VideoThe days of wine and roses -- and gold-plated dental floss -- may finally be over for high-profile finance chiefs.
According to the CFO.Com/Mercer CFO Compensation Survey, compensation growth for upper-echelon finance chiefs leveled off last year. In fact, total median compensation for CFOs in the survey dropped 1 percent in 2001.
The reason for the compensation stagnation? Mostly, top-drawer finance chiefs didn't make tens of millions of dollars from gains on the options they exercised in 2001. With financial scandals being uncovered at a nearly weekly pace, some institutional investors have begun to openly question the wisdom of basing executive compensation on the short-term peformance of a company's share price. And with an increasing number of corporations begining to expense options, some companies may chose to reduce the number of grants they offer relative to other forms of compensation.
Of course, back in the nineties, some investor groups flat-out demanded that the compensation of top finance managers be tied in large part to a company's share price. After all, the activists argued, managers should be rowing in the same boat as shareholders.
The argument may still hold water. But with millions in executive compensation riding on a company's share price, it appears that a few finance managers have simply gamed the system. To hit their earnings targets -- and hence keep share prices moving up -- senior executives at a few corporations have played fast-and-loose with their bookkeeping. Others have committed out-and-out fraud.
Accounting-gate won't have corporate boards scrambling to set up lavish stock option plans for senior finance executives, that's for sure. And as the CFO.com/Mercer survey reveals, options for top senior executives simply aren't paying off the way they used to, either.
While options are still the biggest piece of the pay pie for many top-earning finance chiefs, the survey indicates that those equity grants started to lose their luster in 2001. In fact, the median gains on exercised options by top finance chiefs fell to $616,000 last year.
Admittedly, $616,000 isn't exactly chicken scratch. Still, it's a considerable drop-off from $964,000 -- the average median gain for top CFOs who exercised options in 2000.
Even finance chiefs at the apex of our 2001 Top Ten list saw their option gains thin. Tyco International's departing CFO Mark Swartz, for instance, realized option gains of $14 million last year. While that's not quite a poke in the eye with a sharp stick, it's not even close to the nearly $50 million Swartz raked in from exercised options the previous year.
Can't Buy Me Love
Developed for CFO.com by Mercer Human Resource Consulting , the CFO Compensation Survey looks at the salary, bonuses, and long-term incentives of 234 finance chiefs working at 350 of the largest U.S. companies ($1 billion in revenues and up) that filed proxies between July 31, 2001 and April 5, 2002. The survey also looks at the pay of 355 CEOs.
To be sure, continued hefty option income helped keep the three highest CFO earners of 2000 -- Tyco's Swartz, Cisco Systems' Larry Carter, and Sun Microsystems' Michael Lehman -- at the top of the list last year.
Swartz, Carter, and Lehman did play musical chairs in the rankings, which are based on realized total direct compensation (TDC). Realized TDC is the sum of salary, bonus, and long-term-incentives (including gains on options exercised, restricted stock values, and long-term incentive plan payouts).
After finishing number 1 in 2000 with a whopping TDC of $62 million ($49 million in option gains), Swartz slid to the runner-up slot this year with $32 million ($14 million in options).
Swartz's compensation slide seems set to continue, too. Edward Breen, Tyco's new chairman and CEO, said in an Aug.1 letter to employees that Swartz had decided to leave the company. Recently, several analysts had reportedly thought the highly-paid CFO might step down following Tyco's recent poor performance, not to mention an internal investigation into the conglomerate's bookkeeping. Swartz's departure seemed imminent once the company named Breen to replace Swartz's old boss, Dennis Kozlowski.
Sun's CFO has fared better. Even though his total pay dropped 8 percent, from nearly $40 million ($39 million in option gains) to $37 million ($36 million in options) in 2001, Lehman was number 1 in our survey this year, up from third place in 2000.
Cisco's Carter fell from second to third on the heels of a 40 percent drop in his total compensation. Interestingly, the Cisco finance chief made almost exactly the same amount from his options -- about $29 million -- in 2000 and 2001.
Meltdowns and Fizzles
Below the top three, the shift in CFO fortunes provides a neat snapshot of what's happened to the economy over the last two years. As tech stock prices melted and the semiconductor industry fizzled, the finance chiefs of Hewlett-Packard, Apple Computer, Micron Technology, and Applied Materials (a semiconductor company) fell from the 2000 list of top earners.
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