Even at relatively small companies, it’s becoming more and more apparent that it pays to be a CFO.
For example, a company in the electrical and electronics industry and located in New York state had projected $157 million in revenues and an 11 percent profit margin in 2000. Poised to reap rewards for the company’s good performance,the CFO stood to earn $984,000 in total direct compensation, with a whopping $631,000 bonus topping off a base salary of $353,000.
And consider another CFO of an Ohio company in the heavy-equipment and transportation sector with a projected $187 million in revenues and an 11 percent profit margin. That executive was slated to earn a total of $758,000, consisting of a bonus of $439,000 and a base salary of $319,000.
Those senior financial executives were the top two CFO earners among the subjects of a recent study by Frederick, Md.-based Panel Publishers of overall executive compensation at firms with annual sales ranging from about $2 million to $200 million.
The survey, which looked at the compensation of the top five executives in 885 companies, was based on questionnaire replies completed in 2000 by 343 companies (including 289 private firms) plus compensation information from 542 companies (537 of them public) gleaned from 1999 proxy filings.
Unfortunately, Panel Publishers could not release the CFOs’ identities. Still, the results offer an unusual window to the compensation of CFOs at smaller companies and their pay as compared to others in the same industry and also to the other top executives at their firms.
Just who are Panel’s secret group of CFOs? Rounding out the top five, one who worked for a Florida-based, business-services firm was projected to have been paid $668,000 in total direct compensation, while one toiling for a Michigan-based electrical and electronics company was slated to earn $542,000.
The fifth highest CFO earner in the survey was projected to have a surprisingly heavy base salary in 2000. That CFO–whose company, which was based in New York state, recorded an astronomic 50 percent profit margin last year and $185 million in revenues–only stood to get a bonus of $161,000 to go with a base salary of $300,000.
Overall, the growth of CFO salaries at many small- and medium-sized companies reflects the economic expansion of the last few years. For instance, the median projected base salary for CFOs at companies that paid bonuses or incentives soared from $95,000 to $120,000 between 1997 and 2000. Over that time, median CFO bonuses slated at these companies fluctuated between $25,000 and $27,000. (See Table 3.)
What’s happened over the last four years is that CFO pay has been “tying into the business direction of these companies,” said Shawn Ogiba, a human resources consultant with The Segal Co., a New York City-based benefits and compensation consulting firm, who also worked on the survey.
Not unexpectedly, the survey also found an impressive rise in CFO stock option awards as a percentage of salary, starting at 129 percent in 1997, more than doubling in 1998 (276 percent), soaring into the stratosphere with 1873 percent in 1999, and coming back down to a more believable 248 percent last year. (See Table 4.)
Ogiba grants that the high options figure in 1999 might be represented by an “anomaly” in the survey, with a few outsized grants spiking the percentage, rather than a widespread upward trend. But that was also a year in which many new dot-coms were granting options, with other companies reacting to that trend in compensation, Ogiba notes.
Options Glow Dimming
With the current downturn in the economy, however, stock options and bonuses may have less appeal for CFOs. “To the extent that companies are not doing as well, we may see an uptick in base pay for CFOs,” whose work is being increasingly valued at smaller companies, says Howard B. Goldsmith, a contributing editor on the survey and a vice president of Segal.
“During an expanding stock market, executives are happy to take less base pay and more equity,” Goldsmith adds. “But as the economy moves to uncertain ground, people want their compensation in base pay rather than equity.”
That may be, but CFOs at smaller organizations were receiving healthy stock option grants in 2000 relative to other top executives, according to the survey. In fact, 58 percent of CFOs eligible for stock options were granted them. That’s the same percentage that eligible CEOs received.
Only top sales and marketing executives, with 60 percent, recorded a higher percentage of option grants. Fifty-two percent of eligible chief operating officers got options, while only 38 percent of top manufacturing and production executives got them. (See Table 6.)
Stock options weren’t the only area in which CFO compensation seemed to be closing in on that of their bosses. Among the firms surveyed, the median total direct compensation of CFOs as a percentage of that of their CEOs rose from 46 percent in 1997 to 56 percent in 2000. (See Table 2.)
“What’s happening is that there’s a recognition within this sized company that the CFO is becoming more and more a major player,” says Goldsmith.
Through their roles in acquiring other firms and in raising capital, CEOs are recognizing the CFO as a “real strategic partner for success,” Goldsmith says.
Published as the 2001 Officer Compensation Report by Pane1, the survey focuses on five top executive positions: CEO, chief operating officer, finance and accounting executive (CFO), sales and marketing executive, and manufacturing and production executive.
The report says most of the companies polled fall into one of two basic “market cycle stages.”
Stage-one companies tend to have a limited range of products, a regional focus and an emphasis on cash. Such companies also typically have “no management depth” and its executives make decisions “quickly and intuitively, without detailed analysis,” according to the report.
Stage-two companies face pressures that seem to beg for the skills of adept CFOs, a situation that’s been particularly true in the last few years.
Such companies, typically emerging from a regional to a national presence and paying a strong return on shareholder equity, are in the midst of quick, strong growth and an increase in their product lines. Cash, however, is in short supply.
At such firms, management is typically in the midst of a management shift “from founders to professional managers” and is engaging in “more formalized decision making.”