VideoWhen it comes to compensating top CFOs, the times have changed even if the players have not. Consider James H. Hance Jr. In 2000, the Bank of America (BoA) finance chief and vice chairman topped our list of the 25 highest-paid Old Economy CFOs, and graced the cover of CFO magazine. The previous year, Hance's expected total direct compensation (TDC)—defined as salary, bonus, restricted stock, and the value of options granted—hit $51.7 million. Of that, salary and bonus accounted for only $2.5 million; the rest consisted of $26.8 million in option grants, along with $22.4 million in restricted stock.
In 2002, Hance once again emerged as a top earner among finance chiefs at public corporations with $1 billion or more in revenues. But according to CFO.com's annual report on the highest-paid CFOs, based on a survey conducted by Mercer Human Resource Consulting, Hance earned a relatively puny $12 million. (Mercer's measure of total direct compensation includes gains on exercised stock options, rather than the value of the options granted.) More tellingly, Hance's pay package has undergone a serious makeover, and he did not exercise stock options last year. (See our special report on compensation for all the numbers.)
It's not as if BoA turned in a mediocre performance: the company's net income grew from $6.8 billion to $9.2 billion in 2002. But in a marked shift from previous years, the board tipped the balance of executive pay toward restricted stock. In fact, Hance's $10.8 million bonus—the biggest in this year's survey—consisted of $6.7 million in restricted shares, along with $4.1 million in cash.
BoA compensation-committee members say they're doling out more restricted stock grants because they want executives to hold shares longer. Another reason may be that recent financial scandals have tainted the granting of lavish stock options. Says Hance, "I think it's a function of the times, when you think of some of the criticism companies have undergone [for their use of options]."
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The BoA finance chief wasn't alone in seeing his pay package rejiggered last year. According to the survey, which was based on a sample of 250 CFOs at 350 large public companies, the median bonus for finance chiefs rose by a hefty 17.5 percent in 2002—the biggest increase in four years. And those mounting bonuses fueled a healthy boost in overall CFO compensation. In fact, although the median salary increased only 5.2 percent, the TDC jumped a whopping 21.4 percent.
Granted, bonuses may have surged because companies booked more profit last year. But the rise in short-term incentive pay could also mean that the interests of executives and shareholders are finally getting in sync. "Bonuses for CFOs need to be tied to company goals, not CFO goals, because [as a senior officer of the company, your] interests should align with those of shareholders," argues Joseph Bronson, CFO of Applied Materials, a Santa Clara, California-based maker of semiconductor equipment. "You don't get paid for effort, you get paid for results."
The survey suggests that CFOs are indeed getting paid for results—good or bad. In fact, bonuses and corporate performance seem to be marching almost in lockstep. Peter Oppermann, a senior compensation consultant with Mercer Human Resource Consulting, points out that the 17.5 percent rise in CFO bonuses in 2002 mirrored the 14.6 percent rise in median net income for the employers in the sample group.
But compensation committees at revenue-strapped industrial companies are getting downright stingy with incentive pay. Thanks to the long slump in the microchip industry, for instance, Applied Materials hasn't paid bonuses to its senior executives for the past two years. Explains Bronson, "We at least can't be accused of paying bonuses [to executives] who don't achieve results."
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Although Bronson did not receive a bonus, he did cash in about $2 million in stock options. In recent months, however, a number of companies, most prominently Microsoft, have decided to stop granting options to workers altogether.
Whether this trend continues depends a lot on whether the Financial Accounting Standards Board votes to require public companies to expense options. In the meantime, some of the CFOs surveyed found the options they already own squarely in the money. Buttressed by a $10.1 million gain on the options he exercised, for example, Apple Computer's Fred D. Anderson returned to our list of top-paid CFOs in the number-two spot, after a one-year hiatus. Other big option winners last year included Navistar International Corp.'s Robert C. Lannert ($5.6 million from exercised options), Aflac's Kriss Cloninger III ($5.5 million), and Merck & Co.'s Judy C. Lewent ($4.7 million).
But despite respectable gains, the overall median value of stock options dished out to finance chiefs last year (calculated using a binomial model) dropped from 49.6 percent of expected total pay to 44.2 percent. And like Hance, several CFOs, including Bear, Stearns & Co. CFO Samuel L. Molinaro Jr., who vaulted to number three on the list, did not cash any stock options. The lion's share of his $8.2 million TDC came from an $8 million bonus.
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