From the May 2003 issue of Treasury & Risk magazine


Despite a much tougher job and more intense scrutiny, CFOs are feeling the sting of recent corporate scandals when they open their paychecks

Admittedly, it was only down 1% to a mere $3.256 million, from $3.291 million. But in 2002, the first full year since the Enron Corp. scandal erupted, CFOs as a group saw their compensation drop for the first time in a decade, according to compensation analysis firm Pearl Meyer & Partners in New York. No matter how you slice it, the contraction is another illustration of how a tough job just got tougher.

The CFO compensation reductions cut across a variety of industry sectors, and for some were quite painful. A sampling: Susan Tomasky's total compensation at American Electric Power Co. fell 30% in 2002 from a year earlier; Boeing Co.'s Michael M. Sears suffered a 13% decline; IBM Corp.'s John R. Joyce took a 17% hit, and Robert P. Brace of Duke Energy Corp. had to brace himself for a spectacular 74% drop.

Sound bad for CFOs? Hold onto your stock options, because executive compensation experts warn that you may not have seen the worst. Diane Doubleday, a principal at Mercer Human Resource Consulting in San Francisco, notes the real shift in the compensation mix might not occur until 2003 or 2004. "If you think back to the beginning of 2002, we had Enron, but there were more shoes to drop. And we didn't have Sarbanes-Oxley," she says. "I think a lot of companies entering 2002 were very optimistic that they would be improving. But we had more corporate failures, the economy didn't bounce back and Congress reacted very quickly" to the corporate scandals. Now that those issues are very much in the minds of compensation committees, expect to see comp packages undergo some changes, Doubleday predicts.

Of course, not all financial executives took it on the chin. Pearl Meyer reports that treasurers actually did better last year, with their total remuneration rising 3% to $963,000. Take-home pay for controllers jumped 5% to $1.038 million. The Pearl Meyer survey is based on an examination of 2002 proxies from 63 companies with average revenues of $26 billion.

Another title that experienced a significant jump in pay and stature is chief auditor. William B. Reeves, a senior director at executive search firm Spencer Stuart, notes that he has seen several companies upgrading the chief auditor to C-level rank, reporting directly to the CFO--and being paid more as a result. The Pearl Meyer survey bears this out, showing that the top audit executives at the companies analyzed earned an average of $576,000 in 2002, up 9% from 2001.

Clearly, CFOs are paying the price for the greed of Andy Fastow, Mark Swartz and Scott Sullivan--not to mention abysmal markets.

Obviously, one reason for the current dip is the declining value of the stock options that have made up the bulk of compensation for the past decade. That portion of take-home will not return in force until the markets do.

But companies also want to change the rules of the compensation game that they now realize worked against the welfare of the organization. Facing stalled corporate profits and disgusted shareholders, compensation committees are beginning to appreciate that offering packages that rely heavily upon short-term spikes in the stock price as performance indicators tends to encourage executives to make decisions that look good to the markets, but are not necessarily healthy

for the company. Just look at Tyco, the textbook example. The company is now trying to clean up its books after an acquisition spree that left it heavily leveraged and cash flow poor. The solution is obvious: Change the underlying performance indicators to emphasize long-term financial soundness rather than sensational short-term growth.

What's in? Cash bonuses tied to actual financial performance measures like profits, cash flow and revenue growth as well as restricted stock as a retention tool that keeps executives focused on long-term goals.

"With so many people having stock options under water, there is a renewed interest in cash and a greater appreciation for restricted stock as opposed to pure options," says Spencer Stuart's Reeves. Plus, many companies expect to be required to expense stock options, which may cause a further de-emphasis of options, particularly among non-executive employees.

There are other factors that could limit the use of stock options. Paula Todd, a principal at Towers Perrin, notes that dilution has become a big worry for many companies that doled out stock options like crazy during the late 1990s, but more importantly for their shareholders. With the major stock exchanges proposing to permit companies to issue shares only after they obtain shareholder approval, the dilution concern might make it tough for companies to issue options as freely as they did.

Heftier base salaries as an inducement to attract the most qualified candidates are a trend that began around the tech bubble pop of 2000. Admittedly, the labor market is hardly as tight as it was toward the end of the last decade, but getting the best and the brightest still requires opening your wallet. And living with Sarbanes-Oxley and increased scrutiny from the investment community demands nothing less when it comes to the corporate financial team.

Strength in the Base

For this reason, comp experts like Allen Geller, a managing director at recruiting firm Raines International, predict base salaries will continue to climb even as overall compensation shrinks. "I think there may have been in the last year a return to more of the basics--traditional financial management that encompasses accounting, control and financial planning," says Russell Boyle, a recruiter at Egon Zehnder International. "A candidate has to be operationally focused, understanding the full complexity of the company."

The definition of who deserves to be included in that austere group also began to change as the market went south and investors went ballistic. In terms of qualifications, the magic letters these days are C-P-A, so forget about attracting bigger bucks because you have M&A or IPO experience. This trend started last year, but is picking up steam in 2003. Also, Young Turks need not apply. Executive recruiters say that what they are looking for in this economic climate is a candidate with a considerable amount of gray hair, literally or at least figuratively, who has survived a recession or two. "There is a comfort in the wisdom that comes with age and experience," says Spencer Stuart's Reeves. "Middle-aged and experienced financial executives are feeling more appreciation [from corporations] because they have seen more cycles and they earned their stripes. These CFOs are not going to do anything to jeopardize their reputations." Or their retirements, for that matter.


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