Compensation for CFOs and other senior finance executives is climbing as demands sharpen across a broad spectrum of responsibilities.
When describing his role as CFO of Big Lots Inc., Joe R. Cooper begins by explaining the $4.2 billion retailer's branding efforts. He quickly summarizes a national television marketing campaign and runs through Big Lots' Web site. He then moves on to outline the company's merchandising and supply-chain initiatives. "The finance organization here is involved in all aspects of the business," explains Cooper, who was promoted in February from the post of vice president and treasurer. "We're highly involved in planning strategic initiatives, targeting the desired returns of those efforts, communicating their objectives and helping to hold the business accountable for the results of the initiatives."
That said, over the past year, Cooper -- a former Big Four auditor -- has greatly increased the amount of time he spends flexing his CPA skills because he's been overseeing Big Lots' compliance with the Sarbanes-Oxley Act. "It's not as if you get to relax your attention on the strategic side of the business or on your operations" as a result of regulatory demands, he explains. "You just need to commit more energy to the control side."
Cooper was drawn to Columbus, Ohio-based Big Lots four years ago by the variety of challenges his job encompasses; the importance the company places on its finance function; and the leadership qualities of then-CFO Mike Potter, who has since ascended to CEO. This kind of mutual attraction between well-rounded CFOs and organizations that highly value finance is common, according to the results of Business Finance's 2004 Finance Executive Career & Compensation Survey, which was sponsored by Ajilon Finance. The responsibilities of top finance executives continue to expand -- and their compensation is keeping pace.
Sixty-one percent of CFOs who participated in the Business Finance survey earned more in 2003 than they did in 2002, and 44 percent of CFOs expect their earnings to rise again in 2004. Half expect to earn about the same amount that they made in 2003, and only 6 percent predict that their pay will fall this year. Among all survey respondents, most of whom have senior-level titles (see Methodology on page 27), 62 percent saw a compensation increase in 2003, and 59 percent anticipate another jump this year (see graph 2, below).
These findings do not surprise Neil Lebovits, who is president and COO of managed services, consulting and staffing firm Ajilon Finance, Office & Legal in Saddle Brook, N.J., even though few (if any) other corporate functions have seen steady compensation increases over the past few years. "Every finance department was asked to do more with less during the recession," Lebovits notes. "When Sarbanes-Oxley appeared, finance was asked to do even more with even less. And the risk associated with upper-level finance positions increased. Now CFOs and, frankly, even strong divisional controllers want to get paid for the risk of signing their lives away."
Sarbanes-Oxley's quarterly certifications and the subsidiary certifications many divisional controllers are signing -- added to soaring workloads and a reduction in resources -- warrant higher pay, Lebovits argues.
"The big story," he emphasizes, "is that there is a demand for increased compensation among finance executives and that demand is being met. You definitely see more and more creativity in how companies are compensating senior finance executives. They're not being cheap about it."
Cost Cutting Takes a Back Seat
The survey's other good news is that cost management is no longer finance executives' top priority; this shift may signify a strengthening of the economic recovery. Instead of belt tightening, most survey respondents are focusing on revenue growth, strategic planning, merger-and-acquisition (M&A) activity, and financial reporting processes. Governance and regulatory concerns, which were hardly mentioned in previous years' surveys, are also garnering attention.
In Business Finance's 2003 survey, almost 40 percent of CFOs identified cost reduction as their top priority for the coming year. This year CFOs identified revenue growth as their number-one priority and ranked mergers and acquisitions second. Only 11 percent expect cost cutting to be their primary focus during the next 12 months (see graph 3 on page 24). In addition, when asked which aspect of their job will be the most important driver of their future compensation, CFOs overwhelmingly chose creating shareholder value and strategic planning (see graph 4 below).
Seymour Burchman, senior vice president of Sibson Consulting in Princeton, N.J., points out that survey respondents' growing emphasis on strategic activities may reflect companies' renewed focus on top-line growth as the economy improves. "It also may signal even greater involvement by the finance people in running the business," he adds.
Executive recruiters such as Gary Kaplan, president of Gary Kaplan & Associates in Pasadena, Calif., report an increase in requests for finance executives with valuation skills as the recovery leads to a rebound in M&A activity. "This was a very quiet area for the past couple of years," he says. "Now we see that requirement in virtually every set of CFO specifications that we receive from clients."
However, CFOs in some industries must maintain the recession mind-set a while longer. "My number-one priority continues to be cost efficiency and trying to find cost savings," says Howard Garfield, CFO of Hillwood Development Corp., a Dallas-based real estate developer. The real estate industry, with its heavy reliance on job creation as a growth driver, tends to be one of the last sectors to suffer -- and one of the last to emerge -- from economic slowdowns. The challenges of the past 18 months, Garfield says, have required him to fall back on the fundamentals of his finance skill set.
The need for balance recurs as a theme throughout the survey results. Although CFOs are spending time once again on growth activities such as revenue management and M&A, they continue to cut costs, work on Sarbanes-Oxley compliance, improve financial reporting and raise capital. Today's CFO must exhibit a blend of strategic and transactional skills.
At Progress Rail Services Corp., a $1 billion subsidiary of Progress Energy based in Albertville, Ala., CFO David Klementz has spent roughly 30 percent of his time over the past year focused on financial software systems. A major data warehousing effort, for example, will improve the accuracy and availability of the financial and operational information Progress Rail Services executives use to guide the business. Evaluating IT investments may appear a more tactical than strategic task, but Klementz expresses the importance of paying adequate attention to both types of activities.
"You cannot meet the strategic goals you're paid to meet as a CFO unless you have the right management team, analytic tools and plans in place," he explains. "A strong IT focus or succession planning may have less of a direct link to the CFO's compensation, but the CFO can't achieve strategic goals without those other pieces in place."
You Must Comply
The survey results suggest that finance executives consider corporate governance and regulatory compliance to be just the sort of tactical chores Klementz is referring to. They are crucial for the company but are not, on their own, financially rewarding for the people who have to carry them out. A negligible portion of all respondents (7 percent), and even fewer CFOs (4 percent), pointed to governance and compliance responsibilities as the most important driver of their current compensation. And only 2 percent of CFOs and 5 percent of all respondents believe these duties will be a key determinant of their future earnings. Yet they are among survey participants' top four priorities for the coming year.
This bears out what many finance executives have already discovered: Regulatory compliance is a time-consuming necessity. Even though it may not boost an individual's bottom line, the documentation-heavy governance marathon must be run carefully. In fact, 65 percent of CFOs chose governance and compliance issues as the factor they would give the most importance if they weighed a job offer from another company (see graph 5 below). Regulatory concerns rated above compensation, the potential employer's financial performance and the position's location.
Progress Rail Services' Sarbanes-Oxley needs have dovetailed nicely with corporate efforts to integrate acquisitions into the organizational structure. Still, when Klementz tallies up all of the work that documentation, process flowcharts and testing of inter-nal controls have required of his finance team, he is surprised by the result. He estimates that compliance activities consume about 20 percent of his time, as much as 50 percent of his divisional controllers' time, and all of his internal audit director's time.
Despite anecdotal reports of extensive compliance efforts and the duties' high ranking on survey respondents' priority list, some observers worry about the fact that so few finance executives consider these activities to drive their compensation. Robert Rabidoux, a business professor with Argosy University in Sarasota, Fla., says governance's poor showing as a determinant of pay suggests that "the impact of federal legislation has not disturbed the status quo." If that's the case, Rabidoux says, Sarbanes-Oxley may "possibly be seen as a blip on the radar screen and not a [reason to] shift the behavior of finance managers."
Defusing the People Problem
Discussions with more than a dozen finance executives, recruiters and compensation experts reveal that human capital management is another nonstrategic activity that retains critical importance for finance executives. Only 4 percent of CFOs in the Business Finance survey said developing talent is the most important determinant of their earnings. However, 9 percent of all respondents chose this option as the top driver of their current compensation, and 13 percent selected it as the key factor affecting their future pay.
These results could suggest that lower-level finance managers overestimate the future impact of their coaching skills, but compensation experts don't think that's the case. Sibson Consulting's Burchman says that failing to pay attention to managing and developing employees is a key factor in turnover risk. He says organizations need to give this area more emphasis to ensure that employees with high potential remain in their ranks.
Mark Anderson, president of ExecuNet in Norwalk, Conn., predicts that the talent war which exploded in 1999 and then flamed out in 2001 will soon rekindle. "We're not quite going to return to the frenzy of 2000 -- which was probably one of the best times for executive employment -- but the need to manage, develop and retain top people clearly is going to increase," he says. "We definitely see that as one of the major challenges any corporation will face over the next five years."
This trend holds positive implications for senior finance executives' pocketbook, but it requires them to pay extra atten-tion to their management activities. The survey asked participants whether they consider themselves to be compensated equitably in light of the way corporate finance has changed over the past two years; 52 percent answered yes. CFOs and senior vice presidents of finance expressed the highest degree of contentment with their pay. Sixty-six percent of respondents with each of these titles answered affirmatively. Likewise, a majority of controllers (56 percent) and finance managers (58 percent) consider their compensation to be fair relative to their role's responsibilities and risks.
The looming problem is that satisfaction levels are much lower in the middle and bottom tiers of finance. When CFOs, treasurers, vice presidents, controllers and finance managers are removed from the calculation, a majority of survey respondents -- 55 percent -- are unhappy with their earnings. And although staff-level titles represent only 15 percent of all respondents, those people consistently expressed displeasure with their pay. Eighty percent of tax managers, 70 percent of financial analysts and 65 percent of accounting managers believe their compensation is insufficient.
The reasons for this discontent appear to vary in accordance with the size of the respondent's pay package. Higher earners who are unhappy claimed their compensation is inequitable because of the increase in risks attached to their position. Middle earners reported that their salaries have not kept pace with the expansion of skills their job demands. Lower earners indicated that their paychecks have not kept up with surging workloads (see chart 6b, below).
While finance executives may write off some of this displeasure as standard bellyaching, those who ignore it altogether may be courting sizable turnover. Many companies that have boosted CFO compensation have failed to extend increases deeper into the organization.
"Those [lower-level finance] people are extremely frustrated," Lebovits reports. "When we talk to people to see how open they'd be to being recruited, we'll get an 80-plus percent acceptance rate. People have been asked to do way too much, and in the mid to lower level of finance departments it has been a double whammy. They've faced everything the rest of the company has faced, and now they have a large amount of extra compliance work to do. And, thanks to the recession, they're sending their own faxes because they have less administrative support and spending more time wrestling with their systems because they have less IT support."
Proactive organizations have recognized that unemployment -- despite recent portrayals in the general media -- is right at a 50-year average. "As soon as job creation really comes into its own, there is going to be a massive talent war," Lebovits warns. "Many companies cannot afford any defection or any drops in productivity. And productivity will decrease."
Progress Rail Services and Hillwood Development are among the companies firing preemptive strikes to prevent future talent battles. So is transportation services provider Yellow Roadway Corp., based in Overland Park, Kan. Don Barger, that company's senior vice president and CFO, assigns rising finance managers the task of planning quarterly meetings attended by his function's top 40 executives. Barger uses the meetings as a dual opportunity to communicate priorities and develop his staff.
"When we continue to ask staff to do more with less, people skills and personal management are critical," says Hillwood's Garfield. "The pressure that finance departments are facing to cut costs, be better with their numbers and increase their reporting under the new SEC rules is taking a huge toll. Consequently, I spend more time coaching than I did in the past."
Progress Rail's Klementz does, as well. He points to the stricter regulatory environment as a motivation for strengthening his management, development and recruitment efforts. "In a billion-dollar organization, I can only have knowledge of so much, yet my exposure is huge," he says. "The only way for me to address that is to be comfortable with the level of competency, sophistication and commitment in my organization. I find that I'm taking a harder look at the people I have." He is also augmenting his department's internal audit, treasury and analysis teams, because they have not received staffing increases in the recent past.
Big Lots' Cooper addresses personnel concerns by taking an active approach to succession planning. Before his recent promotion, he set out a definitive plan to help his vice president of strategic planning, Tim Johnson, "be prepared for the next step, not knowing exactly when that would be." Johnson assisted him with the company's investor relations. Then, when Cooper moved up to CFO, he promoted Johnson to the IR role. "You can't give your team specific timetables, but you can give them the tools and the mentoring they need to grow," Cooper notes. "When it's time, they're ready. In the finance team, we're very focused on ensuring that we're prepared."
At San Jose, Calif.-based Cisco Systems Inc., Mike Bender, director of finance IT investment management, has been coaching his team on the IT financial management equivalent of long-distance running. "I've really focused on keeping the team motivated and on having patience," explains Bender, who is the controller for Cisco's $1 billion-plus annual investment in IT. "We have fewer resources, but we have more, and bigger, fish to fry." The key for Bender is identifying how his employees can support the corporation's move from a functional orientation to a process orientation.
"Everyone on my team can come up with complex financial analyses, but what they love is the interaction with business managers," Bender notes. "The business managers will ask them anything, and the team often fields questions on topics outside the normal scope of financial responsibility. They become an independent, third-party validation for the business managers. We're their trusted advisers."
Adaptability Is Essential
The term "trusted adviser" seems to be a fitting -- and popular -- description of the CFO position's expanding mix of strategic and transactional responsibilities. Executive search consultants report that their clients are looking for a broad range of skills. And finance executives seem to be delivering. Despite the accounting blocking and tackling that Sarbanes-Oxley requires, 74 percent of CFOs who responded to the compensation survey consider themselves to be more focused on management activities than on transactional tasks.
Barger, a seasoned CFO and former controller with a Wharton MBA, describes the CFO's role in four parts: business partner to the line organization, trusted adviser to the CEO and to the line organization, tone setter at the top of the finance function, and developer of talent. However, he adds, "you may emphasize one of those aspects more than the others, depending on the business cycle, the economy or the political environment." When, for example, Yellow acquired rival Roadway last year, Barger's "trusted adviser" duties assumed a new prominence. "That's when, as CFO, you have to stand up and give your own opinion and be counted upon," he says.
Privately owned software firm Business Engine, based in San Francisco, counted on its former finance chief, Doug Dickey, to wear many hats. He was recently promoted to president and CEO; however, until last month, he was not only interim CEO, but also CFO and executive vice president of operations. Dickey is a former Oracle executive and a CPA, and he served at one time as a senior manager with PricewaterhouseCoopers. He believes the CFO's role returned to its roots over the past few years.
In the mid-1990s, many finance executives "were very focused on their stock price and on things which, on the surface, added to shareholder value but did not create long-lasting shareholder value," Dickey notes. "Now I think those people have come back around to a more traditional understanding of the CFO role. When companies start looking at survival, they fall back to the basics: How are we structured? How do we make money? How do we lose money? How are we doing against our peer group?"
As recently as 2001, Business Engine needed its CFO to be a deal-maker "charged with positioning the message of the company for additional funding or for going public," Dickey explains. But the organization's need for valuation and negotiation skills subsided quickly with the onset of the recession, and Dickey's role shifted toward more traditional CFO duties; he became more of a transactional disciplinarian. Late last year, as the economy started to rebound, his focus began shifting again. He is now expected to split his attention between traditional CFO activities such as cost man-agement and the strategic responsibilities prominent on his agenda several years ago. This new mix of duties is evidenced by the flow of Business Engine board meetings. Through the first two hours of those meetings, Dickey fields questions about operations and performance. Then, once the board members are confident that the company is on solid footing, they spend the second half of the meeting discussing strategic planning and growth.
Barger and Dickey agree that top finance managers must be prepared for companies' ever-changing demands. Dickey says he would not have been hired by Business Engine if he had not possessed impressive deal-making credentials. But he would not have remained with the company through the recession if his skill set was not packed with operations experience and finance and accounting fundamentals.
"There is something to be said for being adaptable and being able to adjust your priorities to the environment," Barger says. "It's a case of emphasizing one part of your CFO skill set at a particular time over another. A recent example is the need for setting the tone at the top in light of Sarbanes-Oxley. That part of my role has taken on more importance."
Holistic Finance
The Business Finance survey results suggest that the highest-paid CFOs are strategic business partners who continue to utilize the transactional tools in their skill sets. CFOs who described their job as management-oriented or mostly management-oriented posted an average compensation of about $230,000, while those who described their role as transaction-oriented or mostly transaction-oriented posted an average compensation below $175,000.
Professor Rabidoux, a former CFO, believes that finance executives' compensation will continue to reflect the expanding skill set that those positions require, as well as the additional risk they entail. He says the current expectations of industry, creditors and the investing public require companies to find a "holistic" CFO.
Lebovits seconds this notion. He says Ajilon's clients want "everything" when they seek candidates for high-level finance slots. Prospects must be able to help grow the business, play a key role in M&A activity, talk to Wall Street, keep costs down, and skillfully handle compliance and financial reporting.
These specifications increasingly describe the expansive responsibilities of CFOs like Cooper, Dickey, Barger and Klementz. To meet their organizations' growing demands, Cooper says, finance executives must collect as much varied experience as possible and must embrace the challenge.
"Over the next 12 months, I will focus on continuing to develop my team and ensuring that we're complying with Sarbanes-Oxley," the Big Lots CFO explains. "But I'll spend just as much -- if not more -- time helping the company execute our strategic plan. There is a big role for finance here."