CFO pay rises, but subjective bonuses rankle finance chiefs

CFO pay is rising steadily, but some finance chiefs are not happy with how their bonuses are determined.

Median CFO compensation in 2012 increased 6% relative to 2010, according to the 2013 CFO Compensation Survey, which was released by the American Institute of CPAs and Arizona State University on Monday.

The largest compensation increases went to chief executives, presidents and COOs, whose pay declined the most in the recession, according to the survey, which is conducted every other year and is based on responses from 2,300 executives, mainly CFOs.

The increase in median compensation for chief executives, presidents and COOs in 2012, relative to 2010, was 35%. Compensation is defined as salary and bonus.

Subjectivity and satisfaction

Since 2006, median CFO pay has risen 18.75%, compared with an 11.1% rise in median pay for chief executives, presidents and COOs, according to the survey. CFO pay has not experienced the ups and downs of chief executive pay. Instead, finance chiefs’ pay has increased slightly each year, which could be a reason, according to another survey, that CFOs in general are happy with their jobs.

CFOs expressed less satisfaction if their annual bonuses were awarded subjectively. The practice of subjective bonuses is more common in smaller, private US companies, according to the survey, which was conducted by Michal Matêjka, a professor at the W.P. Carey School of Business at Arizona State.

The proportion of subjective CFO bonuses in private companies has decreased over the years, but that proportion remains relatively high compared with other countries, according to the survey.

On average, CFOs in private companies have 58% of bonuses contingent on meeting financial performance goals, 13% contingent on explicit non-financial targets such as customer satisfaction or safety targets and 27% awarded subjectively. The remaining small percentage is funded in other, unspecified ways.

Heavy use of subjective bonuses led to low satisfaction for CFOs about the design of their compensation packages. The survey found that highly dissatisfied CFOs had 40% of their bonus awarded subjectively, compared with 25% for satisfied finance chiefs.

The report offers three ways companies can limit subjectivity in CFO bonus plans:

• Greater use of objective non-financial targets: Matêjka says that using a measure such as customer satisfaction, market share or clicks to the company website can be effective. "You tell people at the beginning of the year, this is the expected level of performance," Matêjka said. "They know what the game is. They know what’s expected, and they know whether they’re on track. They may not meet it, but at least they know from the beginning how the bonus is going to be constructed."
• Greater involvement of corporate boards in determining CFO compensation: Matêjka believes that when boards have a say on executive pay, chief executives are expected to put more structure into a CFO’s incentive plan.
• The use of bonus pools, which are funded only after specific company financial objectives are reached: "You specify in advance what the conditions are for bonuses to exist," Matêjka said.

Matêjka said some subjectivity is needed in the awarding of bonuses. For example, a bonus that depends on performance relative to a group of industry peers may have to be determined at the end of the year as information about company and peer performance becomes available.

Why involvement of boards is important

The survey showed that 37% of corporate boards in private companies had considerable influence on CFO compensation, compared with 70% of corporate boards in public companies.

Board influence, the survey found, was associated with a lower reliance on subjective bonuses and greater involvement of CFOs in key decisions. In companies where the board had a high influence on CFO pay, 40% of CFOs reported that they were highly involved in major business decisions, compared with 31% in companies where the board’s influence was low.

"The results suggest that active influence of the board of directors on CFO compensation may have some benefits," the report says. "Greater influence may possibly result in a greater interaction between the board and the CFO, which may in turn elevate the CFO position" and allow for a greater involvement of the CFO in major business decisions.

Related CGMA Magazine content:

"Growth, Company Size Go a Long Way in Determining CFO Pay": US companies that grew by 50% or more in the three years before April 2012 increased CFO pay by an average of 20.2%, according to a fall 2012 report. For CFOs at companies that grew less than 10%, average pay increased 0.9%.

"CFO Pay Increases, but CEO Pay Climbs More": Pay for CFOs of S&P 500 companies rose nearly 6% in 2011, and numbers compiled by Mercer show a continued shift to more variable compensation. CFOs received a median $2.75 million in 2011, and those at the top 100 companies made an average of $4.34 million.

—Neil Amato (namato@aicpa.org) is a CGMA Magazine senior editor.