Following a decline in total compensation between 2008 and 2010, CPA financial executives expect to see compensation increases this year, according to an AICPA-sponsored report released June 2.
The report, authored by Professor Michal Matějka of Arizona State University’s W.P. Carey School of Business, examined financial executive compensation and incentive practices in the post-recessionary economic environment and focused on the choice of performance targets in CFO annual bonus plans.
Cash Compensation Trends
Median CFO cash compensation in 2010 was $167,000, a 7% decline since 2008. Other top financial executives experienced a similar decline while CEOs, presidents and COOs experienced a 23% decline (see Exhibit 1).
Source: CFO Compensation Survey: Incentives and Performance Targets Following a Recession (2011), by Michal Matějka, W. P. Carey School of Business, Arizona State University, tinyurl.com/5uvskmm.
The report attributes compensation declines and the projection for gains in 2011 to financial performance targets, a major component of financial executives’ compensation plans. The probability of achieving 2011 earnings targets went up significantly (to 64%) in 2011 compared with 48% in 2009. The estimated probability of meeting nonfinancial targets stayed largely unchanged—64% in 2011 compared with 68% in 2009 (see Exhibit 2).
Source: CFO Compensation Survey: Incentives and Performance Targets Following a Recession (2011), by Michal Matějka, W. P. Carey School of Business, Arizona State University, tinyurl.com/5uvskmm .
Performance Targets in CFO Bonus Plans in Private Companies
In 2011, CFOs of private companies had on average 54% of their bonuses contingent on meeting financial performance goals; 14% contingent on explicit nonfinancial targets; 27% awarded subjectively; and 5% awarded in some other way (see Exhibit 3).
Source: CFO Compensation Survey: Incentives and Performance Targets Following a Recession (2011), by Michal Matějka, W. P. Carey School of Business, Arizona State University, tinyurl.com/5uvskmm .
The bonus’s weight on financial targets was lower in smaller private companies (about 50% in companies with sales below $50 million) and greater in larger ones (about 60% in companies with sales above $50 million).
Frequency of Various Nonfinancial Targets in CFO Bonus Plans
The most common type of nonfinancial targets in CFO bonus plans were operations targets (used in 16% of private companies).
Targets related to market and strategy were used in 2% to 7% of smaller companies (sales less than $100 million) and up to 31% of the largest companies (sales greater than $500 million). Inversely related to size was the use of targets related to CFOs’ accounting and IT functional duties—up to 22% of smaller companies included them in CFO bonus plans, while hardly any of the largest companies did (see Exhibit 4).
Source: CFO Compensation Survey: Incentives and Performance Targets Following a Recession (2011), by Michal Matějka, W. P. Carey School of Business, Arizona State University, tinyurl.com/5uvskmm .
The report used data collected in March and April from a survey of about 1,000 AICPA members who held senior executive titles such as CEO, CFO or controller.
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