You wouldn’t have thought 2000 was an off year for Mark H. Swartz, the CFO for Tyco International, the acquisition-hungry conglomerate.
Last year, Swartz earned $61,612,846 in total direct compensation (TDC), a figure that planted him in first place among his peers in a sample of CFOs at 350 of the largest public companies that filed proxy statements between July 28, 2000 and April 6, 2001.
TDC is the sum of total annual compensation (base salary plus bonus) and total long-term incentives (gain on options exercised plus the value of restricted-stock grants plus long-term incentive- plan payouts).
In 2000, Swartz gained $48,840,326 on stock options he exercised that year, to go along with a restricted-stock grant worth $10,603,770 and total annual compensation of $2,168,750. An indication of how well he did his job was his selection as the winner of a 2000 CFO Excellence Award in Mergers & Acquisitions.
Yet Swartz’s TDC had actually dropped by 20.2 percent last year, with the gain on options he exercised in 1999 ($62,802,959) far outdistancing his option gains in 2000. Still, that was pretty good for an off year.
Other top-earnings CFOs in the sample of proxies, which was culled by William M. Mercer Inc. and analyzed by the consulting firm at the request of CFO.com, parlayed whopping option gains into actual TDC boosts.
Cisco Systems’ Larry R. Carter, the second biggest earner in the sample and another CFO Excellence Award winner, saw his TDC rise last year by 133.9 percent, largely as a result of the $48,170,629 gain he earned on options he exercised.
Sun Microsystems’ Michael E. Lehman , in fact, saw his TDC soar by 304.1 percent on the wings of a more than $30 million increase in his gain on options exercised in 2000, which rose to $38,855,224 from his $8,583,680 gain in 1999.
In fact, except for Goldman Sachs’s David A. Viniar, who recorded no gains on options exercised in 2000, all of the top-ten CFO earners reported greater gains on options exercised than they had the year before.
To be sure, Mercer’s analysis is based on a sample of the biggest companies. Many more proxies were filed after the April 6 cutoff date. Nevertheless, it provides the basis for a snapshot of the compensation of top-earning senior financial executives .
Besides calculating the top ten, Mercer traced CFO compensation patterns for the entire sampleand compared them to the compensation of chief executive officers at the companies studied for five years.
Since the TDC figures of almost the entire top ten largely reflect gains in options granted in prior years, their compensation doesn’t particularly reflect high levels of performance in 2000, Peter Oppermann, a principal with William M. Mercer in New York City, tells CFO.com.
“These guys did well because they exercised options” at lucrative moments in 2000, rather than receiving huge incentive-based grants and raises last year, Oppermann tells CFO.com.
Still, while compensation wasn’t a particular gauge of performance, “you would hate to have CFOs being dumb investors” of their own money, he says.
The consultant notes that the industries represented in the top-ten list for 2000, which is heavy with computer-technology companies that have been big issuers of stock options, could very well be different this year.
“We may see a greater use of restricted stock granted this year than options,” says Oppermann who predicts hikes in CFO base salaries of between 6 percent 6.5 percent for 2001.
“If we spend the rest of the year in the doldrums, we won’t see the high level of option gains or, perhaps, more restricted-stock gains [in comparison to option gains] than in the past,” according to the consultant, who cited Swartz’s $10.6 million 2000 restricted-stock award as a harbinger of the trend.
“There’s still a tight market for talent, especially in CFOs,” the consultant says.
At the same time, with the downturn in the stock market, the effectiveness of restricted stock as a retention tool is rising in comparison to options, he says. That’s because, unlike the situation with options, “even if the price goes down [the restricted stock is] still worth something,” the consultant explains.
From the employer’s point of view, however, restricted stock may be a less powerful performance incentive than options because it carries less risk for the executive. “All I have to do is live and breathe, and then I get something,” Oppermann explains.
Employers should balance their restricted-stock compensation with stock options, “so there is not a lack of risk in the long-term incentive plan,” he adds.
At the median of the Mercer sample, CFOs earned 12.2 percent more in TDC in 2000 than they did in 1999, according to Mercer. The median gain on options exercised was $964,808, while the median restricted- stock grant value was $435,069.
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