Stock-Based Incentives Drive CFO Pay Up:A Closer Look at the Implications

Finance chiefs at US companies have seen significant increases in their
compensation packages, primarily driven by stock-based incentives over the
past year. According to newly released data from C-Suite Comp, a firm
specializing in executive and board pay analytics, the median pay for CFOs
rose by 8.45% in 2023 compared to the previous year, reaching approximately
$1.8 million/year.
Top-earners come from various sectors including technology, financial
services, and retail. Interestingly, half of these top-paid CFOs are women. This
aligns with the broader trend highlighted by a 2023 study from Crist|Kolder
Associates, which found that nearly 19% of CFO positions in Fortune 500 and
S&P 500 companies were held by women, up from 10% in 2013. Additionally,
the first quarter of 2024 saw 20 out of 82 CFO appointments globally being
women, the highest number since 2021.

The new data comes as turnover of CFOs has surged, with S&P 500 companies
experiencing a turnover rate of nearly 6% in Q1 of this year, according to
Russell Reynolds Associates. This increased turnover often leads to higher pay
for CFOs as companies strive to retain or attract the right talent.

While this might seem necessary, it raises concerns about shareholder value and
corporate governance. High executive compensation, particularly in small and midcap companies can
spark pushback. Shareholders often express frustration with dividend policies,
governance issues, or the disparity between executive pay and company
performance. High profile companies like Walmart and Zoom have faced
criticism over executive pay amid underperforming shareholder returns.

Employing compensation consultants can exacerbate these issues. Often, they
recommend pay packages that do not align with shareholder interests, further
eroding shareholder value. To counteract this, the board should advocate for
more prudent and defensible executive pay decisions.

Companies should prioritize shareholder value over excessive executive
compensation. To achieve this, companies must increase transparency and
ensure that executive pay is directly linked to long-term company
performance. Compensation committees should be composed of independent
directors capable of making unbiased decisions regarding executive pay.
Additionally, C-Suite buying in the open market (putting some of those salary
dollars to work to buy equity alongside shareholders) is always well received
by the market as well.

When companies fail to prioritize shareholder value, shareholders are likely to
react negatively. They vote against executive pay packages, express their
dissatisfaction publicly, and push for changes on the board. Discontented
shareholders may divest, leading to a decline in stock price and overall
company value. Persistent issues with executive compensation could also
attract activist investors who may seek to enforce changes through more
aggressive measures.

Fair warning: fair and transparent compensation practices keeps shareholders
happy, healthy and with any luck, wealthy.