How does your pay stack up?
Financial Executives Institute and Arthur Andersen recently partnered to bring FEI members a comprehensive report on executive compensation. Data was compiled from more than 400 companies on numerous compensation components, including base salary, annual incentives, long-term incentives, benefits and perquisites for 3,500 executives in 24 executive positions. Featured here are highlights for the CFO, treasurer and controller positions. For illustrative purposes, the values of compensation elements have been calculated using derived averages for these three positions.
Survey population. The companies included in the report represent a broad group of industries and regions within the United States. The survey population provides a good representation of both public-sector (42 percent) and private-sector (50 percent) employers, as well as manufacturing (43 percent) and nonmanufacturing (44 percent) organizations. The data is divided into 31 industry classifications, four organizational structures (public, private, governmental and nonprofit), six regions and a variety of sizes (revenues for nonfinancial companies and assets for financial companies). For the CFO, treasurer and controller positions, more than 375,109 and 300, responses, respectively, were analyzed on base salary, annual incentives, long-term incentives, benefits and perquisites.
Base salary. Base salary is a standard part of any compensation package, but levels of pay and administration of the programs differ significantly from one company to another. For instance, CFOs ranged in 1996 from $102,300 at the 25th percentile to $200,000 at the 75th percentile. Treasurers ranged from $95,000 at the 25th percentile to $158,000 at the 75th. Controllers earned from $65,000 at the 25th percentile to $123,000 at the 75th percentile.
In terms of program administration, the majority of companies (67 percent) base increase decisions on merit, while 23 percent use a combination of merit and cost of living. Only 3 percent of respondents say they rely solely on changes in the cost of living to determine increases. The average salary increase between 1995 and 1996 was 7 percent for both CFOs and controllers; treasurers received an average increase of 6 percent.
Annual incentives. Designed to motivate and reward executives for performance during a particular year, annual incentives are utilized by 81 percent of the responding companies. Annual awards may be based on achieving specified performance goals, or they may be wholly or partially discretionary and based on intangible criteria. The most prevalent measures (the majority of companies use more than one) include comparing actual performance to budgeted performance (64 percent), net income (39 percent), and earnings before interest and taxes (29 percent). The majority of companies make lump-sum cash payments and cap those payments.
Eighty-four percent of CFOs employed by companies with annual incentive plans earned awards in 1995. Their awards averaged 46 percent of their base salaries. The 87 percent of treasurers earning awards in 1995 received an average of 30 percent of base salary, and the 87 percent of controllers who earned awards averaged 27 percent of their 1995 base salary.
Long-term incentives. Stock options, restricted stock and long-term performance plans are common components of executive compensation packages. The report analyzes the prevalence, size and value of those long-term incentive plans, as well as the most frequently used plan design features.
Stock options are by far the most popular form of long-term, equity-oriented incentive compensation. Nonqualified stock options are slightly more common (32 percent of respondent companies offer them) than incentive stock options (27 percent), with only 16 percent of respondents offering both types. In most plans, grants are made annually, but vest pro rata over four years, with eligibility and grant size left to the discretion of the board.
Seventy-seven percent of CFOs surveyed received awards valued at,on average, 269 percent of base salary. This means an executive who earns a base salary of $163,600 would, on average, receive a stock option grant of $440,084. (Grant values were determined simply by multiplying stock price by the number of shares awarded and do not reflect the actual stock option value.)
By comparison, treasurers (76 percent receive options) averaged stock option grants of 222 percent of salary, which, on an average base salary of $132,700, works out to $281,324. And 64 percent of controllers received a stock option grant at an average value of 182 percent of salary. For instance, a controller earning a base salary of $99,700 would receive an option grant of $181,454.
With restricted stock, executives are granted shares of stock that are subject to forfeiture until certain conditions are met. The shares become available as the conditions are met or the restrictions lapse. Sixteen percent of all companies offer restricted stock plans. Eligibility is typically based on board or management discretion, and awards are based on company and individual criteria. Most grants are made annually, but vest pro rata over five years.
Long-term performance-unit and stock plans are usually three- to five-year, performance-based plans that tie company performance directly to the executive's compensation. Under a performance-unit plan, executives are granted units based on achieving specific performance goals. Final awards are based on the number of units earned times the fixed value of the performance unit. The award may be paid in cash, stock or a combination of both. A performance-share plan is similar, except the value of the share is tied to the value of the company's share price.
About 13 percent of respondents offer a performance-unit plan, and 14 percent offer a performance-share plan. Eligibility is usually based on title or position. Some of the most common performance measures include performance against budget or plan, net income, sales and total shareholder return. Most performance cycles begin annually and last three years.
Benefits. Benefit programs are designed to provide security both during and after an executive's employment and often greatly increase the value of the compensation package. The predominant benefit is life insurance (76 percent of all respondents offer it) that is 100 percent paid for by the company. Other benefits include 401(k) plans (74 percent), medical insurance for family members (74 percent), defined-benefit pension plans (33 percent) and profit-sharing plans (30 percent).
Perquisites. Executive perquisites are enhanced fringe benefits that are ordinarily beyond what is available to all employees. Cellular phones (63 percent) and company cars or allowances (51 percent) are two of the more frequent perquisites across all companies. Others include tax preparation and planning assistance (22 percent), a car allowance (15 percent), preretirement counseling (13 percent) and a personal computer at home (12 percent).
In today's competitive business environment, organizations have a myriad of executive compensation programs available to them. The key to creating a successful program is determining the mix of elements that enables your organization to provide competitive compensation while meeting its business needs. Carefully constructed compensation plans can also make for satisfied and more motivated employees who will ensure your company's competitiveness within your industry segment.
To order a copy of the 282-page Executive Total Compensation Survey, please call VantageSource, the Arthur Andersen fulfillment center, at (800) 872-2454. The cost is $195 for survey participants, $495 for FEI members and $695 for nonmembers.
Mr. Hughes is senior manager in the compensation consulting practice of Arthur Andersen's Atlanta office. You can reach him at (404) 223-7472.
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|Title Annotation:||compensation of financial executives|
|Author:||Hughes, James V.|
|Date:||May 1, 1997|
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