Newswise — While much public scrutiny has focused on the compensation of chief executive officers, a new study investigates remuneration of the chief financial officer, a role that has taken on greater significance in an era of Sarbanes-Oxley and other regulatory requirements.
The study, led by Steve Balsam, an executive compensation expert at Temple University, found that the greater the CFO's job complexity and the better the CFO's performance, the higher the CFO's overall compensation package with job complexity reflected in the salary and performance reflected in the bonus. Specifically, the study shows that CFO salaries increase with the intricacy of a firm's operating, investing and financing activities, while bonuses were correlated with a CFO's ability to deal with analysts and meet earnings forecasts particularly when achieved by managing accruals, a questionable but not illegal practice.
Balsam's study is one of only a few to investigate influences on CFO compensation. Most executive compensation research has focused on CEOs, who serve as a firm's primary decision makers with greatest responsibility for company performance. However, increased regulatory obligations have created a higher profile for CFOs, a reality reflected in higher compensation packages.
While CFOs of the past were primarily financial stewards whose job was to put together and present accurate and timely financial reports, today's CFO "is in charge of understanding and applying the steady stream of new FASB (Financial Accounting Standards Board) standards and interpretations and meeting increasingly stringent SEC (Securities and Exchange Commission) regulations including Sarbanes-Oxley Act certification of the financial statements," said Balsam.
Balsam believes that it's important for investors, regulators and lawmakers to understand exactly how compensation is driving CFOs, who control a firm's "accounting levers."
"Our findings highlight the importance to firms of meeting analyst forecasts and their willingness to incentivize and reward CFOs for doing just that," said Balsam, professor of accounting at the Fox School of Business.
Such a system that rewards CFOs for meeting analyst expectations has potential to increase the temptation to manage earnings to meet targets by either deferring revenues or expenses to a subsequent accounting period or accruing them in advance. These questionable accounting practices have come under increased scrutiny from legislators and the public as a result of the nation's volatile economy and the government's investment of TARP funds to prop up the financial industry.
"Regulators and shareholders don't want CFOs managing earnings to meet targets, yet they are," said Balsam.
The study comprised data from a 14 year period (1993 " 2006) on 2,200 CFOs from the 1,500 largest companies in the U.S. Mean CFO salary was $320,160, mean bonus was $219,832, and mean total compensation was $1,374,865. Each grew substantially over the study's sample period.
Balsam's co-authors on the study, "Impact of Job Complexity and Performance on CFO Compensation" are Afshad Irani, University of New Hampshire, Whittemore School of Business and Economics, and Jennifer Yin, The University of Texas at San Antonio, College of Business.
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