All good things must come to an end, and that includes the rise in CFO pay during recent years. Following a 4% increase in 2007, total direct compensation for CFOs fell 4% in 2008, thanks to the recession. Yet there was a silver lining: base salaries continued to rise at a strong clip, an indication of the increased value that companies place on CFOs during hard times.
According to advocates of pay-for-performance, the drop in CFO total compensation is clear evidence that the system is working. Both CEO and CFO short-term cash bonuses suffered big hits last year, in lockstep with overall corporate performance declines. What’s more, finance chiefs in hard-hit industries like finance and real estate experienced the biggest total compensation decreases, while those in stronger-performing sectors like consumer staples fared much better.
“Outstanding performance should guide outstanding compensation,” says Peter Oppermann, worldwide partner at Mercer, which provided much of the data for this year’s survey of CFO compensation. Such performance, and its attendant rewards, were rare in 2008. “By and large, pay for performance — the apple pie and motherhood of executive compensation — seems to be doing what it’s supposed to,” says Oppermann.
Mercer’s latest CFO compensation survey covers 350 large and midsize companies in a range of industries, broken down into three categories: the top 50 U.S. companies by revenue, the next largest 150 companies by industry mix and revenue, and the “Midsize 150,” companies in select industries with a revenue range of $2.5 billion to $11.7 billion. Although CFOs in the top-50 category received an average 13% raise in their base salaries, their total direct compensation fell 17%, by far the largest decline among the three categories. By comparison, total direct compensation rose by 1% for CFOs in the “Large 150″ category and fell by 1% for finance chiefs in the Midsize 150. (Mercer defines total direct compensation as the sum of salary, actual short-term incentives, and actual long-term incentives.)
Along with Mercer, two other organizations that focus on compensation issues — Equilar and Salary.com — provided up-to-date data on CFO pay. Equilar looked at 309 companies in the Standard & Poor’s 500 stock index, while Salary.com pored over Securities and Exchange Commission filings of “most highly compensated executives” for 8,000-plus public companies, says Deborah Nielsen, director of data operations for Salary.com.
While both Mercer and Equilar measured the fall in CFO median total compensation at 4%, Salary.com pegged it at 7%. All three organizations attributed the decline in large part to the steep fall in annual short-term incentives (31% according to Mercer) or cash bonuses (22.6% and a whopping 171.6% according to Equilar and Salary.com, respectively). The median cash bonus in Equilar’s survey dropped from $557,000 to $431,000, compared with a decline of $2.6 million to $950,000 in Salary.com’s.
Aaron Boyd, Equilar research manager, notes that the percentage of CFOs who received a bonus declined slightly, from 93.9% in 2007 to 88% in 2008 — another indication that corporate performance is having an effect on compensation. But whether pay for performance worked can only be determined for certain on a case-by-case basis, he cautions. “There indeed were cases that effectively rewarded or punished an executive, but there were others where pay did not fall in line with how the company performed,” says Boyd.