The past few years have been good for Occidental Petroleum CFO Stephen Chazen. In 2005, he earned nearly $33 million, including gains on options he exercised and long-term incentive-plan payouts. That puts him at the top of the latest list of highest-paid finance executives, compiled for CFO magazine by Mercer Human Resource Consulting. He was number four when we did the study last, in 2004.
Chazen owes some of his wealth to luck. He became CFO of Los Angeles–based Occidental in 1999, when the price of oil was below $20 a barrel and few expected much of the company. Since then, of course, the price of oil has more than tripled, and Occidental's stock price has followed suit.
"When the company gave out [the executive team's] options, our stock had traded at $20 to $30 per share for years. No one actually thought it would be a $100 stock," says Chazen.
Still, much of Chazen's options-related pay depends not on the simple rise of Occidental's stock price but on whether shareholders' returns exceed competitors' returns — and they have for several years. Starting this year, Chazen will have to clear a new hurdle to receive restricted stock grants. In July, Occidental declared that the top five executives will get stock only if the oil company meets or exceeds its cost of capital. If Occidental's average return on equity over three years matches its 11 percent cost of capital, executives receive one-fifth of the (undisclosed) target number of shares. They receive the full target number at 15 percent ROE, and double that number at 20 percent.
Even if the surge in his pay has been extraordinary, much about Chazen's arrangement shows how compensation for a growing number of CFOs is evolving: they're making more, but boards are also making them work harder to achieve the mega-pay levels that became common in the 1990s.
The Price of Experience
On average, CFOs have seen a significant — if not extravagant — increase in their earnings in the past year. Average base pay for
corporate finance chiefs in 2004 was $274,000, with bonus pay of $283,000. For 2005, base pay climbed to $306,000 and bonus pay to $341,000. Long-term incentive amounts rose more sharply, from $701,000 to $812,000, an increase of 16 percent.
For CFOs at big companies, total pay surged 25 percent, from an average of $2 million to $2.5 million. True, pay for top CFOs hasn't quite reached the heights seen in our 2002 survey (based on 2001 salaries). That year, Michael Lehman of Sun Microsystems pulled in $37.2 million. But CFO pay shows signs of soaring once again.
"Our survey records the gains CFOs realize on their equity awards, so we're seeing the net benefit of strong corporate performance," says David Cross, a principal at Mercer. But in addition to record earnings, unprecedented demand for skilled public-company CFOs is driving up compensation.
"I've been recruiting CFOs for 30 years, and have never seen so much demand in the mid-to-large-cap market as I have in the last 36 months," says Peter Crist, CEO of Crist Associates.
Silicon Valley firms are back in the hunt. "Funding dried up after the dot-com crash, but the VCs are back," says John Wilson, CEO of JC Wilson Associates, which recruits finance executives for the high-tech sector. "We're getting CFO requests from early-stage companies once again."
One reason for the surging demand: many big firms hope to upgrade their finance talent. As Fortune 1,000 companies get bigger and more global, and investor pressure intensifies, companies need a broader set of skills. The dwindling of the chief operating officer post contributes, since CFOs often are asked to take on many of the former COO's duties. Indeed, Chazen's wide-ranging job description at Occidental is beginning to sound almost typical. In addition to being CFO, he runs Occidental's chemical business and its gas marketing operation, and oversees its power plants, liquid-natural-gas facilities, and reservoir engineers.
Small firms are competing for specialized talent, too, mostly among finance professionals who are CPAs. "There's great skittishness on the part of investors," says Wilson, much of it reflecting concerns about compliance if their firm goes public. "They want someone who's a proven public-company CFO," he says.
Coaxing such executives into a new job has required some hefty equity offers. "To get a CFO out of his or her seat, you have to either have really substantial long-term incentives or you must offer a big block of stock," says Crist. "Compensation committees aren't wild about that, but they don't have much choice."
Today, that stock rarely comes in the form of equity alone. Instead, many companies pass out restricted stock as well. The move away from options isn't new, of course; it began after the dot-com crash pushed many options programs underwater and investors noted the role of options in high-profile accounting scandals. FAS 123R, which requires options expensing, accelerated the shift. Because options no longer confer an accounting benefit, boards consider options a less-attractive approach compared with other forms of equity pay.
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