Although CFO pay in companies listed in the Standard & Poor's 500 Index increased nearly 6% last year, there is a two-tiered approach to compensation emerging among these companies. Among the 100 companies that make up the top of the S&P 500, the gap between CFO pay and CEO pay is increasing. However, companies in the so-called "other 400" -- those companies in the S&P 500 but not in the top 100 of the index—are seeing the gap between CEO and CFO compensation narrowing, according to an analysis conducted by compensation consulting firm Mercer.
First, let's look at CFO pay itself. As you see below, median pay has increased but the percent of that pay coming in the form of guaranteed salary has declined.
|Median CFO Pay* 2011 (percentage increase from 2010)||Median CFO Salary 2011||Percentage of total pay as salary 2009||Percentage of total pay as salary 2011|
|S&P 500||$2.75 million (5.9%)||$559,000||27%||24%|
|S&P 100||$4.34 million (5.5%)||$704,000||26%||22%|
|S&P "Other 400"||$2.56 million (6.1%)||$542,000||29%||25%|
* CFO pay includes salary, actual short-term incentive payout and grant-date expected value of long-term incentives
As companies increase the portion of variable pay in CFOs' pay packages, the mix of incentives is also shifting. The typical mix of long-term incentives available to CFOs includes stock options, restricted stock and performance awards (either in cash or shares). However, the relative emphasis on those vehicles is changing. For example, performance awards in particular have been growing significantly in popularity, with 64% of S&P 500 CFOs eligible for these awards in 2011 compared to 55% in 2009. The prevalence of performance awards is even greater for CFOs of S&P 100 companies, with 71% of these companies offering these awards to CFOs in 2011 compared to 59% in 2009.
The growth in performance awards reflects companies' focus on creating rewards that are based on a mix of the market price of the company's stock and non-market-based operational and other non stock-based performance metrics that are important to a company's long-term health.
As performance awards have become more common and prominent in CFOs' pay mix, the use of stalwarts like stock options and time-vesting restricted stock has declined somewhat, especially among S&P 100 companies:
|S&P 500 2009||S&P 500 2011||S&P 100 2009||S&P 500 2011|
|Use of stock options||74%||72%||78%||74%|
|Use of time-vesting restricted stock||58%||57%||59%||55%|
Now, let's compare CFO salary levels to salaries for the CEO using another Mercer analysis. The analysis shows that CFOs of S&P 100 companies have a median salary that is 50.7% of the median salary for CEOs among this group of companies, and the gap has been increasing for the past couple of years. By contrast, the gap between CFO and CEO pay among the "Other 400" S&P companies has closed somewhat to 54.2%. Here is a rundown of how this gap is playing out in other aspects of CFO pay:
Target annual incentives are 45 to 50 percentage points lower for CFOs than for CEOs. CFO payouts in 2011 were approximately one-third of CEO payouts.
Total cash compensation (salary plus earned bonus) shows that CFO total cash compensation is approximately 40% of total cash compensation for CEOs.
Long-term incentives: CFOs received grants that are approximately one-fourth of the value granted to CEOs.
Median total direct compensation (total annual compensation plus expected value of long-term incentives): CFOs have 76% at-risk pay (non-salary), compared to 84% for CEOs. This is generally because CEOs have a greater share of compensation from long-term incentives -- 59% for CEOs compared to 53% for CFOs.
Experts suggest that if this gap between CEO and CFO pay continues, it could be a turnoff to institutional shareholders and otherwise indicate problems with corporate governance. For these reasons, companies with a significant gap would be well served to evaluate why the gap is occurring and whether and how it should be addressed.