From the May 2008 issue of Treasury & Risk magazine

New Challenges Shape Pay Levels

These days, when Steven Hall sits down with his clients to hammer out the structure of their executive compensation plans, they take into consideration a new set of factors: How it will look in the cold light of day on their proxy statements. Thanks to the Securities and Exchange Commission's new rules requiring more disclosure of top executives' performance goals, including those of the CFO, a number of clients have started to think twice about just how shareholders might react to their bonus plans, according to Hall, president of Steven Hall & Partners, a New York executive compensation consulting firm. One client, who wanted to design a bonus that was solely based on time-vested options, decided to re-jigger the structure after realizing shareholders might demand more performance-based incentives. "When companies are making decisions, they're thinking about what the disclosure will look like, and deciding their original design may not be the right thing to do after all," says Hall. "I've seen clients go back to the drawing board as a result."

Two years ago, the SEC took what seemed to be a big step toward reigning in exorbitant executive compensation when it issued new rules requiring full disclosure of the performance goals on which salary and bonuses are paid. The idea, of course, was that if companies had to reveal in their proxies when executives didn't meet their targets, they might be forced to moderate their pay levels. For CFOs, the new requirements had an added dimension: For the first time, they were required to be included as one of the top five executives listed in the disclosure.

Certainly, the numbers indicate that CFO compensation has taken a hit over the past year. Median total compensation increased by 4.6% in 2007 to $2.7 million, from $2.6 million in 2006, according to a study of more than 200 Fortune 500 CFOs in office for at least two years by Equilar, a Redwood Shores, Calif.-based executive compensation research firm. But, while base salaries increased by 6.8%, to $534,167, aggregate bonus compensation--which includes discretionary, annual performance-based, and multi-year performance-based bonuses--was another story altogether. It declined by 5.3% to a median of $600,000. The chief driver of that decline was in annual performance-based bonuses, which were down 8.2%. "For finance chiefs, like other executives, this has been a turbulent year on the compensation front," says Alexander Cwirko-Godycki, research manager at Equilar. "Overall pay levels are climbing at a slower rate than past years, and bonus compensation appears to be down."

That's in stark contrast to previous years, when increases in performance-based compensation contributed to higher pay
levels for treasurers and controllers, as well as CFOs. Between 2004 and 2007, base salaries of CFOs rose by an annual rate of 2.3%, to $385,000, while total compensation for the group, including short-term annual incentives, rose by 7.1% to $630,000, according to a survey of approximately 100 companies with annual sales of $1 billion to $5 billion by New York-based benefits consulting firm Mercer. The base salaries of treasurers rose 3.6% to $194,400, and 4.9% for their total pay packages, to $257,900, while salaries of controllers jumped 10.3%, to $210,000 and 14.8% for total compensation, to $275,300. It's unlikely, however, that the current declines in performance-based compensation are mainly the result of the new disclosure rules or fear over shareholder reaction.

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