Senior finance executives are enjoying higher salaries and bonuses after juggling cost-cutting mandates, all-consuming compliance demands and growth challenges over the past two years.
For corporate finance executives, the past four years have been challenging. The accounting scandals, the recession, compliance with the Sarbanes-Oxley Act and continuing geopolitical uncertainties made for tough going within most corporate finance functions. Judging from the results of Business Finance's 2005 Finance Executive Career & Compensation Survey, finance leaders seem to have graduated from four years of hardship to new roles and new opportunities. Just ask Doug Bettinger, who at age 37 became the CFO of 24/7 Customer, a Los Gatos, Calif.-based offshore call-center services supplier with primary operations in Bangalore, India. Bettinger joined 24/7 Customer in November 2004 after a rigorous 12-year stint at Intel, which included three years in Malaysia. His intense compliance work at Intel, where he was corporate planning and reporting controller, combined with his immersion in Intel's business made him an attractive candidate to help run a rapidly growing global business, develop its compliance infrastructure and design a road map for taking the company public.
A rosy outlook and the promise of new opportunities like the one Bettinger seized are abundantly reflected in the results of Business Finance's 2005 Finance Executive Career & Compensation Survey, sponsored by Ajilon Finance. Twenty-five percent of CFOs who participated in the survey report that their total compensation increased by more than 10 percent from 2003 to 2004 (see graph 3 [1]). CFOs' median compensation rose from $195,000 in the 2004 survey to an even $200,000 in 2005 (see graph 1 [2]). In fact, median compensation rose across all job categories compared with the 2004 survey. CFOs expect to earn their higher salaries by devoting more attention to revenue growth in 2005. This objective remains their top priority, just as it was last year, but the proportion of CFOs who give "growing revenue" the number one spot increased by 20 percent over the previous survey.
Revenue growth results in better opportunities for career advancement, but it also requires a greater focus on hiring, managing and developing people -- a priority that CFOs in this year's survey describe as their third most important. Eighty-eight percent of all survey respondents consider their company's hiring outlook for the coming year to be moderate, good or excellent. And for the first time in three years, the survey shows that creating shareholder value is not the most important driver of CFOs' pay: 38 percent of CFOs point to "business and financial reporting/analysis/forecasting" as the top driver of their current compensation.
CFOs Emerging, COOs Fading
Bettinger's acceptance of 24/7 Customer's offer reflects the new opportunities opening up for top finance executives, but it also illustrates the value of the complete package of skills and experiences that CFOs are expected to possess. The board of directors at 24/7 Customer, which includes venture capitalist extraordinaire Michael Moritz of Sequoia Capital, former Andersen Consulting CEO George Shaheen and Google founding board member Ram Shriram, were attracted to Bettinger because of the business experience he amassed at Intel, which will help him guide the new business process outsourcing firm's growth.
Bettinger splits his time between a Silicon Valley office and Bangalore, where he has hired three senior finance managers, two of whom possess deep transactional accounting experience. He also expects to hire a compliance specialist, probably based in the United States, who will help ensure that the company is Sarbanes-Oxley compliant well before it files an S-1 form to go public.
"I'm familiar with what's required to run a large business," says Bettinger, who earned his MBA from the University of Michigan. "At Intel, [executives and managers in] the finance function gained a large amount of hands-on, 'what-should-we-do-with-the-business?' experience. In the back of my mind, I try to use Intel's CFO as my model of what I think a CFO should be doing. Andy Bryant is an incredibly solid guy."
"CFO Thought Leaders: Advancing the Frontiers of Finance" (Booz Allen Hamilton, 2005) is packed with similarly worthy role models for aspiring finance managers. It contains interviews with 17 leading CFOs, one of whom, Pfizer Inc.'s David Shedlarz, has been promoted to vice chairman of the pharmaceutical giant since he was interviewed for the book.
Vinay Couto, Chicago-based vice president at consulting firm Booz Allen Hamilton and one of the book's authors, says the timing is ripe for a closer look at the CFO role because recent portrayals of the position as a pressure cooker overwhelmed by compliance, demanding CEOs and strong boards miss a more important point. Many CFOs of progressive companies, Couto explains, have been making a transition beyond the role of trusted (but largely silent) adviser to what Booz Allen describes as a "strategic activist."
Bettinger was hired as much for his business acumen as for his compliance experience and finance and accounting skills. That's because today's CEOs face greater pressure and more demands on their time to grow the business. Plus, the COO position is fading. A recent Crist Associates report finds a "dramatic" decrease in the number of companies with COOs and indicates that only 14 of the 50 largest U.S. companies (based on market capitalization) currently have a COO. That leaves the CFO to take on greater line responsibility in the business; interact more closely with the board; and, as Couto notes in the book, "take on the most important elements of the corporate agenda such as driving double-digit growth, managing risk and executing a turnaround."
In short, CFOs are more engaged than ever before in designing, adapting and implementing their organization's business models, says Couto. That responsibility requires finance chiefs to identify and track the right financial and operational metrics so that measurement drives the behavior necessary to execute strategic objectives, suggests Minneapolis-based Robert L. Lumpkins, vice chairman and CFO at food and agriculture company Cargill Inc. in Minneapolis in a "CFO Thought Leaders" interview.
Klaus P. Stegemann, executive vice president and CFO of Siemens Corp., the electronics and engineering giant with U.S. operations based in New York City, points out in the book, "From time to time, the CFO is driven into a COO role, which presents some inherent conflicts." He adds, "First and foremost, the CFO has to make sure that everything is in compliance with rules and regulations. If there is a need -- and time -- the CFO can, and should, direct certain operational responsibilities." CFOs who responded to the survey apparently are making time for operations: a high 46 percent claim IT as a direct report.
Compensation Climbs, Bonuses Get Creative
Do-it-all finance executives like Bettinger and their hard-working staffs are being paid for their production, according to the survey. Sixty-eight percent of CFOs and 65 percent of all respondents report that their total compensation packages increased from 2003 to 2004 (see graph 2 [3]). The reported pay escalation exceeded the expectations of respondents in last year's survey. In 2004, 59 percent of all respondents and only 44 percent of CFOs indicated that they expected to earn more in 2004 than they did in 2003.
This year's survey respondents are also conservative in their estimate of how their 2005 salaries and bonuses will compare with last year's compensation; 53 percent of all respondents expect an increase, while less than half of CFOs expect to earn more in 2005 than they did in 2004. However, executive search consultants such as Neil S. Lebovits, president and COO of managed services for staffing firm Ajilon Finance in Saddle Brook, N.J., say anecdotal evidence points to higher 2005 salaries and bonuses than these finance executives expect.
An appropriate question about future compensation levels for CFOs seems to be how compensation is packaged. As Lebovits predicted in our 2004 survey, companies have grown more creative in how they pay their finance professionals. Bonuses, for example, are increasing in number and variety, in part because some public companies are required to begin accounting for stock options as an expense later this year. Overall, that requirement has reduced the amount of stock options companies are issuing, reports Chicago-based Judy Thorp, national partner in charge of KPMG LLP's compensation and benefits practice.
Paradoxically, governance-related pressure from investors and regulators is encouraging top executives, including CFOs, to keep more skin in the game for the long term by owning more stock in the company. That's creating an interesting dichotomy, says Thorp. She expects stock options to remain a key component of compensation packages at the C level despite the new accounting rules, but she also expects fewer stock options to be granted below the top level of public companies. "The financial impact is probably going to be too costly for companies that broadly awarded stock options to vice presidents and directors to continue to do so at the same level," Thorp predicts. As a result, long-term incentives tied to performance will likely increase.
CPA plus MBA, Compliance plus M&A
In the short term, CFOs' performance goals will focus most intently on growing revenue and cutting costs, the top two priorities that this group identifies in the survey (see graph 4b [4]). Although growth is clearly the strongest focus for CFOs, the survey suggests that a rigorous approach to cost justification is not going away anytime soon.
While those two priorities might look contradictory on first blush, they make perfect sense on closer inspection. They reflect the growing collection of responsibilities -- some of them conflicting -- that finance executives are embracing. At Siemens, Stegemann reports shifting his focus from cost control and productivity enhancement to growth initiatives, such as merger-and-acquisition (M&A) activity. However, the nuts-and-bolts internal controls and financial reporting demands of Sarbanes-Oxley compliance also remain a top priority. "We have two priorities," Stegemann reports. "Ensuring compliance with [Section] 404 and achieving profitable growth through productivity improvement and support of acquisitions and sales initiatives."
Mike Koetting is CFO, Americas, for Carlson Wagonlit Travel, based in Minneapolis. He has four top priorities: protecting the company's assets; meticulously reporting its finances; accurately predicting future financial performance; and, "last and most important, recommending ways in which we can improve future performance."
Increasingly, finance executives are expected to apply transactional and strategic skills simultaneously. For CFOs, who not long ago could get by with MBAs and lengthy M&A experience, that combination of skills has elevated the value of the CPA designation and the experience that accompanies it. More than half of all survey respondents have earned an MBA; 59 percent of CFOs who responded to the survey have MBAs, while 61 percent of them have CPAs.
"The CPA and auditing know-how was once a nice-to-have," says Paul McDonald, executive director of executive search firm Robert Half Management Resources, headquartered in Menlo Park, Calif. "Now it's a must-have. CFOs need to be grounded in CPA skills, risk management and internal controls, but they also need the M&A and business expansion background."
For finance directors, controllers and accounting managers, the have-it-all demand has resulted in a growing business focus. Forty-nine percent of all survey respondents expect their roles to become even more management-oriented in the next 12 months. By far the largest portion of CFOs in the survey (61 percent) describe the principal nature of their current role as "both management-oriented and transaction-oriented, but mostly management-oriented."
That balancing act is required at Fortune 500 corporations and small companies alike. "Frankly, the general business skills as opposed to purely financial skills are probably more important," notes Tracy Dolan, vice president of finance and administration for ExactTarget, a private, fast- growing marketing software provider in Indianapolis. "I also have to communicate effectively -- that's vital. I think you find finance executives who have more of a focus toward a broader view of the world are going to be more effective in the long run."
You Must Measure To Measure Up
For the first time in three years, the survey shows that shareholder value is not the most important determinant of CFO compensation: 38 percent of CFOs point to "business and financial reporting/analysis/forecasting" as the top driver of their current compensation, compared with 36 percent who identify "creating shareholder value" as the top factor (see graph 5 [5]). Among all survey respondents the results were even more striking: 38 percent identifies "business and financial reporting/analysis/forecasting" as the most important driver of their current compensation. Only 20 percent choose "creating shareholder value."
Those results, Ajilon's Lebovits explains, are less surprising today than they might have been before July 31, 2002. "Clearly, people are paid to deliver timely and accurate results," he says. "But if you look more closely at Sarbanes-Oxley compliance, you see that getting the numbers and accurately analyzing current and future numbers really does tie in to the CFOs' job of helping their companies drive top-line growth."
In past years, Stegemann typically split his time evenly between financial reporting and larger strategy issues at Siemens. "Because of Sarbanes-Oxley, I would now put that closer to 60:40," he reports. "Having said this, the most important responsibility I have is to ensure compliance in Siemens' financial reporting, which I would argue is adding shareholder value." Transparency and compliance, he adds, are significant concerns for investors, but if those are sound and have earned the confidence of internal and external constituencies, Stegemann can lend his leadership to the company's growth strategy.
Other survey results also point to the rising importance of business performance management (BPM) activities. Among all participants, "growing revenue" is the most frequently cited priority for the next 12 months (16 percent). However, four of the five next most frequently cited priorities correspond to BPM, compliance or both: improving financial reporting (cited by 14 percent of respondents); preparing better forecasts (12 percent); complying with Sarbanes-Oxley and other regulations (10 percent); and stream- lining/outsourcing business processes (10 percent). (See graph 4a [6].) Together, those four related priorities far outweigh revenue growth. That emphasis also suggests that companies are revamping and improving financial reporting processes and BPM capabilities as they seek to boost the efficiency of their initiatives.
Is it a stretch to suppose that past and future compliance efforts will generate process improvements? Probably not, according to the survey: 51 percent of all respondents think that the Sarbanes-Oxley Act has had a positive effect on their business.
QAD, a global enterprise application provider for manufacturing companies that is based in Carpinteria, Calif., this year launched an "operational excellence" initiative that uses insights gleaned from the company's initial Section 404 push to deliver process improvements through several mechanisms, including some moves to shared-service centers. "The amount of Section 404-related work that most companies have conducted in the past 18 months has been tremendous," says executive vice president and CFO Daniel Lender.
Many organizations wasted time, effort and money in their initial Section 404 projects, Lender notes. But most compliance and internal audit teams realized that their company's financial-reporting processes could be improved. QAD's initiative seeks to heighten the efficiency of its ongoing compliance effort by simplifying and centralizing those processes. The goal is to remove unnecessary steps, thereby reducing the number of internal controls that need to be monitored -- an activity that QAD plans to automate to a greater extent in the future. Lender muses that he has spent every other hour of the past year on Sarbanes-Oxley compliance.
He's only half joking. Lender has logged a massive number of frequent-flier miles visiting the midsize company's multiple global locations to confirm firsthand that internal controls are as effective as their documentation indicates. "So, when a sale occurs in Hong Kong, an order can be processed out of a facility in New Jersey, and our product can be shipped from Ireland," he says. Expanding existing shared service centers and adding new ones will reduce Lender's internal controls-related travels. The drive toward operational excellence is simultaneously designed to strengthen the company's financial reporting, forecasting and consolidation processes.
People Matter More Than Ever
QAD's process improvements also have HR benefits. Lender wants to develop finance professionals with deep sets of specific expertise so that they can contribute to future process improvements in specific areas. Siemens, too, is concentrating on strengthening its finance team.
Nearly 40 percent of CFO survey respondents view the 2005 job market and economy as good, and only 2 percent describe it as poor. "The economy is getting better, and as a result, the job market is picking up," notes Stegemann. "In essence, the war for talent is on. So we are focusing even more time and resources to developing, motivating and retaining top talent."
In the survey, CFOs identify managing/developing people as the third most important driver of their future rewards package, behind creating shareholder value and strategic planning. In last year's survey, this factor ranked fifth. This year, 13 percent of CFOs identify it as the most important determinant of their future compensation, which represents a more than threefold increase over the proportion of CFOs who identified it as the top driver last year (4 percent).
Among CFOs, human capital management ranks as the third most important priority over the next 12 months. This is as it should be, given that 30 percent of CFOs rate the hiring outlook at their companies as good, and 33 percent of all respondents describe their organization's hiring outlook as good or excellent. Pam Wright, vice president of product management for finance and accounting with staffing firm Kforce Inc. in Tampa, Fla., reports that companies are "building up the muscles in their finance and accounting departments." She has seen a surge in requests for internal auditors; IT auditors; and, most recently, financial and business analysts.
Lebovits expects the greater focus on talent retention and a growing demand for finance professionals -- at all levels -- to continue to propel total compensation upward. His firm is predicting a 10 percent to 15 percent rise in the salaries of finance and accounting managers and directors in 2005. Senior finance executives are enjoying higher salaries and bonuses that they well deserve after juggling cost cutting mandates, all-consuming compliance efforts and growth challenges in the past 24 months. But the rosier environment also presents challenges.
Lebovits cautions CFOs and finance executives considering new hires to ignore most of the macro labor statistics because the finance and accounting labor market is unique. "CFOs, finance vice presidents and controllers in charge of hiring have to be very, very careful," he warns. "The demand for finance and accounting people is much greater than the demand for other segments of the workforce. Don't be penny wise and pound foolish. Take care of your good people, invest in the extra hires and be prepared to counter-offer."
Why You'll Leave
When it comes time to make job offers, finance executives should understand what lures their fellow finance and accounting professionals to new pastures; it's not necessarily the green. Among all survey respondents, compensation tied with work/lifestyle balance as the second most important factor that they consider when weighing an external job offer (23 percent). First place went to "company leadership, governance and culture" (40 percent). When identifying the top factors that would motivate them to jump ship, CFOs rate compensation a distant fourth (4 percent), behind company leadership, governance and culture (57 percent), work/lifestyle balance (21 percent), and the new company's financial performance (11 percent). (See graph 6 [7]).
Surprising? Not to Atlanta-based Chuck Eldridge, head of the finance officers practice at executive search firm Korn/Ferry International. He notes that the opportunity to get to the next level almost always ranks as the most important factor finance executives consider when weighing an offer. However, the importance of work/life balance is worth noting, because it may suggest that the 80-hour "compliance plus my full-time job" workweeks of the past 18 months are not only generating higher compensation but also taking their toll. The portion of finance professionals who feel they are fairly compensated in light of the changes the finance function has undergone in the past 24 months remained steady from 2004 to 2005 at 52 percent. Once again, however, the level of satisfaction decreases among lower-level finance professionals -- a trend that may cause problems in overworked accounting departments as the finance job market continues to harden.
You'll Move Mountains
When Andy Holzhauser joined Pomeroy IT Solutions, a technology products and services company based in Hebron, Ky., two years ago as the head of the to-be-created internal audit department, it was for the reason most finance and accounting professionals accept a new job. The former Deloitte auditor saw the Sarbanes-Oxley Act as a tremendous opportunity, one best leveraged in the trenches of compliance at a public company. Holzhauser, 26, like 24/7 Customer's Bettinger, exemplifies what the future holds for ambitious finance executives who seek out the right role models and career opportunities.
Since he joined Pomeroy, Holzhauser has been overseeing a group varying from six to eight finance, IT and auditing professionals who have managed the company's Sarbanes-Oxley compliance effort. He has also launched the midsize company's internal audit department, which will begin conducting a traditional annual audit once it ensures that the bulk of compliance-monitoring processes has been successfully handed off to the business units in which key internal controls reside.
When Pomeroy acquired a business last July, Holzhauser sat at the table with the company's leadership as it outlined the integration of the two organizations. That process, which amounted to a reengineering activity, had significant compliance repercussions. Holzhauser credits Pomeroy with empowering his team to adjust and establish internal controls on the front end of the process -- a decision that also drove home to the rest of the newly integrated company the importance of compliance.
Holzhauser has gained a deep understanding of the business by constantly interacting with business managers as he and his team advised them on internal control improvements and educated them about ongoing compliance monitoring. Along the way, the CPA has also learned a lot about the company's ISO9001-2000 efforts, new standards for help desk outsourcing and IT controls. "It's been incredibly interesting so far," Holzhauser says. "I'll always have financial roots and a passion for the nuts and bolts of accounting. But down the road, I can envision the possibility of becoming a chief compliance officer."
That's a goal no one heard from the finance function two years ago. For a growing number of rising finance managers and executives, this intense introduction to regulatory compliance, combined with the evolution of the CFO's role, has opened up a new world of career opportunity.
Salary Database
This article's survey is the foundation for an ongoing compensation benchmarking service, courtesy of Business Finance and Ajilon Finance. See how your compensation compares at www.bfmag.com/salary [8].
MethodologyIn all, 576 finance professionals completed the 2005 Finance Executive Career & Compensation Survey in February and March. Forty-nine percent of all survey participants have 16 or more years of professional experience, and 70 percent have more than 11 years of experience. Respondents include CFOs (10 percent); finance senior vice presidents, vice presidents and directors (14 percent); treasurers (2 percent); controllers (11 percent); finance managers (11 percent); other manager and executive titles (18 percent); and finance and accounting staff (34 percent). A majority of respondents hail from companies with annual revenues of $1 billion or more, 15 percent work at $500 million to $999 million companies, and 30 percent work at $100 million to $499 million companies. Respondents represented a range of industries, led by manufacturing (20 percent), financial services (17 percent) and health care/medical (10 percent). |
