CFO Role and CFO Compensation: An Empirical Analysis of Their Implications

Journal of Accounting and Public Policy, Vol. 37, No. 4, pp. 265-281, July-August 2018

Posted: 25 Aug 2018

See all articles by Ariela Caglio

Ariela Caglio

Bocconi University - Department of Accounting; SDA Bocconi

Andrea Dossi

SDA Bocconi; Bocconi University - Department of Accounting

Wim A. Van der Stede

London School of Economics & Political Science (LSE)

Date Written: August 15, 2018

Abstract

Given concerns over CFO pay, especially incentives, and considering the tension between a CFO’s fiduciary responsibility and being a key member of the firm’s executive team, we examine the determinants and effects of CFO compensation amount, incentive intensity, and proximity to CEO compensation in a sample of European companies (FTE 500, 2005–2009). First, we focus on the CFO role as a determinant of CFO compensation. Like prior work, we proxy for CFO roles by using hand-collected public data on education and past professional experience, but we supplement these proxies with proprietary data to more directly capture the firm-specific nature of the CFO job in term of its similarity with that of the CEO. We thus argue how CFOs can have varied roles characterized by different levels of financial expertise and CEO-likeness, and document that it is this latter aspect that is associated with CFO compensation. Second, we study the effects of CFO compensation design on outcomes in the CFO’s realm related to financial reporting. We find that CFO financial expertise is positively associated with financial reporting quality, while a CFO’s pay long-term incentive intensity and a CFO’s incentive compensation proximity with the CEO are negatively associated with financial reporting quality. Overall, then, our results suggest that CFOs get rewarded for their CEO-likeness, and particularly for their being similar to the CEO in terms of tasks and decision making authority. But it is their financial expertise that is positively related to financial reporting quality. At the same time, using compensation that is more incentive intensive and more similar to that of the CEO appears to be potentially detrimental to the quality of financial reporting. These results are relevant for boards involved in selecting highly expert CFOs, and their compensation committees charged with defining subsequently effective incentive compensation plans for those CFOs.

Keywords: Chief Financial Officer (CFO), CFO role, CFO incentive compensation, CFO compensation determinants, CFO compensation effects

Suggested Citation

Caglio, Ariela and Dossi, Andrea and Van der Stede, Wim A., CFO Role and CFO Compensation: An Empirical Analysis of Their Implications (August 15, 2018). Journal of Accounting and Public Policy, Vol. 37, No. 4, pp. 265-281, July-August 2018. Available at SSRN: https://ssrn.com/abstract=3231782

Ariela Caglio

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

SDA Bocconi ( email )

Via Bocconi 8
Milan, Milan 20136
Italy

Andrea Dossi

SDA Bocconi ( email )

Via Bocconi 8
Milan, Milan 20136
Italy

Bocconi University - Department of Accounting

Via Roentgen 1
Milan, 20136
Italy

Wim A. Van der Stede (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 7955 7420 (Fax)

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