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Trends reflects broad revisions to executive compensation policies
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Compensation for chief financial officers (CFOs) of S&P 500 companies rose 5.9 percent in 2011, according to an analysis by HR consultancy Mercer. The analysis, derived from 2009-11 data-year proxy statement disclosures filed with the Securities Exchange Commission, revealed that:
• S&P 500 CFOs received a median $2.75 million in total direct compensation (salary plus actual short-term incentive payout plus grant-date expected value of long-term incentives).• CFOs of the 100 largest U.S.-based corporations (the S&P 100) received a somewhat more modest increase of 5.5 percent to a median $4.34 million.• CFOs total direct compensation at the remaining companies (the “other 400”) rose 6.1 percent to a median $2.56 million.
• S&P 500 CFOs received a median $2.75 million in total direct compensation (salary plus actual short-term incentive payout plus grant-date expected value of long-term incentives).
• CFOs of the 100 largest U.S.-based corporations (the S&P 100) received a somewhat more modest increase of 5.5 percent to a median $4.34 million.
• CFOs total direct compensation at the remaining companies (the “other 400”) rose 6.1 percent to a median $2.56 million.
Like that for many named executive officers, the pay mix for CFOs has shifted gradually from fixed to variable compensation:
• The proportion of total direct compensation consisting of salary shrank from 27 percent in 2009 to 24 percent in 2011. • For CFOs of S&P 100 companies, the portion of salary decreased even more, from 26 percent in 2009 to 22 percent in 2011. • For CFOs at the "other 400," salary decreased from 29 percent in 2009 to 25 percent in 2011.
• The proportion of total direct compensation consisting of salary shrank from 27 percent in 2009 to 24 percent in 2011.
• For CFOs of S&P 100 companies, the portion of salary decreased even more, from 26 percent in 2009 to 22 percent in 2011.
• For CFOs at the "other 400," salary decreased from 29 percent in 2009 to 25 percent in 2011.
Salaries Up, Short-Term Incentives Down (Modestly)
Despite this shift from fixed to variable pay, the median increase for salaries of CFOs of S&P 500 companies was 3.7 percent to a median of $559,000. CFOs of S&P 100 companies were paid a median of $704,000, while those at the "other 400" companies were paid a median of $542,000.
This differential reflects the larger size of the S&P 100 companies; the revenues of S&P 100 companies are more than six times those of the "other 400" ($38.44 billion versus $6.27 billion, respectively).
A modest year-over-year decrease in short-term incentives partially offset the increase in salaries. Following a double-digit increase in 2010, median change in actual total annual compensation (salary plus actual short-term incentive payout) in 2011 was up 3.3 percent to $1.13 million.
“The above-target payouts in 2011 reflect excellent financial results for many companies, including a healthy 10.6 percent year-over-year median increase in pretax income,” said Ted Jarvis, Mercer's global director of rewards data, research and publications. “However, as a percentage of target compensation, short-term incentive payouts shrank from 130 percent in 2010 to 118 percent in 2011. Compared to 2010, when median pretax income increased 14.4 percent, the more modest performance in 2011 translated into a correspondingly lower payout.”
According to Jarvis, “Another explanation for the dip in payouts may be a return to more accurate—or at least more optimistic—target-setting in 2011, coming off a sustained period when economic forecasting was difficult and consensus forecasts notably bearish.”
Long-Term Incentives Trends
Long-term incentives (LTI) contributed 53 percent of median total direct compensation for CFOs of S&P 500 companies in 2011. Increasing 7.7 percent to a median $1.57 million for S&P 500 CFOs in 2011 (and up 7.9 percent to $2.79 million for S&P 100 CFOs), they typically consist of multiple incentive vehicles with the most common combination being a mix of stock options, restricted stock and performance awards (either in cash or shares).
Mercer’s analysis shows the prevalence of performance awards—granted as the only LTI vehicle or in tandem with other vehicles—rose markedly in the past three years. Performance awards were granted to CFOs at 64 percent of S&P 500 companies in 2011 (up from 55 percent in 2009). The rise was even more pronounced for CFOs of S&P 100 companies, for which the prevalence increased to 71 percent in 2011 (up from 59 percent in 2009).
By comparison, use of stock options at S&P 500 companies declined from 74 percent to 72 percent and time-vesting restricted stock from 58 percent to 57 percent. The shift was more evident among S&P 100 companies for which the prevalence of stock options fell from 78 percent to 74 percent and time-vesting restricted stock from 59 percent to 55 percent.
“This realignment in the long-term incentive portfolio is not unique to CFOs, but reflects broad revisions that many companies are making in their compensation policies to address weaknesses exposed by the recent economic collapse,” commented Jarvis. “Options and time-vesting restricted stock derive virtually all of their value from the market price of the underlying securities. Since the value of performance awards derives at least partially from nonmarket-based measures, they’re better suited for an economic environment in which operational and other nonstock-based performance metrics are deemed to be crucial indicators of a company’s long-term health.”
At Largest Firms, a Wider Disparity Between CEO and CFO Pay
Compensation for CFOs is significantly lower than for CEOs, and the gap at the 100 largest U.S. companies in the S&P 500 widened in the past year, according to Mercer’s analysis. By contrast, the gap narrowed between CFO and CEO pay at the remaining companies (the “other 400”) in the S&P 500 index.
In 2011, median salary for CFOs of the S&P 100 was 50.7 percent of median salary for CEOs, a ratio that fell for the second consecutive year. The trajectory for median pay for CFOs at the "other 400" charts an opposite course—54.2 percent of median salary in 2011, a ratio that rose for the second consecutive year.
“Institutional shareholders and proxy advisers are scrutinizing the disparity between pay for CEOs and other executives as a potential indicator of governance problems,” said Ted Jarvis, Mercer's global director of rewards data, research and publications. “A wide discrepancy may complicate CEO succession planning and be symptomatic of a weak talent bench, poor incentive plan design or failed oversight.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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