2020 will go down in the corporate annals as the year of the CFO. That’s a bold pronouncement, but at a time of extraordinary economic uncertainty during a literal existential crisis, CEOs of private companies (and publicly traded ones, too) turned to the professional knowledge and judgment of their CFOs to plan, manage and direct the corporate ship through the maelstrom.
This leadership role was so important that many private companies that previously provided scant equity-based compensation to their CFOs altered their stance. According to Chief Executive’s CEO & Senior Executive Compensation Report, private companies with more than $1 billion in annual revenues awarded equity ownership stakes representing 20 percent of their CFOs’ median compensation in 2020, compared to no equity-based compensation the year before. By contrast, median equity-based compensation for Chief Operating Officers represented 2 percent of median compensation.
The 13th annual compensation survey by Chief Executive Group examined the median compensation of CEOs, CFOs and COOs at more than 1,400 private companies (median pay signifies the midpoint of all private companies in the data set). Although equity stakes were flat in 2020 for all three executives at companies under $1 billion in annual revenues, the substantial hike in equity-based compensation for CFOs in the $1 billion-plus category is noteworthy.
“The increase in both CFO equity ownership and overall compensation in that category suggests how important they were to strategically guide the company during a time of great uncertainty,” said Isabella Mourgelas, a research analyst at Chief Executive Group, who noted that CFOs also experienced gains in their salary in 2021 across most company sizes (by annual revenues). “CEOs and COOs saw no gains, no matter the size,” she said.
Similar survey findings on public companies indicates that CFOs at the largest 100 companies in the S&P 500 received a reported 7 percent increase in median pay in 2020, of which stock option awards increased 13 percent year-over-year, according to data provider MyLogIQ.
Added up, it was good year to be a CFO. Yet few private equity firms, board members, CEOs, investors and other stakeholders would disagree the boost in compensation was well deserved. “The CFO role has evolved to where it’s like 10 jobs in one, expanding both in scope and relevance,” said Ankur Agrawal, a partner in the New York office of management consulting firm, McKinsey & Co. “Amid all the uncertainty, the CFO played a central role in stabilizing the business and positioning it to thrive when conditions improved.”
Other consultants offered similar perspectives. “At the outset of the pandemic shutdowns I met with many CFOs, and they were constantly running new financial models and projections, thinking through costs and looking for ways to eke out a bit more revenue, amidst a plummeting stock market and a world of unknown—with their staffs working from home,” said Sanjay Sehgal, KPMG partner and advisory head of markets. “When all else was chaos, they had calm hands.”
Steve Gallucci, global and U.S. CFO program leader at Deloitte, chalked up the compensation hike to the rare skill sets CFOs have attained over the years. “The modern CFO is a strategist and [a business] catalyst; they’re not just the person making sure the trains run on time,” he said.
Wearer of Many Hats
Indeed, the many responsibilities of today’s strategic CFO are a far cry from the role a generation ago, hence the need to compensate accordingly. Back then, CFOs were purely financial executives entrusted to run a tight, efficient finance operation, minimize business risks and get the books right. They developed the budget, managed accounting, communicated with banking partners, and drew up the internal and external financial reports. CFOs still attend to these tasks—and plenty more than that.
“They’ve become a true business partner to the CEO and the rest of the business, assisting decisions on talent, operations, IT, the supply chain and so on,” Gallucci said. “They have their finger on the pulse of the business because everything has a financial component.”
When the pulse is flagging, that’s when CFOs are especially needed to diagnose the situation and figure out how to pump life-saving blood into the business. At the outset of the pandemic in 2020, such assistance was sorely needed. Overwhelmed by uncertainties, more than 50 percent of companies in the S&P either withdrew or reduced their earnings guidance at mid-year. Unable to posit a clear direction, many companies issued several forecasts, each one considering a different long-term recovery scenario.
Through it all, CFOs remained “composed,” Agrawal said. “That’s not easy to do when the clock-speed of decision-making is ticking and your opinions affect company performance, resource allocation, business models, customers, new products—whatever. But the CEO is dependent on this strategic advice to make decisions.”
Gallucci agreed. “At all times, the CEO trusts the CFO to interpret business drivers and risks, helping the CEO to achieve their vision and strategy,” he said, adding that these evaluations have been especially elucidative over the past two years. “In times of crisis when a rapid response is needed, the CFO moves to the center.”
That’s where they’ve stayed as the pandemic eases but has yet to draw a final breath. Other business crises requiring CFO appraisals have emerged in the meantime, from the broken supply chain to higher inflation and a menacing series of worrisome Covid variants. CFOs have also been tasked with analyzing the Great Resignation’s impact on recruitment and hiring, the ups and downs of managing people in a future “work from anywhere” model and continuous digital transformations involving the use of robotics and sophisticated AI tools.
Small wonder that over the past two years, the interactions between CEOs and CFOs have increased in both “frequency and intensity,” Agrawal said. From October 2020 through October 2021, CFO interactions with their companies’ CEOs on issues like strategy, performance, organizational transformation and M&A activity increased from 41 percent to 65 percent, according to McKinsey research. The reason: “The CFO was in front of it all, managing the volatility and uncertainty, and articulating the situation to the board, investors and other owners,” Agrawal said.
These stakeholders urgently needed to hear and understand the company’s response to the myriad business crises not just from the CEO but also from the CFO, he explained. “The CFO is the person who most directly contributes to the company’s financial and organizational resilience on a day-to-day basis. After years of research on the role of the CFO, there’s no question they have shifted to longer-term responsibilities like strategic leadership and organizational change,” he said.
Agrawal emailed a data set of McKinsey CFO survey findings from 2016 through 2021, showing that CFOs have taken on increasing responsibilities in their organizations for investor relations, post-merger integration, board engagement, procurement and digital—in some cases dramatically. For example, nearly two-thirds of CFOs (64 percent) are responsible for investor relations at present, compared to 44 percent in 2016.
“CFOs engage today with a broad range of stakeholders,” Gallucci concurred. As the leader of Deloitte’s CFO practice, he has enjoyed a front row seat watching the position evolve. “They go deep into conversations on strategy, are very curious and have a rare ability to work across domains and on a close basis with the CEO.”
Sehgal at KPMG said the bond between CEOs and CFOs has never been stronger. “Under the CEO’s guidance, no other executive knows as much about the company’s risks, liquidity, cash position and how to deploy capital to maximize shareholder value,” he said.
“CFOs provide insight to the CEO on how much cost can be passed on to customers in price increases, a task that requires significant analytical capabilities, not to mention knowledge of the business inside-out,” he added. “These competencies make them the copilot to the CEO, ready to take command when the chief executive leaves or retires. Needless to say, they’re no longer number crunchers.”
What’s in a Name?
Not by a long shot. But what exactly is a Chief Financial Officer, as the title appears to have lost its specific job distinction? Through much of the 20th century, the “financial manager,” as the position was then called, was detached from the decision-making process. The first CFOs arrived in the 1960s, but they were few and far between. Following the implementation of new corporate accounting and reporting requirements in 1976 (SEC Accounting Series Release #190), the number of CFOs skyrocketed.
It wasn’t until the early 2000s that CFOs began to take on responsibility for the many functions they may now oversee. While their strategic guidance directs internal business functions like HR, marketing and supply chain management, their insights also inform external regulators, investors, audit firm partners and consultants. Added up, no one would dispute the rationale for increasing equity-based CFO compensation at private companies.
“By weaving more equity into the CFO’s compensation arrangement, it ensures their personal horizon is aligned with the longer-term business horizon, creating value for the owners and other investors,” said Wes Bricker, vice chair and U.S. trust solutions coleader at PwC, where he is responsible for the firm’s private company practice. “With the overall value of private companies increasing, it increases the value of the equity awards, making it an excellent incentive.”
Down the line, expect CFOs to wear more hats. Their comprehensive knowledge of Generally Accepted Accounting Principles (GAAP) and expertise in preparing a financial statement and ensuring it is accurate, complete and verifiable make them the logical business leader to manage their organization’s ESG initiative. “Our surveys indicate the CFO role is evolving to oversee ESG, driving the company’s social and environmental agenda for the future,” Agrawal said.
Anticipating that investor demands for public company ESG data to be audited and assured will see the light of day, many public company CFOs are engaged in crafting an ESG governance structure and control environment, accepting that it will be up to them to monitor, manage and ultimately be held accountable for ESG factors and risks. The job is not for the fainthearted.
Given the evolving breadth of CFO responsibilities well beyond financial management, should the position’s title be changed? If so, then to what, we asked the consultants. “Since they connect the dots across the company to generate financial returns and value for the enterprise, playing an active and strategic role beyond the technical applications of the finance function and driving the company’s business transformation, in a sense CFOs are becoming Chief Business Officers,” said Bricker from PwC.
Not a bad response. Asked the same question, Gallucci laughed, noting that Deloitte’s Next Generation CFO Academy, which prepares finance executives for a future CFO role, recently hosted an event at which the CFO of a large company told the gathering that his job title was a misnomer. “He said he thought it should be changed to `Chief Everything Officer,’ for obvious reasons,” Gallucci said. “But then the initials would be `CEO’ and that wouldn’t work.”
Not until the CEO retires, at least. And the real money kicks in.