Are CFOs overpaid? And how does a company determine what to pay its chief financial officer?

Look at what it shells out for the chief executive. Or at least that’s the conclusion of a study of CFO pay conducted by veteran compensation expert Graef Crystal.

Crystal, a self-styled executive-pay gadfly who for years has irked, jabbed, and enraged corporate managers over their compensation, these days uses a column for Bloomberg as his stage.

In a review of 73 CFOs of U.S. companies with 2001 revenue of at least $8 billion, Crystal concludes that if a CEO is overpaid, then it’s likely the CFO will be overpaid as well.

“Big companies pay CEOs more, but according to regression analysis I did for these companies, the most important factor in determining whether a CFO was overpaid or underpaid was how much his boss earned,” writes Crystal.

Crystal says he defined pay as average annual compensation over three years and included base salary, annual bonus, free stock grants, the estimated present value of stock option grants, other long-term incentive payouts, and miscellaneous compensation. He mostly looked at the period from December 31, 1998, to December 31, 2001.

Crystal notes that differences in company size, as measured by three-year average revenue, accounted for 19 percent of the variation in CFO pay. Interestingly, though, he claims differences in company performance didn’t change anything.

One key factor pushed that 19 percent figure to 76 percent, however. The culprit? The percent by which a company’s CEO was overpaid or underpaid, based on Crystal’s prior review of pay for CEOs of 180 major U.S. companies for the same three-year period.

Crystal also states that the CEO study concluded that the only explanation for the way CEOs are paid is that board compensation committees appear to give them whatever they want.

Take Mark Swartz, the former CFO of Tyco International who was recently indicted for fraud. Crystal argues that based on Tyco’s three-year revenue, the “going rate” for his job was $4.1 million a year. However, Swartz’s three-year pay worked out to $59 million a year, putting him 1,052 percent over the market rate.

His former boss, Dennis Kozlowski, earned 619 percent over the market rate. Crystal points out that if Kozlowski’s pay overage is used to explain Swartz’s pay overage, then Swartz turns out to be overpaid not by 1,052 percent, but by a mere 273 percent.

“So, if the CEO is overpaid, then the CFO is apt to be overpaid, too,” Crystal concludes. “But not quite to the same extent.”

Here is Crystal’s list of the 15 most (relatively) overpaid CFOs for the December 1998 to December 2001 period studied. The list includes the CFO, company, average annual total pay, and percentage above the market norm. Four of the 15 finance chiefs are no longer with their companies—Swartz, WorldCom’s Scott Sullivan, Sun Microsystems’s Michael Lehman (retired,) and Verizon’s Frederic Salerno.

• Mark Swartz, Tyco International, $59 million, 1052 percent
• Jeff Henley, Oracle Corp., $10.8 million, 281 percent
• Larry Carter, Cisco Systems, $13.9 million, 231 percent
• Scott Sullivan, WorldCom, $16.5 million, 179 percent
• Richard Kelson, Alcoa, $10.6 million, 149 percent
• Michael Rose, Anadarko Petroleum, $4.7 million, 143 percent
• David Viniar, Goldman Sachs, $11.4 million, 117 percent
• James Stewart, Cigna Corp., $8.4 million, 105 percent
• Jack Wyszomierski, Schering-Plough, $5.5 million, 101 percent
• Arthur Krause, Sprint, $8.7 million, 90 percent
• Charles Golden, Eli Lilly, $5.4 million, 85 percent
• Michael Lehman, Sun Microsystems, $6.4 million, 77 percent
• Thomas Chewning, Dominion Resources, $4.2 million, 64 percent
• James Daley, Electronic Data, $6.8 million, 63 percent
• Frederic Salerno, Verizon, $12.9 million, 59 percent

And the 10 most relatively underpaid CFOs for the same time period and sample group?

• Marvin Quin, Ashland, $1.1 million, -54 percent
• Edward McIntyre, Xcel Energy, $1.4 million, -56 percent
• William Stivers, Weyerhaeuser, $1.5 million, -57 percent
• John Gibbons, Valero Energy, $1.3 million, -59 percent
• Jeffery Howells, Tech Data, $1.6 million, -60 percent
• Richard McCook, Winn-Dixie Stores, $1.3 million, -60 percent
• Richard Galanti, Costco Wholesale, $1.9 million, -65 percent
• Fred Corrado, Great Atlantic & Pacific Tea, $1 million, -66 percent
• James O’Donnell, Conagra Foods,$1.7 million, -66 percent
• Jack Liu, Schlumberger, $948,000, -68 percent

SEC to Discuss International Impact on New Rules

The Securities and Exchange Commission said it will hold two interactive roundtable meetings on December 17 to discuss the international impact of proposed rules on auditor independence and attorney conduct.

The commission said the discussions will give the international community an opportunity to sound off on their views of the rules, which are part of the package of directives from the Sarbanes-Oxley Act.

Panel participants will include luminaries representing regulators, standard setters, the accounting profession, professional associations, law firms, foreign issuers, and U.S. issuers with operations abroad, including the European Commission, U.K. Accountancy Foundation, Ontario Securities Commission, and the Final Four accounting firms.

SEC Faces Opposition on Audit Rule

Meanwhile, the SEC is facing wide opposition to one proposed new rule: that public companies disclose how many financial experts they have on their audit committees.

According to Reuters, opponents are arguing that the rule places too much emphasis on formal accounting experience.

A number of companies, including Target, Morgan Stanley, and H.J. Heinz Co., have sent comment letters to the SEC making the case that chief executive officers from outside companies who serve on audit committees should be considered financial experts.

“We don’t have a quibble with the concept that members of the audit committee ought to have financial expertise,” Target general counsel Jim Hale told Reuters. “Our concern is, don’t exclude those people because they don’t have a degree on their wall that says CPA.”

Under the proposed rule, if a company’s audit committee lacks financial experts, the company’s management must say so.

Many of the opponents of the proposed rule are concerned that there may not be enough people who can meet the stringent requirements.

The SEC has reportedly defined an expert as being independent and having, from either education or experience, an understanding of generally accepted accounting principles and financial statements, experience in preparing or auditing financial statements and with internal accounting controls, and an understanding of audit-committee functions.

“We urge the commission to broaden the definition to encompass a broad range of relevant financial and accounting experience,” the New York State Bar Association reportedly said in its letter.

IASB Proposes New Merger Rules

The International Accounting Standards Board (IASB) proposed new rules regarding mergers, some of which have already been adopted by the Financial Accounting Standards Board (FASB).

The IASB had announced in July 2001 that it would undertake a project on mergers as part of its initial agenda, with the goal to improve the quality of, and seek international convergence on, the accounting for business combinations.

“Accounting for business combinations diverges substantially across jurisdictions,” said Sir David Tweedie, IASB chairman, in a statement. “These proposals mark a significant step toward achieving high quality standards in business combination accounting, and in ultimately achieving international convergence in this area.”

The key items of the IASB’s proposals:

• All business combinations would be accounted for using the purchase method. The pooling-of-interests method would be prohibited.

• Costs expected to be incurred as a result of a business combination to restructure the acquired entity’s (or acquirer’s) activities would be treated as postcombination expenses, unless the acquired entity has a preexisting liability for restructuring its activities.

• Acquired intangible items would be recognized as assets separately from goodwill if they meet the definition of an asset, and are either separable or arise from contractual or other legal rights.

• Identifiable assets acquired, and liabilities and contingent liabilities assumed, would be initially measured at fair value.

• There would be no amortization of goodwill or intangible assets with indefinite useful lives. Instead they would be tested for impairment annually, or more frequently if events or changes in circumstances indicate a possible impairment.

The IASB said it still has a few matters to address to eliminate remaining differences between international and national standards on business combinations. That list includes issues related to applying the purchase method of accounting. The IASB is currently engaged in a joint project with FASB to harmonize that treatment.

In addition, the IASB indicated it is looking at accounting for formations of joint ventures and business combinations involving entities under common control, as well as possible applications for “fresh start” accounting.

Short Takes

• On Thursday Standard & Poor’s pared its forecast for the year-end U.S. junk bond default rate to between 7 percent and 7.5 percent from between 8 percent and 8.5 percent. The credit-rating agency said the default rate fell in November to 7.84 percent from 8.38 percent in October.

• Chicago Mercantile Exchange Holdings Inc., the parent of the Chicago Mercantile Exchange, sold 4.75 million shares for $35 each, above the expected range of $31 to $34, in its initial public offering. The country’s largest future’s exchange raised $166.3 million in the underwriting.