Climbing The Compensation Chart
By Eric KrellBusiness Finance Magazine
Based on findings from the 2000 Finance Executive Compensation Survey, CFOs and other top-paid finance executives are taking on broader responsibilities and honing their individual core competencies in a way that strengthens not only the health of their companies, but also their own compensation and long-term career goals.
In a year rich with engaging story lines - the fizzling of the millennium bug, the explosion of e-business, the bursting of the Internet bubble and the evolution of outsourcing - one of the most intriguing items for finance professionals everywhere falls under the headline "Finance Execs Highly Valued as Strategic Partners." CFOs who invest more time in business and strategic issues far outearn their transaction-oriented counterparts. That news may not surprise finance professionals whose free time has shrunk as they have delved deeper into corporate planning activities, honed their sales spiels to the investment community and helped budding e-business initiatives mature into profitable processes.
Building upon last year's drilldown into influences on finance executives' compensation, Business Finance asked readers to carve out time from their dense schedules to consider, evaluate and prioritize four pages of factors affecting their personal bottom lines: What lured you to your current position? What leadership roles have you sought out? How many hours do you work per week? What would entice you to jump ship? By sifting through, isolating, crosscutting and analyzing these and dozens of other factors, we extracted a more complete picture of top-paid finance professionals.
One-third of CEOs at large companies (those with $500 million or more in annual revenue) have risen through the finance function, rather than operations (26 percent) or sales and marketing (21 percent). "Before they can become CEOs, CFOs must have a better orientation to the sales area, the manufacturing process, the competition and the customers," notes Bradford C. Violette, executive vice president of AOC, a financial staffing and recruiting firm in Charlotte, N.C. "CFOs who become CEOs understand the need to get close to the operational dealings of the company."
The 2000 Finance Executive Compensation Survey suggests that senior-level finance executives are indeed stretching their skill sets the way Violette describes - many CFOs are taking a page from organizational strategy. Just as companies have embraced the pursuit of core competencies, so too are the best-paid finance executives cultivating a select group of high-value skills and expertise.
Acronyms also appear to pay dividends: Finance executives with IPO, M&A, CPA and MBA on their résumés significantly outearn their peers. So do those CFOs, finance directors and controllers who focus on business and strategic issues instead of concentrating on process and administration. "CEOs need to focus their attention on the vision of where the business is going and how the business model will change as the company changes," says Madeleine Ludlow, CFO of Cincinatti-based Cadence Network Inc., an online provider of cost management services for multisite enterprises. "And CEOs need to be able to turn to their partners, CFOs, and say, 'OK, now what are the things we need to get done?'"
To determine how the survey's findings hold up in the busy world of corporate finance, we ran them by experienced finance executives, top executive search firms and finance consultants. In doing so, we discovered that Business Finance is not alone in drilling down into the skill sets of finance executives. Leading companies and the executive search firms they hire have become much more specific in identifying the nature of financial expertise they want to inject into their organizations. Look at a listing for any CFO job opening and, chances are, you'll see a bulleted list of precisely defined specs: "MBA who understands revenue accounting for software (SOP 98-1)," "capital-raising machine," "CPA with consumer goods experience," etc. While there are no silver-bullet skills that guarantee bigger compensation packages (although a dozen factors that come close are examined below), there is plenty of evidence that it pays to develop an arsenal of expertise with care and foresight.
The Nearly Silver Bullets
To identify which factors exert the greatest influence on a finance professional's compensation, we conducted a statistical analysis using general linear models that identified the independent variables most predictive of total compensation. The analysis considered each compensation factor while equalizing all other factors.
Twelve variables emerged as having a direct impact on compensation. The five with the greatest influence are title, company revenue, the region where the company is based, whether the organization is pursuing an e-business strategy and gender (see Gender Issues, below). Male CFOs who work for West Coast companies that have annual revenues of $500 million or more and are actively pursuing an e-business strategy boast the top compensation among all survey respondents. Finance professionals who work for companies with revenues of more than $500 million (all other factors being equal) earn, on average, 32 percent (nearly $26,000) more than those who work at organizations with revenues of $49 million or less. Similarly, finance professionals who work for companies with e-business capabilities (again, ceteris paribus) earn, on average, 11 percent ($9,500) more than their peers at unwired organizations. And when all other factors are equalized, survey respondents who work in the West earn an average of $9,272 more than those on the East Coast, $11,702 more than those in the Southeast, $14,635 more than their peers in the South, $17,686 more than finance professionals in the Midwest, and $18,988 more than their Rocky Mountain counterparts.
The second five most influential variables include whether respondents have ultimate decision-making authority in the areas they are responsible for (those who do earn more); whether they are responsible for the A/R and A/P functions (those who delegate that responsibility earn more); whether a position on the senior management team at another company would motivate them to accept a new job (those who said it would earn more); the CPA designation (finance professionals who have it earn, on average, $8,284 - or 10 percent - more than those who don't); and total years of financial experience (10-plus seems to be the magic number).
The final two variables that were statistically shown to affect total compensation (though they are much less influential than the preceding 10 factors) are hours worked and whether the finance professional is responsible for the business/office administration function. All other factors being equal, finance professionals who work 55 hours or more per week earn 5 percent more than those who work 45 to 49 hours per week. And finance professionals who are responsible for the office/business administration function earn $6,219 less than those with more strategic concerns. In other words, top-paid strategic partners know how to shed the small stuff. "I have very few transactional duties at this point," says Katherine Vilchinsky, CFO of ShareMax, an online strategic sourcing firm in Parsippany, N.J. "I'm involved in setting up policies, procedures and controls, but more so on the strategic end. I have a talented staff that handles the transactional end."
Strategy for Higher Salary
Although the statistical analysis was able to isolate the direct impact on compensation of only the 12 variables mentioned above, other factors clearly help shape compensation levels. One of these additional drivers of current and future pay is involvement in key areas of corporate strategy. Senior-level finance executives who focus on strategic issues receive substantially greater compensation than CFOs and finance directors who are more transaction-oriented. The survey findings are crystal clear as to what types of activities strategy-oriented finance executives pursue. They play leadership roles in mergers and acquisitions (M&As) and IPOs; create shareholder value; play a crucial role in strategic planning and reengineering efforts; and delegate transactional activities, such as revising accounting policies and creating performance measurement systems, to free themselves up to focus on strategic decisions.
"I can't tell you how many times I've heard that taking a company public is a requirement or highly preferred," says Curt Fee, senior director of global executive search firm Spencer Stuart's Chicago office. "I have three CFO searches going right now, and each client wants public experience. Companies expect CFOs to be able to act quickly in an IPO situation."
Wall Street experience is also a specification frequently included in CFO job descriptions that cross desks at executive search firms. "You can only gain that experience when you're working at corporate headquarters," says Gary Kaplan, president of executive search firm Gary Kaplan & Associates in Pasadena, Calif. "If you're a divisional CFO or a subsidiary CFO, there is very little opportunity for Wall Street exposure. Typically, the corporate CFO, or someone working very closely with that CFO, gets that experience. Controllers normally are not picking it up." Kaplan says Wall Street experience translates to relationships with investment bankers and "having them in your Rolodex." The CFO's role during IPO pitches is "tantamount to a boxing promoter," says Eli Neusner, senior analyst with MetaMarkets.com, a Web-centric investment company in Boston. "Analysts sit through hundreds of these road shows each year, and it's difficult to distinguish the wheat from the chaff. One thing that really helps is when the CFO gets up there and energizes the crowd."
But Neusner estimates that only three out of 10 CFOs excel at these presentations. The most common stumbling blocks include getting too bogged down in the numbers and failing to focus on the three bullet points that tell the company's story. "What's the competitive advantage, strategic advantage and management vision?" he asks. "Those three things have to be clearly articulated." Neusner suggests that CFOs demonstrate the advantages of their product or service - whether it's a business-to-business marketplace or a better baking soda - in a listener-friendly way. "If there is a Dale Carnegie course for CFOs about to go through the IPO process," he adds, "I'd recommend that 95 percent of them take it."
Certified Masters of Salary
Here's another helpful recommendation for finance professionals interested in boosting their compensation: Earn your CPA and MBA.
The data suggests that CFOs who have both an MBA and a CPA garner an average total compensation of $168,987, while their peers who do not possess that combination earn an average of $139,467 - a 21 percent difference. The gap is nearly identical among finance directors and controllers. Despite those figures, only 19 percent of CFOs, 18 percent of finance directors and 12 percent of controllers in this study possess both an MBA and a CPA. (Only a small percentage of survey respondents possess other certifications - CFA, CIA, CMA and CFP - and the findings do not indicate any significant compensation differences related to those certifications.)
Kaplan says the value of an MBA has soared because it is one way that traditional, control-oriented CFOs can transform themselves into "chief strategists who truly are partners with the CEO." Vilchinsky earned her MBA from the University of California at Berkeley while working full-time for a former employer. And once she completed her advanced degree, she quickly moved beyond her internal auditor role into business analysis and new product development.
Fee says the CPA's value has also increased among CFOs as they grow more integral to the process of taking companies public. "People infer that if you are a CPA, you are more competent and credible when you talk about financial matters," Fee notes. "They also infer that you have some higher professional obligation to be truthful to your public audiences."
Work/Life Imbalance?
In addition to the positive impact of the CPA and MBA on compensation, the survey data suggests that the desire to be a part of an organization's senior management team corresponds to higher compensation levels. When asked what attracted them to their current positions, all respondents identified the following factors (in order of frequency): increased responsibilities, position on the senior management team, better compensation, better work/life balance and the excitement of a dot-com culture. Respondents who indicated that a position on the senior management team was a significant attraction make an average of 30 percent more than those who did not. On the other hand, respondents who accepted their current positions because they wanted to earn more actually earn, on average, about 6 percent less than those who were not attracted by higher compensation, suggesting that compensation becomes less important at the higher levels of a finance professional's career trajectory.
Finance professionals who consider a better work/life balance a motivating factor suffer a financial hit, according to survey data. Respondents who were attracted to their current position because of a healthier work/life mix earn, on average, about 20 percent less than those who are motivated by other attractions. Yet that pay cut does not appear to translate to far fewer hours worked. Respondents who were attracted to work/life qualities in a job work an average of roughly 46 hours per week, while respondents who were not motivated by work/life opportunities work about 49 hours per week.
This finding does not surprise AOC's Violette; there are other quality of life attractions besides hours on the job that appeal to finance professionals. "We see more people relocate to the Southeast, for example, because they have more purchasing power for property and real estate," he says. "Or because they're attracted to the climate and the opportunity to enjoy more recreational activities. But that does not mean that they're necessarily working fewer hours." Scott Garrison, CFO of Relativity Technologies, a software company that equips legacy systems with e-business capabilities, moved to Raleigh, N.C., from Silicon Valley. "In my age group - I'm in my 40s with teenage children - you hear quite a bit about lifestyle issues in the Valley. You have the housing issue, the congestion, and it's very difficult to raise children there. In our view, it was important that our kids get a perspective on a different part of the country."
For CFOs, Violette adds, a better work/life balance often translates to negotiating for more vacation time. "It means they're insisting on four weeks of vacation," he notes, "even though they're probably not going to use it."
The 2000 compensation survey findings support Violette's observation about the work ethic of CFOs and other finance professionals: They're working harder and smarter than ever before. "The top-paid finance executives have recognized that they need to get beyond the pure process aspects of their role," says Kaplan. "If you're really obsessed with receivables, payables or SEC filings, that's not the ticket to better compensation."
Crunching Our Numbers
All told, more than 1,400 finance professionals bared their bottom lines by responding via e-mail (47 percent), postal mail (43 percent) and telephone (10 percent) to the 2000 Finance Executive Compensation Survey. Business Finance conducted the survey in conjunction with AOC, a financial staffing and recruiting firm based in Saddle Brook, N.J. Up2Right Marketing in Loveland, Colo., collected and tabulated the data.
Respondents included CFOs (21 percent), finance directors (16 percent), controllers (31 percent), finance managers (24 percent) and finance staff (8 percent) among 19 different industries. Forty-four percent of respondents work for companies with annual revenues of less than $50 million, 10 percent for organizations with revenues of $50 million to $99 million, 16 percent for companies with revenues of $100 million to $499 million, and 30 percent for organizations with annual revenues of $500 million or more. All respondents work for U.S.-based companies.
Geographically, survey participants were distributed among the Midwest (28 percent), Northeast (21 percent), Southeast (20 percent), West (16 percent), South (8 percent) and Rocky Mountain region (6 percent).
Beneath the Numbers
No matter how deep their reach, compensation surveys usually miss something. While trying to nail down compensation influences, top search firm executives often mention a driver of compensation that is difficult - and delicate - to describe.
When sources discuss this crucial quality, and most prefer to do so off the record, they use terms such as personality, polish, diplomacy, finesse, 'A' player, presentability, personally impressive and telegenic. When leading companies search for CFOs, the phrase "does not have the right leadership qualities" occasionally is attached to candidates who may be technically flawless and possess all the right experience yet lack certain crucial intangibles. An executive at one search firm says he can detect whether a CFO candidate's leadership qualities mesh with the client company's needs after spending 10 seconds with the candidate.
Finance executives should recognize that these intangibles play an important role in the jobs they are offered and in the compensation packages they receive. "Once a CFO has the technical credentials to get the interview, the playing field begins there," says Bradford C. Violette, executive vice president for AOC in Charlotte, N.C. "From that point, 75 to 80 percent of the selection process boils down to subjective issues."
For that reason, CFOs should examine the expectations - including the unwritten ones - attached to serving as the CEO's partner. "The CFO is apt to be the one executive with whom the CEO is closest," says Curt Fee, senior director of Spencer Stuart's Chicago office. "And the criteria used to determine whether a CFO meets the expectations of that relationship are highly subjective. It has to do with whether or not the CEO is comfortable with that person walking around the North American business community with the CEO's name on his sweatshirt. People who go into technical fields, like accounting, tend to be fairly reserved. That's a generalization, but one based on 30 years of conducting big-company searches. That reserve does not transfer well to the CEO's needs."
To qualify for big-league compensation, finance executives have to demonstrate big-league intangibles. And cultivating those qualities begins with taking a look at what lies beneath their skill sets and experience. Rest assured, others will want to look there too.
Gender Issues
Do companies prefer male candidates, and do they pay women less than their male counterparts to perform the same job? "I've never had a client push one way or the other," says Patt Mayer, San Francisco branch manager for RHI Management Resources, which connects temporary CFOs and finance consultants with its client companies. "Being male or female makes absolutely no difference." Mayer's observation echoes the comments of other search firm executives and finance-focused headhunters. Companies do not pay female finance executives less because they are female. And the survey supports that claim -- up to a point.
Among all survey respondents, men's compensation was roughly 36 percent higher than women's compensation. But our statistical analysis indicates that much of that discrepancy results from differences in the skill sets and responsibilities of male and female respondents. For example, the female finance professionals who participated in this survey have, on average, fewer years of total financial experience than the male participants. And the majority of female respondents work an average of 40 to 49 hours per week, while the majority of male respondents work 45 to 54 hours per week. Certainly those factors, which are independent of gender, influence compensation numbers.
However, other variables in the survey do not entirely explain the salary gap. Even when the effect of gender is isolated from other factors, female respondents earn, on average, 10 percent less than their male counterparts. Our analysis equalized all other factors to determine the direct correlation between gender and compensation, and the correlation translates into a shortfall of $8,362 in women's average total compensation.
