And CFOs should expect the initial structure — as much as the ultimate payout — of compensation packages to reflect both internal and external company performance. The recent penchant for trying to give executives the top pay in their industries must be tempered by a company's relative performance within its industry, say critics. "All company executives cannot be in the top quartile of pay scales," The Conference Board report noted dryly. Predicts Johnson, "Compensation committees will be much less influenced by [compensation] benchmark data than they were historically. They'll look at peer group data, but as a guidepost. They're not going to solve it as an algebraic equation."

These efforts to tie compensation more closely to company performance, says Johnson, are likely to be "smoothed in" over time. And much depends on the fate of stock options, the evolving Sarbanes-Oxley rules, and even on whether more scandals lurk in the wings. Shortly before this article went to press, allegations arose that former Tyco CFO Mark Swartz, one of the top 10 earners in 2001, helped himself to unauthorized cash bonuses — the very form of compensation championed by many critics of stock options. Ultimately, only one thing is certain. "Going forward," says McCullough, "what is going to result in the biggest increase in compensation is if companies start performing again."

Tim Reason is a staff writer at CFO.

Plaudit for Audit
"Of all financial jobs in the company, internal audit has grown in stature, and expense, the most in the past year," says Gordon Grand, who leads the financial officers practice at executive-recruiting firm Russell Reynolds Associates. And the higher the reporting relationship, the higher the pay, adds Howard J. Johnson, senior vice president and director of auditing at JC Penney Co. Although most internal auditors still report to the CFO or controller, says Johnson, "the move is on to have more chief audit executives report either to the CEO or directly to the audit committee."

Johnson, who reports to JC Penney's general counsel, saw his own position elevated from vice president to senior vice president shortly after turnaround specialist Allen Questrom took over as CEO in 2000. His compensation got a nice bump, too: it's now roughly equivalent to that of a controller or treasurer, says Johnson, and includes a mix of base pay, bonus, and stock options. Ironically, the bonus is based in part on keeping audit-staff turnover below 15 percent — a potential challenge given their newfound status.

Johnson isn't worried, though. "We have far more ex-internal auditors running parts of JC Penney than we have in the audit department today," he admits, but poaching from outside the company is low. "Of the upper third of my staff, a lot make as much as chief auditors at other companies do," he says. In contrast to companies where just about every internal audit position is a 2-to-3-year stepping-stone assignment to controller or another finance position, Johnson's own staff averages 13 years of experience.

Longevity costs more, notes Johnson, but also results in higher-quality audits: "If you are in an internal audit shop and know that in three years you'll be someplace else in the company, how objective and independent are you going to be?" Many companies are now looking to "upgrade" their audit employees, suggests Johnson, explaining that some "are seeing that they don't have the caliber of staff necessary to do all the new things in terms of corporate governance and financial reporting." —T.R.

Cash Flow

There's a wide range in every component of CFO pay.
Source: Mercer Human Resource Consulting

Industrial Strength

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