Why your CFO's compensation declined compared to the CEO's
Many companies evaluated compensation -- and these C-level execs weren't immune from cuts.
Businesses were less likely to increase CFO pay in fiscal 2020, in part because of the economic fallout from the pandemic.
Financial performance in 2020 fell compared to previous years. Median revenue declined 1 percent, and operating income increased 1 percent — below 2019 increases of 3 percent and 5 percent, respectively. In a typical year, performance at these levels likely would have resulted in more meaningful compensation decreases.
CAP, an independent executive compensation consulting firm, recently surveyed compensation practices at 135 companies, with median revenue of $12 billion. The results compared CFO compensation to that of CEOs.
Related: CFOs now in command of health plan design
Salaries. In 2020, salary increase prevalence declined by about 10 percent from historical practice.
“We believe the COVID-19 pandemic was the main factor for the decrease,” according to the survey report. “However, salary increases were still quite prevalent for CEOs and CFOs, at 44 percent and 55 percent of the sample, respectively. Median 2020 salary increases were 2.7 percent for CFOs (or 4.3 percent for those receiving an increase) and 0 percent for CEOs (or 4.1 percent for those receiving an increase).”
Compensation by industry. Median total compensation increases varied by industry. In 2020, consumer goods and information technology companies generally experienced higher compensation increases compared to other industries.
Bonuses. The study found approximately the same number of companies with bonus increases (64 of CFOs and 60 of CEOs) and decreases (65 of CFOs and 60 of CEOs). A small number of companies had the same payout for two straight years (six CFOs and 15 CEOs).
Bonus payouts generally were aligned with performance outcomes for most companies. For example, of the companies with a bonus decrease, more than 60 percent had a reduction in operating income during 2020, and more 80 percent of companies with a bonus increase had higher operating income during the year.
Target pay mix. The pay program structure for CEOs and CFOs largely has remained unchanged since 2011. CEOs continue to receive less in the form of salary and more in variable pay opportunities, especially long-term incentives, than CFOs.
Target bonus opportunities. Target bonus opportunities as a percentage of salary remained unchanged for CEOs in the sample. For CFOs, the 25th percentile increased to 90 percent of salary from 80 percent last year. Target bonuses are expected to remain largely unchanged.
Long-term incentive vehicles. The use of two different vehicles to deliver long-term incentives remains the most prevalent approach, used by almost 60 percent of companies. Approximately 30 percent of companies use all three equity vehicles (stock options, time-based stock awards and performance plan awards).
The portion of awards granted in performance plans decreased slightly in 2020 at the expense of higher time-based awards. The stock option portion remained unchanged. Even though most awards in the analysis were granted before the onset of the COVID-19 pandemic (because of disclosure rules), the minor increase in time-based awards was expected.
“The COVID-19 pandemic was a shock to the system, with many companies evaluating the impacts of the pandemic at the end of the year and adjusting performance results for annual incentive calculations, because annual incentives are typically paid to a broader employee population than are long-term incentives,” the report concluded. “The total cash compensation outcomes for 2020 continue to reinforce the alignment of pay outcomes with a broader view of company performance.
“Since many companies made equity grants early in 2020, prior to the impact of the pandemic on the stock market, we may not see the pandemic’s impact on LTI levels until the 2021 grants are disclosed.”
READ MORE: