Good morning. CFOs at newly independent companies can see substantial increases in compensation.
A Compensation Advisory Partners (CAP) study of industrial and manufacturing spinoffs, shared with CFO Daily, found that median target total compensation rose roughly 66% for “SpinCo” CFOs with comparable pre- and post-transaction pay disclosures, compared with 57% for CEOs. CFO salaries rose 11%, while annual long-term incentive opportunities increased 102%. The study covered 19 major separations involving 29 resulting companies. Median revenue was $11.8 billion for parent companies before the transaction and $5.2 billion for the resulting companies.
The larger equity packages reflect the shift from divisional leadership to the top ranks of a new standalone public company, Ryan Colucci, a CAP partner and author of the report, told me. “The buck stops with you now,” he said.
That expanded responsibility also helps explain a striking difference in hiring patterns. While 79% of SpinCo CEOs came from within their organizations, 58% of CFOs—11 of 19—were recruited externally. Many of those external hires had experience as public company CFOs, Colucci said.
“Honeywell Aerospace, for example, hired the former CFO of Deere & Company,” he said. Honeywell Aerospace, a spinoff of Honeywell, became an independent, publicly traded company in June, trading on the Nasdaq under the ticker symbol HONA. Josh Jepsen joined Honeywell Aerospace as CFO on Feb. 23. According to his offer letter from Honeywell, his annual base salary is $1 million, and he was also offered a cash sign-on bonus of $1.525 million, payable within 30 days of his start date.
Colucci said boards may turn to external candidates because an internal divisional finance leader may have limited experience in building a finance organization. However, recruiting a seasoned CFO can bring additional costs.
Incoming CFOs may forfeit equity awards or bonuses from their previous employers, prompting companies to offer cash or equity sign-on packages. These awards can help replace forfeited compensation while giving executives a financial stake in the new company, although the replacement awards are not necessarily dollar for dollar, Colucci said.
Recruitment also begins well before a separation is complete. Some externally hired CFOs join six to nine months before the transaction closes, initially working within the parent organization, he said.
The median transaction took approximately 13 months from announcement to launch. Approximately three-quarters of SpinCo CEOs and CFOs had their compensation established before separation or through a staged process that began before closing.
One-time transaction or launch awards were also common: 83% of the resulting companies provided them, with median awards of approximately $3 million for CEOs and $1 million for CFOs. These awards were separate from recurring target compensation and recruitment packages.
Yet becoming independent rarely means abandoning the parent company’s entire incentive framework. Companies generally retained familiar structures while adjusting performance measures or equity vehicles to reflect their new circumstances, Colucci said. A standalone business might add cash-flow or working-capital measures, introduce strategic goals related to the separation, or reconsider its use of stock options, he said.
Sheryl [email protected]
This story was originally featured on Fortune.com
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