Are you hiring a CFO? Calculating Compensation Within Private Companies

Hiring a top notch CFO, someone who will advance your company’s agenda and business objectives, requires strategic thinking on a number of fronts, not least of which is compensation. Not only will a well thought out compensation plan bring the best candidate to the table, it will align your CFO properly with your company’s interests. This is especially true for private companies where the CFO can have a significant impact on the overall success of the business. When structuring your CFO’s compensation plan, your main considerations should be:

Base Salary

Your overall compensation plan should reflect the size, complexity and growth pattern of your company. Since base salary is the most visible (and often the biggest) component of that plan, this is the first thing private company CFOs look at when they’re contemplating a new position. Once you have a benchmark number (relatively easy to get in most markets) tailor it to your particular operation. It’s important to get this number right. Not only is most of the variable pay component of the package expressed as a percentage of the base salary, if you go to the market with number that’s too low, some great candidates will take a pass, even if your plan has some real upside potential.

Short Term Incentives

Short term incentives usually take the form of annual bonuses and are designed to focus the CFO’s attention on achieving specific project and activity goals that will help you and your company achieve your near term business objectives. These goals should be explicitly stated and performance metrics negotiated and agreed upon up front. Examples of these goals could include:

1. improving profit margins by a specific value
2. successfully leading an ERP implementation
3. securing new financing arrangements
4. quarterbacking a new facilities build-out

This is usually a cash bonus and is calculated as a percentage of the CFO’s annual salary.

Long Term Incentives

One way to maximize your CFO’s overall long-term contribution and motivate him or her to increase enterprise value over the longer term is to offer some form of long term incentive. By definition, the performance period for a long-term incentive typically runs between three and five years, with the executive not receiving any pay from the incentive until the end of the performance period.

Public companies have a real advantage over private companies in attracting and retaining key executives through the granting of stock options. However private companies can also achieve that end through a grant of restricted stock or a cash-based long-term incentive plan that mirrors the payout under an equity-based plan. While not an option for many if not most private companies, in certain circumstances it may be a key component in attracting and retaining the CFO that will help take your company to the next level.