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For a big CFO bonus, beat the street --- But just barely

Ed Zwirn | March 5, 2012
It can be better to win small than to win big -- at least for CFOs who want larger bonuses.

It can be better to win small than to win big -- at least for CFOs who want larger bonuses.

In a groundbreaking paper to appear in a coming issue of Accounting Horizons, Steven Balsam of Temple University, Washington and Lee University's Afshad J. Irani, and Jennifer Yin of the University of Texas at San Antonio looked at the impact of various factors on CFO salaries and bonuses.

Not surprisingly, the study -- which tracked 2,107 CFOs working for 1,477 companies over a 13-year period -- found that job complexity and overall firm performance affected both CFO salaries and bonuses, "CFO-specific performance" fittingly drives only the latter.

Focusing on this CFO-specific performance, it is also perhaps no shocker to read that CFOs "receive higher bonuses when the firm meets or beats earnings forecasts."

The surprise turns out to be how much more lucrative it can get for CFOs that just squeak by, as opposed to astounding Wall Street.

"In what we feel is our most interesting finding, we observe that CFOs receive higher bonuses in years where they meet or just beat analyst forecast expectations and have had negative analyst forecast revisions or positive discretionary accruals," the authors say. "This finding is consistent with the vast literature documenting the importance of meeting earnings goals, as well as the CFO's instrumental role in using accounting discretion to achieve those goals."

And the magnitude of this reward appears significant: CFOs found to use these methods to achieve a "small beat" got bonuses 42% higher than those in companies that failed to meet expectations. This effect was limited to CFOs, and was not found to be the case for other C-Suite members.

On the other hand, CFOs face "ethical and legal disincentives" --- ranging from SEC enforcement actions to criminal charges -- that should in theory discourage them from either cooking the books or colluding with analysts.

"Still it may be in the best interest of the firm and its' shareholders for the CFO to manage expectations/earnings," they observe. "To induce him/her to do so, which involves effort and risk on the part of the CFO, the compensation committee may need to provide additional incentives."


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