Why Your CFO’s Compensation Declined Compared with the CEO’s

Businesses were less likely to increase CFO pay in fiscal 2020, in part because of the economic fallout from the pandemic.

Companies’ financial performance in 2020 fell compared with previous years. Median revenue declined 1 percent, and operating income increased 1 percent—well 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 for executives.

CAP, an independent executive compensation consulting firm, recently surveyed compensation practices at 135 companies with median annual revenue of $12 billion. The results compared CFO compensation with CEOs’ pay. The results include:

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.” The median size of 2020 salary increases was 4.3 percent for CFOs receiving an increase and 4.1 percent for CEOs 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 with other industries.

Bonuses.  The study found approximately the same number of companies with bonus increases as with bonus decreases. For most companies, bonus payouts generally aligned with performance outcomes. For example, among the companies with a bonus decrease, more than 60 percent had a reduction in operating income during 2020, while more than 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.  When evaluating stock options, time-based stock awards, and performance plan awards, the survey found that almost 60 percent of companies use two of the three equity vehicles to deliver long-term incentives. Approximately 30 percent of companies use all three equity vehicles. 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.”

From: BenefitsPRO