From the April/May 2012 issue of Treasury & Risk magazine

CFO Pay Package Survey Exclusive

CFOs see moderate pay gains in 2011 as boards focus on aligning compensation packages more closely with company results.

Slow and steady has its good points, wouldn’t you agree? Just take a look at trends in CFO compensation. Overall pay increased at a respectable pace in 2011 as gains in long-term incentives offset decreases in short-term cash bonuses. While that hardly compares with the surge in compensation CFOs saw in 2010, it’s nothing to sneer at, either. It’s also the look of things to come. The same modest increases likely will be the rule in 2012 as compensation committees set more realistic targets tied to performance. “We’re seeing a return to normalcy,” says Todd Lippincott, leader of the executive compensation consulting business for the Americas at Towers Watson, a New York-based human resources and benefits consulting firm. Recent data back that contention.

A study of the 2011 compensation of 50 Fortune 500 CFOs commissioned by Treasury & Risk and conducted by Equilar, a Redwood Shores, Calif., executive compensation research firm, found median total compensation in 2011 increased 9%, to $5.1 million from the year before. In 2010, Equilar’s survey of a somewhat different group of Fortune 500 CFOs showed a 21.4% rise. In 2011, for example, total compensation for IBM CFO Mark Loughridge grew 7%, to $6.4 million. EMC’s David Goulden’s pay increased 3% to $5.1 million.

But perhaps the most salient feature of compensation going forward will be the continuing increased reliance on results. “Decisions will be grounded in performance,” says Compensation Advisory Partners’ Burek. Long-term pay should comprise a larger part of the total, with about half of those incentives based on performance, she says, and about a third in stock options.

The movement toward ever-more pay for performance should also mean stepped-up use of restricted stock. A small portion of that will be based on tenure, a practice known as pay for pulse, since such payment does not reward executives’ contributions to results. A larger part will be performance-based, with upside and downside potential, allowing executives to earn more or less than the target depending on their performance. Some companies have been using market stock units, or MSUs, allowing CFOs to earn a greater number of shares if the stock price increases, according to Van Putten.

In large part, that’s to avoid the glare of public attention if they get it wrong, Van Putten says. Boards are more involved in evaluating performance goals and making sure metrics are aligned with shareholder value. And they’re using increasingly more rigorous goal-setting methods, not just comparing targets to those used by other companies in their industry, but often considering the impact specific situations would have on pay. “They’re doing stress tests,” says Van Putten. “They’re looking at, for instance, if performance were to go south, what impact that would have on bonus plans.”

In fact, concerns about setting inappropriate targets are causing some boards to reject management’s plans and demand they go back to the drawing board, according to Steven Hall, managing director of Steven Hall & Partners, a New York-based compensation consulting firm. Hall says he’s seen perhaps six cases so far where that’s happened. “They’re saying, ‘You have to come up with something better, because we can’t set targets with that level of performance,’” he says. “‘Figure out how to earn more.’”

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