implementation. The International Accounting Standards Board’s standard on expensing goes into effect in January. And while efforts to derail expensing continue in Congress, resistance will most likely prove futile.

Yet even before the final standard is issued, the stock option controversy itself has dramatically affected compensation for CFOs and their finance departments. “Long-term incentive values have dropped in every study we’ve done,” says Diane Doubleday, a principal at Mercer Human Resource Consulting, which conducted the latest edition of CFO’s biennial compensation survey. Many companies are shifting from options to other forms of compensation, she says, but “restricted stock or performance shares aren’t making up the difference. The total pie has shrunk.”

Of course, that trend isn’t confined to the finance department. Stock option grants are smaller throughout Corporate America, and have disappeared altogether for many rank-and-file employees. The good news for CFOs and their direct reports is that the Sarbanes-Oxley Act and shaky investor confidence have created a very competitive market for finance talent. “Large public companies are paying CFOs more,” says Doubleday.

More Diversity

To be sure, options are not going away. But how companies will change the mix of long-term incentives — and for which executives — remains to be seen. After all, knowing exactly how options will be valued and accounted for will allow companies to better analyze the comparative cost of other forms of compensation. Doubleday argues that a shift is already under way, driven more by shareholder and market demands than by accounting proposals. “Whether FASB postpones this standard for a year or not,” she says, “we are still in the middle of a trend away from options to a diversity of compensation vehicles.”

That diversity is even evident among the rarefied ranks of the 20 highest-paid CFOs. While option exercises put Oracle’s Jeff Henley atop the list, many of those options were granted early in his 13-year career. “I’ve held on to options fairly long,” he explains. “That accounts for why I had a significant gain. It certainly had nothing to do with recent times.”

Indeed, although options still constitute a significant chunk of the pay of the 20 best-paid CFOs, five executives made the list without exercising any options at all. One of the five, Bear Stearns CFO Samuel Molinaro Jr., came in third overall on the strength of a $12 million bonus ($5.3 million of which was cash).

Moreover, 9 of the top 20 received substantial restricted stock awards, including more than $5 million worth for John Hancock Financial Services’s Thomas Moloney (eighth on the list). “We have seen a dramatic increase in the use of restricted stock over the last year,” reports Mercer’s Doubleday. Seymour Burchman, senior vice president at compensation advisory firm Sibson Consulting, agrees. “There is a shift from long-term incentive opportunities delivered through options to service-vested restricted stock,” he says.


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