Human Capital & Careers

Salary World Turned Upside Down

For CFOs, more career risk means more money. The same does not hold true for CEOs, however.
Lisa YoonApril 14, 2003

If misery loves company, then many CEOs in today’s bad-news economy could pass for extras in Les Miserables. Pay raises for chief executives for 2003, for example, were the lowest in a long time. Moreover, an unprecedented number of CEOs are going without bonuses.

But amid this dreary backdrop for chief executives, it appears that things aren’t so bleak for chief financial officers. In fact, CFOs are about the only ones who will see decent salary increases in the near future.

In a recent article in The New York Times, several executive-recruiting experts said they already see this bump-up in salary for finance chiefs. The reason for the rise? In a harsh economy, companies need solid money experts to keep costs down. As a result, CFO demand is up, and hence, CFO salaries.

A new report on the effects of the Sarbanes-Oxley Act on executive compensation makes the same prediction for the future. In “The Impact of Changing Corporate Governance on Executive Compensation and Benefits,” released last week, executive-compensation consultancy Clark/Bardes Consulting looks at executive compensation trends post-Sarbox for the first quarter of 2003.

It’s not pretty. For the first time, executive raises were about the same as everyone else’s raises – around four percent. Among the trends the report cites: public-relations-minded companies that withheld executive raises to project a face of austerity to a public irked by reports of corporate excess. In other cases, companies froze executive salaries in a spirit of solidarity with the frozen salaries of the rest of the workforce. Another reason for low-to-no raises for execs was plain old bottom line: flat revenues, flat base pay.

According to the Clark/Bardes crystal ball, these trends suggest a future in which companies link executive pay with company performance. Managers at corporations will also care a lot more about how they’re perceived by employees and investors. No surprises there.

But the report does offer a special note about the new demands on finance chiefs: “We expect to see CFO base salaries increase at levels significantly above other executives because of the significantly increased risk associated with financial reporting.”

Jack Dolmat-Connell, the Clark/Bardes senior VP who authored the report, explains that the new risk means, more than ever, all eyes are on the CFO. In fact, he says, CFO pay could increase to just under COO levels. “More CFOs are starting to be seen as a quasi-COO,” he adds.

After all, under Sarbanes-Oxley, CFOs are the ones who have to put their names on the line along with CEOs. This, in effect, “elevates the stature of the CFO,” Dolmat-Connell says, and salary increases will reflect that. Of course, the new law targets CEOs too, but they aren’t likely to enjoy similar raises. “You can’t really elevate the CEO stature,” he notes. By definition, CEOs are ultimately responsible for the company — law or no law.

Not surprisingly, the Clark/Bardes report predicts that security benefits will also increase for CFOs, CEOs, and the company’s top legal officer — the three executives considered to be the most vulnerable now.

But in a recession, even CFOs can’t expect everything. Don’t spend that bonus ahead of time, the report cautions — it could be as little as a quarter of target, if anything at all. And expect the Securities and Exchange Commission’s eagle-eye stance to trickle down to the compensation committee. Comp committees will be more involved, doing more research, and holding more meetings without executives present, according to the report.

To be sure, the new austerity in compensation owes something to the faltering economy. But corporate America’s bigger concern is finding a way out of the dog house of investor scrutiny. “With the recently passed Sarbanes-Oxley legislation, increased shareholder scrutiny and enhanced orporate responsibility,” the report concludes, “companies should anticipate significant changes to their executive board compensation and benefits practices.”