Proof, Then Payment
Much of that incentive pay has a closer link to performance than in the past. For example, some
CFOs receive options only if their companies’ stock price rises faster
than that of their peers. Others aren’t allowed
to cash in restricted stock grants unless they
hit certain financial targets. Even qualifying for
a bonus — which traditionally involves a performance
component — is more challenging.
“This is a common theme among my
clients,” says Cross, who estimates that more
than half of the (mostly manufacturing) firms
with which he works are now using pay that
is more closely linked to performance. Hurdles
are typically market-based. Under the
10-year-old plan that governs Steve Chazen’s
pay package, for example, the compensation
committee reviews Occidental’s total shareholder
returns for the previous four years and
ranks them against a peer group, which
includes companies such as ExxonMobil and
Kerr-McGee. If Occidental ranks first, executives
receive 200 percent of the target
amount of options (10,000). Poorer performance
means gradually fewer shares. If the
company ranks last or second-to-last, executives
At other times, companies’ internal metrics
determine the measures. As part of his
compensation plan at transportation concern
CSX, Oscar Munoz (#14 on this year’s list)
will receive performance units only if the rail company meets
predetermined cash-flow targets over a two-year period. Insurer
Conseco does something similar, tying the vesting of options
to the achievement of operating ROE over a three-year period.
Oshkosh Truck now splits CFO Charles Szews’s bonus
between an earnings-per-share target and return on invested capital
as compared with competitors’ returns. Before 2002, bonuses
were based 25 percent on net sales growth, 60 percent on EPS,
and only 15 percent on predetermined (not relative) ROIC.
Should CFOs Get Incentives?
Does it make sense to link CFO pay to such goals?
After all, Chazen notwithstanding, most CFOs
lack the operational influence of a business-unit
head. Internal Revenue Service commissioner
Mark Everson is among those who raise governance
concerns about CFO compensation that includes stock or
other variable incentives. Speaking before the Senate Finance Committee in September, Everson argued that finance chiefs,
top corporate attorneys, board chairs, or other executives
responsible for “minding the cookie jar” should receive generous,
fixed cash payments only. Take away any incentive for mischief,
runs his argument, and less fraud will result.
Neither CFOs nor compensation consultants like that idea, of
course. Steve Van Putten, who runs the East Coast executive-compensation
practice of Watson Wyatt Worldwide, notes that as the
CFO’s job expands into areas of strategy, variable pay is appropriate.
“The CFO helps drive the performance and strategic direction
of the company,” he says. “And the best way to get the CFO to
do that is with long-term incentives linked to shareholder value.”