Total compensation for CFOs is expected to show substantial improvement in 2011 after a downward trend from 2008 to 2010 at both public and private companies.
A new survey by Arizona State University professor Michal Matejka, supported by the American Institute of CPAs, found that CFOs whose bonuses are tied to earnings targets expect to see higher compensation this year.
During the recession, many companies shifted gears and increased their emphasis on financial performance targets in CFO annual bonus plans, rather than on nonfinancial ones. But as the economy started to improve, the survey indicates that companies have begun to dial it down again for 2011. For instance, the average bonus weight on financial targets in private companies with sales between $50-99 million was 47 percent in 2007, 65 percent in 2009 and back down to 51 percent in 2011, the survey of approximately 1,000 CEOs, CFOs and other executives found. There was a similar trend in other sized companies, especially larger ones.
The survey also showed that participants believe that their companies’ 2011 earnings targets were much more likely to be achieved in this post-recession period. The average estimated probability of meeting an earnings target was 64 percent in 2011, as compared to only 48 percent in 2009. The estimated probability of meeting nonfinancial targets stayed largely unchanged at 64 percent in 2011 and 68 percent in 2009.
“Pegging much of a CFO’s bonus to earnings targets during a deep recession, is almost like making a swimmer race with cement boots on his feet,” said AICPA vice president for business, industry and government Carol Scott. “But an improved earnings outlook for 2011and a better balancing of financial and nonfinancial performance targets should help boost bonuses and overall compensation of many CFOs.”
The survey found that median CFO cash compensation declined by about 7 percent between 2008 and 2010. Other top financial executives experienced a similar decline, while CEOs, presidents and COOs saw an even greater decline. In 2011, CFOs of private companies had on average 54 percent of their bonuses contingent on meeting financial performance, 14 percent contingent on explicit nonfinancial targets, 27 percent of their bonuses were awarded subjectively and 5 percent in some other way.
Operations targets, used by 16 percent of private companies, were the most common of the nonfinancial targets used in CFO bonus plans. Market Share and Strategy related targets were used in 2 to 7 percent of smaller companies and up to 31 percent of the largest companies. The reverse was true for Targets related to CFOs’ accounting and IT functional duties, where up to 22 percent of smaller companies included them in CFO bonus plans while none of the largest companies did so.
Nonfinancial targets were relatively easy to achieve as long as they were formally included in the bonus plan formula. The average probability of achieving nonfinancial targets was 75 percent in companies that formally included them in their bonus formula, but only 56 percent in companies that set nonfinancial targets without formally linking them to bonuses.
“A fairly large proportion of CFO bonus plans are commonly determined subjectively, especially in smaller companies,” said Matejka. “That makes sense during a recession when the business environment is highly uncertain and financial targets are barely more than a guess work. Going forward, it probably makes sense to reduce the amount of subjectivity and in particular consider an increased reliance on objective nonfinancial performance targets.”
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