Among S&P 500 finance chiefs, total direct compensation as a percentage of CEO pay dipped slightly in 2011, according to an analysis by Mercer (see chart). The gap was entirely due to a widening differential in long-term, non-cash incentive awards, like time-based restricted stock and stock options, in favor of the top dogs.
In fact, CFOs actually picked up ground in the categories of base salary and actual cash compensation, which includes executives’ annual bonuses. CFOs’ bonuses declined slightly last year, but CEOs fared even worse.
When it comes to base salary, there is an interesting distinction within the S&P 500 between the 100 largest companies and the “Other 400,” as Mercer calls them. CFOs in the former group are steadily falling away from their bosses, with the salary ratio declining from 54.7% in 2009, to 52.1% in 2010, to 50.7% in 2011.
Within the Other 400, the opposite is true. CFO salary compared to CEO salary has climbed from 50% in 2009, to 51.5% in 2010, to 54.2% in 2011.
Median salary for CEOs in the Other 400 has stayed very near $1 million since 2009, while CFOs have enjoyed modest but regular salary hikes; with the 3.5% gain the latter group saw last year, the median reached $559,000.
“Institutional shareholders and proxy advisors are scrutinizing the disparity between pay for CEOs and other executives as a potential indicator of governance problems,” says Ted Jarvis, Mercer’s global director of rewards data. “A wide discrepancy may complicate CEO succession planning and be symptomatic of a weak talent bench, poor plan design, or failed oversight.”
Attitudes toward pay differentials may have been tweaked by Dodd-Frank, under which companies will be required to publicly state ratios of compensation for CEOs versus other types of employees. “That has sensitized people to ideas of relative worth, and certainly magnitude differentials, that maybe they weren’t thinking about before,” says Jarvis.
But if there is greater sensitivity to pay differentials these days, why are CFO salaries in the S&P 100 declining versus their bosses’ salaries? Jarvis doesn’t have a ready answer. Within the Other 400, companies “may just feel like $1 million is enough,” he says.
The largest companies, on the other hand, may not be as sensitive to criticism. Some of them suggest as much in their proxy statements, with language noting that they will ignore calls for reduced CEO pay where they feel there is a business reason to do so, Jarvis says. They may be emboldened simply by their size: median revenue among S&P 100 companies in 2011 was $38.4 billion, compared to $6.3 billion for the Other 400.
(The S&P 500 is not composed, as is the Fortune 500, of the largest companies. Rather, Standard & Poor’s selects companies that represent a microcosm of Corporate America. Some companies outside the 500 largest are included in order to round out the proportional representation of industries where even the biggest players may not be within the 500 largest.)
Meanwhile, as the chart shows, CFOs’ total direct compensation is about one-third that of their bosses. Does that reflect perceptions about the relative value of the two roles? No, says Jarvis. Most companies pay executives based on market analyses of pay packages at companies in the same and related industries and companies of similar size.
But Yvonne Chen, a managing director at compensation consultancy Pearl Meyer & Partners, notes that as recently as five or six years ago, it was fairly common for CFOs to be earning half of what their CEOs were. CFO pay got a huge bump after passage of the Sarbanes-Oxley Act in 2002, but that effect lasted for only a few years.
Chen expects that CEOs’ 3X pay differential over CFOs will remain for some time to come. Today, she notes, business-unit heads and chief operating officers or presidents are most often a company’s second-highest-paid executive, even in industries where it might seem that CFOs would be of greater value. For example, Chen recently completed a review of pay in the REIT industry, where financing activities and asset management are key priorities. But even there, CFOs tend to rank third or fourth in pay.