Mercer’s latest analysis of compensation and benefits for CFOs at companies in the S&P 500 reveals total direct compensation (the sum of base salary, short-term payouts and expected value of long-term incentives) for CFOs rose 7% in 2013 to a median $3,131,000. Strong corporate profitability accompanied a median 2% increase in total direct compensation for the S&P 500 CFOs in 2012, and the 2013 data reflect stronger pay in light of relatively similar year-over-year corporate performance. Revenues grew 3% in 2012 and an additional 3% in 2013, and profitability measured by EBIT, improved 5% in 2013 (compared to 4% in 2012).
Compensation mix has remained stable from 2011 to 2013, the period studied in Mercer’s analysis. Each year, 22% was paid in base salary and another 21% in short-term incentives with the remaining 58% of total direct compensation granted in long-term incentives. For the largest companies in the sample – the S&P 100 – the pay portfolio was leveraged substantially more, with base salary representing 17% of total direct compensation in 2013 (16% in 2011 and 2012) and long-term incentives making up 64% in 2013 (66% and 65% in 2011 and 2012, respectively).
“The high variable leverage is expected to continue,” said Stephen Mork, Partner with Mercer’s Executive Rewards practice. “Pressure from shareholder advisory services and advocacy groups, as well as repercussions from say-on-pay votes and stockholders’ increasing access to pay information, combine to ensure that variable pay continues to be a key driver at the executive level. And this is not limited to the US -- similar pressures in attempts to manage executive compensation are seen globally.”
Base salaries, short-term incentives and annual cash compensation
Annual cash compensation increased 6% to a median $1,221,000 in 2013. During that period, base salaries rose 3% to a median $600,000 and short-term incentive payouts grew 6% to a median $651,000. The short-term payout represented 13% premium over target incentive levels reflecting in large part the strong profitability registered by the S&P 500 in 2013. Median target short-term incentives were $530,000 in 2013. As a percentage of base salary, targets have escalated over the past three years, from a median 85% in 2011 to 90% in 2012 and 2013. For companies in the S&P 100, median targets were 100% of base salary; the smaller companies in the S&P 500 typically targeted short-term incentives at 85% of salary (80% in 2011).
“The largest companies tend to set the trends,” said Ted Jarvis, Mercer’s Global Director of Data, Research and Publications. “Accordingly, targets for the smaller companies should continue to rise, however it’s less clear if the larger companies are likely to increase their targets much further.”
Median targets at S&P 100 companies have remained at 100% for each of the past three years, and the 75th percentile, like the median, has been stable over the same period at 125% of base salary. “There may be an institutional reluctance among companies in the S&P 100 to surpass their current goalposts,” explained Mr. Jarvis.
Performance shares and option usage
The grant date present value of long-term incentives for CFOs grew 4% in 2013 to a median $1,835,000. The prevalence of performance shares or performance cash awards continued rising, offered to 45% of all CFOs in the S&P 500. Prevalence was even higher in the S&P 100 (47%) indicating that the largest companies may be setting the trend for industry as a whole. In 2011, performance shares or units were granted to 37% of the S&P 500 (42% in 2012). The increase in performance awards was offset by a decline in option grants from 34% in 2011 to 28% in 2012 and 25% in 2013.
Over one-third of S&P 500 companies grant a portfolio of options, restricted stock (or restricted stock units) and performance awards. Performance awards, when part of the mix, constitute the largest portion of the expected value (41% when combined with both options and restricted shares, 57% when combined with restricted shares and 63% when combined with options). Granting only one type of long-term incentive is uncommon with 4% granting options alone, 4% granting only restricted stock and 9% granting exclusively performance awards. Even as options’ weight in the mix decreases, there is little reason to suspect they will disappear altogether or that performance shares will become the sole long-term incentive vehicle.
CFO vs. CEO pay
At median, CFOs received 34% of the compensation awarded to CEOs in 2013 – roughly unchanged from 2012 and only slightly above 33% in 2011. “Although the CFO frequently is the second- or third-highest paid executive in the corporate hierarchy, this differential is historically fairly stable since 2006, when changes to the proxy rules facilitated valid side-by-side comparisons of CEO and CFO pay,” said Mr. Jarvis.
The lower compensation is not the only way CFO compensation differs from that provided to CEOs. “CFO compensation is not CEO compensation writ small. The components are the same, but the base-to-variable leverage is considerably lower,” said Mr. Jarvis.
Whereas base salaries comprised 14% of CEO pay in 2013, it was 22% of CFO pay. The difference was entirely in the form of long-term incentives which accounted for 67% of a CEO’s pay in 2013 but only 58% for a comparable CFO.
”The disparity between long-term incentive opportunities also points to a key difference in CEO and CFO responsibilities,” said Mr. Jarvis. “While both functions greatly influence the long-term success of a company, the CEO’s role is paramount in establishing a long-term strategy to meet that goal. Accordingly, the weight allotted to long-term incentives in the CEO’s overall compensation mix is larger. The similar weight given to CEO and CFO short-term incentive opportunities, on the other hand, reflects the roles’ closely aligned commitment to realizing short-term objectives.”
However, in time CFO compensation may begin to resemble CEO pay. “So far, scrutiny of executive pay has been primarily at the CEO level, but it could expand to include the variable pay elements for CFOs. As a consequence, the pay structures for the two executives will become more closely aligned,” said Mr. Mork. “Specifically, the portion of CFO pay allocated for base salary will shrink and the portion allocated for long-term incentives will grow. This is an outcome of the increasingly strategic role played by CFOs.”
Mercer analyzed proxy disclosures for the S&P 500 that disclosed compensation data for 2011-2013. Year-over-year percent changes are calculated on a company-by-company (rather than median-to-median) basis. To download the survey results, visit http://www.mercer.com/newsroom/us-cfo-compensation-2013.html.
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