The increase in CFO pay over the past 12 months has been more a function of incentive pay than anything else. And, in contrast with the prior year, this has been mainly focussed on long term incentives.
We examined the change in CFO incentive remuneration from the most recent remuneration disclosures to the previous one to establish if there are any trends in incentive remuneration. Additionally, we analysed CFO data to establish whether or not a relationship existed between incentive remuneration and company performance and to measure how strong it was.
CFOs’ total remuneration (TR), like most corporate roles, relates strongly to market capitalisation. On its own, market capitalisation explains more than half (56%) of the variability in total remuneration.
We extracted the remuneration disclosures for 207 CFOs from ASX 300 companies from GuerdonData® and combined it with company financial data from Aspect Huntley as at 12 February 2007. Because the absolute size of incentive payments relates strongly to market capitalisation, we define incentive remuneration size as short term incentives (STIs) plus long term incentives (LTIs) as a percentage of total remuneration. So incentive remuneration is (STI+LTI)/TR.
Table 1 shows the absolute size of STIs and LTIs and the change over time. It also identifies the proportion of the CFO group who received an incentive payment.
The size of disclosed STIs and LTIs has increased significantly, with an increase in the proportion of CFOs receiving them. The proportion of total remuneration received in the form of incentives has also increased. This indicates that the increase in incentive remuneration is exceeding the increase in fixed remuneration.
We established that the strongest relationship between CFO incentive remuneration and performance existed for three year average TSR. We divided the group into four sub-groups based on three year TSR and analysed the proportion of remuneration made up of incentives and the percentage receiving incentive payments.
The highest performing group includes several mining companies with high three year TSRs. (Includes Oxiana, Paladin, Fortescue Metals, Jubilee Mines and Kagara Zinc.) These returns are often based on significant increases in share price, driven by strong commodity prices or future earnings, rather than current profitability. This may explain why the incentive size and percentage receiving drops in this group. If we exclude these companies the result looks very similar to the second highest group (51-75).
In conclusion, we can say that:
• CFOs are more likely to receive performance pay;
• Performance pay is increasing at a higher rate than fixed pay; Performance pay is increasing as a proportion of total remuneration;
• Performance pay is more short term than long term focused; and
• The extent of difference between short term payments and long term payments is narrowing rapidly.