Pay Up

With finance talent in high demand, companies are boosting compensation — and making some demands of their own.

The past few years have been good for Occidental Petroleum CFO
Stephen Chazen. In 2005, he earned nearly $33 million, including
gains on options he exercised and long-term incentive-plan
payouts. That puts him at the top of the latest list of highest-paid
finance executives, compiled for CFO magazine by Mercer Human
Resource Consulting. He was number four when we did the
study last, in 2004.

Chazen owes some of his wealth to luck. He became CFO of
Los Angeles–based Occidental in 1999, when the price of oil was below $20 a
barrel and few expected much of the company. Since then, of course, the price of
oil has more than tripled, and Occidental’s stock price has followed suit.

“When the company gave out [the
executive team's] options, our
stock had traded at $20 to $30 per
share for years. No one actually
thought it would be a $100 stock,”
says Chazen.

Still, much of Chazen’s options-related pay depends not on the simple rise of Occidental’s stock price but on whether shareholders’ returns exceed competitors’ returns — and they have for several years. Starting this year, Chazen will have to clear a new hurdle to receive restricted stock grants. In July, Occidental declared that the top five executives will get stock only if the oil company meets or exceeds its cost of capital. If Occidental’s average return on equity over three years matches its 11 percent cost of capital, executives receive one-fifth of the (undisclosed) target number of shares. They receive the full target number at 15 percent ROE, and double that number at 20 percent.

Even if the surge in his pay has been extraordinary, much about Chazen’s arrangement shows how compensation for a growing number of CFOs is evolving: they’re making more, but boards are also making them work harder to achieve the mega-pay levels that became common in the 1990s.

The Price of Experience

On average, CFOs have seen a significant — if not extravagant — increase in their earnings in the past year. Average base pay for
corporate finance chiefs in 2004 was $274,000, with bonus pay of $283,000. For 2005, base pay climbed to $306,000 and bonus pay to $341,000. Long-term incentive amounts rose more sharply, from $701,000 to $812,000, an increase of 16 percent.

For CFOs at big companies, total pay surged 25
percent, from an average of $2 million to $2.5 million.
True, pay for top CFOs hasn’t quite reached
the heights seen in our 2002 survey (based on
2001 salaries). That year, Michael Lehman of Sun
Microsystems pulled in $37.2 million. But CFO
pay shows signs of soaring once again.

“Our survey records the gains CFOs realize on
their equity awards, so we’re seeing the net benefit
of strong corporate performance,” says David
Cross, a principal at Mercer. But in addition to
record earnings, unprecedented demand for skilled
public-company CFOs is driving up compensation.

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