Pay reflects significant gains in cash compensation
Mercer’s latest analysis of compensation for CFOs at 159 companies in the S&P 500 shows that total direct compensation (TDC) increased a median 6.7% in 2014 compared to 5.6% in 2013. All pay elements increased in 2014: short-term incentives (STI) led the way with a median increase of 8.0% followed by long-term incentives (LTI) and base salary at 7.2% and 3.2%, respectively. While these pay elements increased in 2013 as well, growth rates were generally lower across the board.
Median base salary increased to $624,000 while the median for CFOs at S&P 100 – the largest of the S&P 500 companies – rose to nearly $800,000. STIs experienced a strong year-over-year increase of a median 8% in 2014 compared to 3% in 2013. STIs for CFOs at the S&P 100 were nearly double those of smaller firms ($1.25 million at S&P 100 vs. $630,000 at the Other 400).
According to Ted Jarvis, Mercer’s Global Director of Executive Compensation Data, Research, and Publications, “This difference is a result of larger companies paying larger base salaries as well as larger companies setting target STI at a higher percentage of base salary.” In 2014, the median STI target as a percentage of base salary at the S&P 100 was 100% compared to 85% at the Other 400.
In general, corporate results were strong in 2014 with most companies surpassing target goals. For the S&P 500, median STI as a percentage of target was 122%. “Bonus payouts for the CFO and other top executives at most organizations were largely based on corporate results,” said John Cummings, a Principal with Mercer specializing in executive compensation. “Companies and investors are paying significant attention to ensuring that payouts are aligned with corporate performance levels that boost share prices.”
Last year, LTI increased a median 7.2% to nearly $1.8 million. A large gap exists in LTI values between the S&P 100 and Other 400. In 2014, CFOs at S&P 100 companies received a median $4.1 million compared to $1.5 million for CFOs as the Other 400. “This disparity in LTI values impacts pay mix significantly, accounting for a noticeable difference among CFOs at the S&P 100 compared to Other 400,” said Mr. Jarvis. “At the Other 400 companies, the equity-to-cash split is approximately 55% to 45%, while at S&P 100 companies the mix is about 70% to 30%.”
Continuing a trend established several years ago, more companies are granting performance-based LTI. Eighty-seven percent of companies used some kind of performance-based LTI in 2014 compared to 82% in 2012. Meanwhile, both stock options and service-vesting restricted shares have been slowly declining in prevalence. Sixty-six percent of companies granted stock options in 2014 (down from 70% in 2012) and 62% of companies granted service-vesting shares (down from 67% in 2012). “Similar to trends for CEOs, performance-based LTI continues to gain favor in the market,” said Mr. Jarvis.
Most companies continue to grant a portfolio of LTI awards, rather than granting only one LTI vehicle. The most prevalent LTI vehicle in 2014 was the combination of stock options, performance-based and service-vesting LTI, used by 31% of companies. While this combination has been the most prevalent the past few years, its use has been declining (down from 36% in 2012). Meanwhile, the use of two LTI vehicles has been increasing in prevalence, utilized by 54% of the companies in 2014 compared to 49% in 2012. Of the two-vehicle portfolios, stock options combined with performance-based shares were the most prevalent (26%), followed by service-vesting and performance-based shares (21%). “While the use of stock options has gradually decreased in recent years, they are still commonly granted in combination with at least one other LTI vehicle,” said Mr. Cummings. “This approach rewards executives for share appreciation while also keeping program risk and share dilution in check.”
CEO vs. CFO pay
The pay gap between CEOs and CFOs continued to shrink in 2014. As a percentage of median CEO pay, compensation for CFOs increased to 35% in 2014 from 32% in 2012. “A number of factors are likely at play, but the chief impetus may be pressure on the CFO position due to increased regulatory requirements and focus on financial risk,” said Mr. Jarvis. “To a lesser extent, proxy advisors’ scrutiny of CEO pay doesn’t extend to CFO pay which may fly below the radar. Thus, demand for qualified CFOs pushes up their compensation while scrutiny by governance watchdogs tends to curb that of CEOs.”
The narrowing gap may also reflect an elevation in the CFO’s status. According to Mr. Jarvis, the role is viewed increasingly as a strategic one rather than simply tactical. “I don’t predict there will be pay parity between the roles, but the prestige of the CFO role has risen since the onset of the current economic recovery.”
Mercer’s analysis is based on compensation data from 32 S&P 100 companies and 127 other companies in the S&P 500 (Other 400). In 2014, median revenue for these companies was $11,686 million.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in more than 40 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With 57,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.
# # #