Take David Goldfarb, CFO at Lehman Brothers. According to figures compiled by compensation analysis group Equilar Inc., Goldfarb was awarded 575,000 options in 2002, valued (using the Black-Scholes method) at $19.2 million. This formed the lion's share of his $22.49 million in total compensation that year. In 2003, however, Equilar reports that Goldfarb received only 200,000 options, valued at $5.3 million, and his total compensation for the year was (a mere) $11.8 million. Similarly, Gary M. Pfeiffer, senior vice president and CFO of E.I. du Pont de Nemours and Co., was granted 140,000 options in 2002, valued at nearly $2.1 million, and took home total compensation of just under $3.1 million. But in his 2003 pay, Pfeiffer received 85,000 options valued at about $1 million, and his total compensation came in at just over $1.9 million.

But don't get too teary-eyed yet. At the same time companies were pulling back on stock option grants to executives, they were also boosting other forms of executive pay. Most notably, they increased annual cash bonuses and total long-term incentives, which can include restricted stock, performance shares and long-term cash plans. Annual bonus incentives for the CFOs in the Pearl Meyer survey shot up 21% in 2003, while total long-term incentives surged 35%.

So two years after the passage of the Sarbanes-Oxley Act and three after the fall of Enron, change is clearly in the air. More companies are likely to continue reducing their options exposure as the FASB rule takes hold, but that may not mean CFO compensation as a whole will continue to drift much lower in coming years. "Companies will switch buckets," predicts Tim Ranzetta, president and chief operating officer of Equilar in San Mateo, Calif. "They'll find other vehicles that are more advantageous from an expense and dilution perspective."

Others agree that substitutions will continue. "Options won't go away in their entirety but they are being supplanted to some extent by restricted shares," says Allen Geller, a managing director at executive search firm Raines International. "The options programs are going to be distributed differently and not as deep down in the management curve. And other items will be created or developed."

One such vehicle that avoids payouts in cash, options or company shares involves the use of specialty partnerships, in which top executives are given shares in the vehicle as a form of remuneration. Geller notes that this trendy compensation tool is used largely by the financial services industry, particularly insurance companies and large investment banks.

Restricted stock and cash bonuses are also on the rise. In part, this is due to the way the economy played out during the year. The early months of 2003 were fairly dark and dreary for many businesses as the threat of military action in Iraq became a reality, and companies delayed hiring and spending plans in the hopes that international tensions would soon subside. "When corporate budgets were set in early 2003 they were fairly conservative," says Jannice Koors, managing director at Pearl Meyers. "Then, you had a very strong rebound in company performance and stock performance later in the year, so performance pay was way up and way ahead of budget."

Meanwhile, option grants may themselves become less unappealing should companies switch to the binomial valuation method, instead of Black-Scholes, as suggested by FASB. Experts claim that this lattice system minimizes the hit on earnings from option grants.

But the damper on compensation is more than merely a byproduct of changes in accounting regulations. Pressure from activist shareholders is also forcing corporate boards to rethink and adjust the way top executives are paid. Similar changes were seen in a Pearl Meyer survey of CEOs, in which cash and restricted stock payouts rose 23% in 2003 while total compensation fell 8%. Ultimately, once the entire fallout from stock options expensing has been digested, the key factor determining the trend line of executive pay will be whether the heat for more earthbound compensation levels persists.

Pressure for More Changes

One person who can be counted on to keep pounding the table on this issue is William McDonough, chairman of the Public Company Accounting Oversight Board (PCAOB), the chief audit regulator. McDonough sees skyrocketing compensation as a moral issue. "In an ideal world, every CEO would go to their boards and ask the members to re-examine executive compensation, starting with his or her own pay," he said in a recent address. "And if pay should be rightfully reduced, what is the worst that can happen? An insulted CEO resigns or takes early retirement?? 1/2 directors, as fiduciaries of their corporations, will have the satisfaction of having said to investors, to the public, to the world that this is what this job is worth."

At the same time, CFOs are under more pressure than ever to perform at the top of their game and in some cases remake reporting controls throughout their organizations, thanks to the changes mandated under the Sarbanes-Oxley Act. CFOs and CEOs must now sign off on financial statements to personally certify their accuracy, and face stiffer penalties if convicted of fraud. "CFOs at large public companies have to be really in touch with all that is going on in their companies, they have to know how that relates to the competitive market and present that to the board and to shareholders," says Russell Boyle, head of the U.S. financial officers practice at Egon Zehnder International. He adds that European firms are also considering more U.S. financial executives to fill their own gaps in recent months. "It requires people who can stand up to scrutiny and there is a lot of demand for these change agents." So while companies are in some cases being forced to bow to concerns about excessive pay packages on the one side, the need to compete for the best and the brightest is likely to provide at least a partial counterbalance. The hard part, as the PCAOB's McDonough pointed out, is figuring out what the job is worth when yesterday's yardstick won't do.