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.

And since the alternatives are costly, boards are studying
them more closely as well. “Options expensing has caused firms
to think about equity programs in a more strategic way,” says
Cross. Companies now make fewer employees eligible to receive
stock. The 2006 data shows that within finance, compared with
two years ago, those executives less likely to get stock-based
long-term incentive plans include top accounting executives, risk
managers, cost-accounting managers, and payroll managers.
Going forward, companies are more likely to provide stock-based
pay to CFOs, treasurers, divisional controllers, and the top
tax, internal-audit, and financial-analysis executives.

Proof, Then Payment

Much of that incentive pay has a closer link to performance than in the past. For example, some
CFOs receive options only if their companies’ stock price rises faster
than that of their peers. Others aren’t allowed
to cash in restricted stock grants unless they
hit certain financial targets. Even qualifying for
a bonus — which traditionally involves a performance
component — is more challenging.

“This is a common theme among my
clients,” says Cross, who estimates that more
than half of the (mostly manufacturing) firms
with which he works are now using pay that
is more closely linked to performance. Hurdles
are typically market-based. Under the
10-year-old plan that governs Steve Chazen’s
pay package, for example, the compensation
committee reviews Occidental’s total shareholder
returns for the previous four years and
ranks them against a peer group, which
includes companies such as ExxonMobil and
Kerr-McGee. If Occidental ranks first, executives
receive 200 percent of the target
amount of options (10,000). Poorer performance
means gradually fewer shares. If the
company ranks last or second-to-last, executives
get nothing.

At other times, companies’ internal metrics
determine the measures. As part of his
compensation plan at transportation concern
CSX, Oscar Munoz (#14 on this year’s list)
will receive performance units only if the rail company meets
predetermined cash-flow targets over a two-year period. Insurer
Conseco does something similar, tying the vesting of options
to the achievement of operating ROE over a three-year period.

Oshkosh Truck now splits CFO Charles Szews’s bonus
between an earnings-per-share target and return on invested capital
as compared with competitors’ returns. Before 2002, bonuses
were based 25 percent on net sales growth, 60 percent on EPS,
and only 15 percent on predetermined (not relative) ROIC.

Should CFOs Get Incentives?

Does it make sense to link CFO pay to such goals?
After all, Chazen notwithstanding, most CFOs
lack the operational influence of a business-unit
head. Internal Revenue Service commissioner
Mark Everson is among those who raise governance
concerns about CFO compensation that includes stock or
other variable incentives. Speaking before the Senate Finance Committee in September, Everson argued that finance chiefs,
top corporate attorneys, board chairs, or other executives
responsible for “minding the cookie jar” should receive generous,
fixed cash payments only. Take away any incentive for mischief,
runs his argument, and less fraud will result.

Neither CFOs nor compensation consultants like that idea, of
course. Steve Van Putten, who runs the East Coast executive-compensation
practice of Watson Wyatt Worldwide, notes that as the
CFO’s job expands into areas of strategy, variable pay is appropriate.
“The CFO helps drive the performance and strategic direction
of the company,” he says. “And the best way to get the CFO to
do that is with long-term incentives linked to shareholder value.”

Slimmer paychecks for finance executives, moreover, could
mean that the smartest candidates opt for more-lucrative work.
“I think you would see a lot of ex-CFOs out there,” says Chazen.
“Of course,” he adds, laughing, “I’d gladly take all of my compensation
in cash, including the Black-Scholes value of the options.”

For now, at least, incentive pay for CFOs shows no sign of
disappearing. In fact, some experts believe we’ll see more of it
next year when the Securities and Exchange Commission’s new
compensation-disclosure rules take effect and CFOs will have to
be included in the proxy statement’s compensation table. Currently,
the five highest-compensated managers — a group that
doesn’t always include the finance chief — must appear.

“Now that CFOs are required to be listed with the top-five
list, you’ll see many of them getting raises,” says Van Putten.
That’s because CFOs will be able to compare their pay with that
of their peers and lobby for an increase. Also, some boards may
decide to increase CFO pay to levels similar to that of the other
listed executives.

Higher CFO pay would leave some executives with another
challenge: what to do with the bonanza. “Now I need to figure
out how to give away all this money,” says Chazen. “I want to
arrange it so that when I die my hand opens up and the last quarter
rolls out and into some charity’s pocket.”

Don Durfee is research editor of CFO.

Topping the CFO

Which finance executives have score the sharpest gains in pay?

One group of finance executives saw its pay rise more than any other last year, but
it wasn’t CFOs. It was controllers.

Between 2003 and 2005, the average base salary for corporate controllers
rose 22 percent, from $151,500 to $184,300. Bonus and long-term incentive payments
climbed even more sharply, by 37 percent and 29 percent, respectively.

It’s a simple matter of supply
and demand, says John Wilson, CEO of
recruiting firm JC Wilson Associates. Still worried about the possibility of
damaging accounting slipups, directors
are pushing CFOs to hire the most qualified
controllers they can find. Indeed, a
recent survey of finance executives conducted
by CFO Research Services (a
division of CFO Publishing) and Ajilon
finds that executives rate demand as
stronger for controllers than for any of
a CFO’s other direct reports.

Controllers are in no greater
supply today than they were five years
ago, however. Given aggressive hiring
by accounting firms, there may even be
fewer.

“Controllers — especially the really good ones — are highly prized these
days,” says Wilson. “It’s driven by the board’s fear of surprises. As CFOs spend more
time on strategy, directors want a strong controller as a second line of defense,
knowing that the CFO won’t be spending much time on green-eyeshade activities.”

And as the numbers show, they’re willing to pay to get one. — D.D.

Pay-Package Pieces

Base salary:
Base salary earned in the fiscal year.

Total cash compensation (TCC):
Sum of base salary and annual incentive.

Total direct compensation (TDC):
Sum of base salary, annual incentive, and long-term incentive.

Short-term incentive:
Annual bonus (cash).

Long-term incentives:
Include stock options, restricted stock, long-term incentive-plan compensation, and/or performance shares.

How the Survey Was Conducted

The 2006 CFO compensation survey is based on data from Mercer Human Resource Consulting’s 2006 Finance, Accounting & Legal Compensation Survey. CFO data refers only to the top corporate CFO, and not to others within the same organization who have a CFO title.

This year’s survey, which collected data on 120,774 employees at more than 2,300 responding organizations, included 575 companies that reported data on chief financial officers. The effective date of the survey data is March 1, 2006.

Sixty percent of businesses responding were public, 20 percent were private, and 20 percent were government, educational, or nonprofit organizations. Average revenues totaled $960.0 billion. Of the respondents, 45 percent are parent organizations, 22 percent are divisions, and 35 percent are subsidiary/group entities.

The list of the 20 top-paid CFOs was compiled separately by Mercer’s Executive Compensation Research Unit, based on proxy data filed by 350 of the largest U.S. companies as of April 1. Total compensation is based on salary, bonus, options grants, long-term incentive payments, and the value of restricted stock at the date of grant.

The 2006 Finance, Accounting & Legal Compensation Survey supplies a full range of compensation data on salaried employees in the finance department. The price of an online copy is $675 for participants and $2,025 for nonparticipants. The price of a hard copy is $775 for participants and $2,125 for nonparticipants. Additional pricing is available for multiple copies. To obtain a copy, go to http://www.imercer.com
or call (800) 333-3070.