CIO pay tied to overall business success
- 30 August, 2012 16:07
Wayne Shurts has accomplished a lot since he joined Supervalu as CIO in April 2010: He embedded his IT staff in business departments, handed out iPads with real-time data to 1,100 supermarket managers, and implemented a promotion analytics system critical to the grocery company's business-transformation plan.
For all that hard work, Shurts got paid $1.3 million in fiscal year 2011. It's a nice sum, but not as big as it could have been.
As one of Supervalu's five most highly paid executives, his compensation rises and falls not so much on his own performance but on whether the company hits certain financial metrics. Supervalu exceeded its goal for cash flow, but fell short on same-store sales and missed net profits entirely, losing $1.5 billion.
While some companies might have handed out some cash for hitting one goal, Supervalu didn't. Its board of directors stipulated that no one would get any performance-related cash payout unless the company reached an earnings per share of at least $1.85, the number the company had hit the year before. But Supervalu tanked in fiscal 2011, ending the year losing $7.13 per share, and executive officers received zero cash incentives.
CIOs in the tippy-top echelons of executive ranks realize that although they are expected to perform technology and strategy work like Olympic athletes of IT, they are not rewarded for that sweat alone. The CIO's individual contribution must mesh with those of his C-suite mates, because only together can they hope to achieve the business metrics the board puts before them--and, afterwards, take home the really big bucks.
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But even with such alignment, the company may still blow financial targets, dragging down the CIO's compensation just like that of his colleagues. The pay packages of CIOs and other executives can fluctuate 40 percent year-to-year, according to our analysis of annual proxy statements filed recently with the Securities and Exchange Commission (SEC). CIOs can do everything right, but larger economic forces or fundamental company problems can still mean they watch potential pay slip away. Supervalu, for example, is "reviewing strategic options" to get itself out of financial trouble, then-CEO Craig Heckert said in July.
"You're among the top officers of the company and your fortunes are very strongly intertwined with theirs," says Rick Ericson, an executive compensation consultant at PricewaterhouseCoopers. "You are subjected to lots of risks that are outside of your control."
It used to be that CIOs were judged and rewarded solely on IT achievements: projects finished on time and on budget, compliance systems installed and working, key hires made. That's still how it is for many CIOs, whose companies view IT as a support function.
But as enterprises build business models around IT, CIOs gain stature and influence--as well as the pressure of trying to hit a list of accounting targets that were once the burden of the CEO and CFO only. Michael Basone, CTO at Weight Watchers International, says IT leaders must remain undaunted. Financial metrics help focus top executives on the same goals, Basone says. But that's only half the battle. Companies must also foster true collaboration at the top, he says, because IT is fused with every other part of the business.
Without IT, there's no sales or profits or customer service or geographic expansion or, increasingly, competitive advantage.
One way to assess how high the stakes are for companies--and for their CIOs, personally and professionally--is to dissect the compensation plans of some powerful IT leaders. Among the 1,000 biggest public companies in the United States, 45 CIOs were rewarded highly enough last year to be included in the proxies required by the SEC, which explain how the top five company executives are paid.
Compensation for this elite 45 is a complex formula of fixed pieces, such as salary and perquisites, and variable pieces made up of cash, stock and options. Within the variable portion, there are both short- and long-term grants. To get them, executives have to achieve the financial goals the board specifies. The motivation? Variable pay can account for 70 percent to 80 percent of a CIO's compensation.
There's no uniformity in those metrics. Profits and sales are popular, of course, but CIOs in our analysis were on the line for at least a dozen other measurements last year, including cash flow, return on invested capital, book value per share and operating ratio. There is also usually an industry-specific metric. For example, Norfolk Southern CIO Deborah Butler had to help her peers improve the railroad's train and connection performance. (Partially achieved.) Allstate CIO Suren Gupta had to help increase the number of policies sold to households that might be interested in multiple kinds of insurance. (Not achieved.) Sometimes special events at the company dictate a goal. Laboratory Corporation of America (LabCorp) recently acquired three smaller medical testing companies, and one 2011 goal for CIO Lidia Fonseca was to help attain specific savings from integrating those acquisitions. (Achieved.)
Some companies disclose more than others. Home Depot, for example, reveals three levels of goals for each of its four metrics for 2011: sales, operating profit, inventory turns and return on invested capital. (See "Measuring CIO Performance: The Rise and Fall of Compensation.") The company also shows the relative weighting of each metric in its incentive plan. CIO Matt Carey earned $1.1 million in stock and $656,000 in options mainly because the company surpassed targets for operating profit and return on invested capital over a three-year period. Carey's total compensation of $3.2 million puts him in the top 10 among our 45 most highly paid CIOs.
Weight Watchers, on the other hand, is more vague in its SEC filing. The company specifies a target for operating profit (at least $423.2 million, the same as it saw in 2010). But it doesn't reveal numerical goals for its online business, which Basone runs as president. He says he surpassed his marks for WeightWatchers.com, with online subscribers up 50 percent in 2011 compared to 2010. Basone earned $1.3 million last year; he got a $390,000 bonus, or 91.5 percent of his $426,000 salary, for attaining goals for the online business and for the company as a whole. He also received awards in stock ($199,000) and options ($252,000), the same as his fellow officers, and other financial benefits.
Ericson at PwC notes, however, that even the most inventive compensation plans can't pull a great performance from a mediocre CIO. More important to the company over time is getting the right CIO in the first place. With all that top officers are responsible for, he says, "if things go badly, any one person can materially hurt a company."
No "I" in Team
CIOs may also have individual technology goals set by the CEO and approved by the board. But achieving individual goals doesn't boost annual take-home pay by much because the IT goals aren't weighted nearly as heavily as corporate financial targets. For every $100 in incentive compensation for top officers, Ericson estimates, $10 or less comes from achieving personalized goals. "That's the numerical reality."
So, while rolling out mobile applications to the sales force is important for the CIO to do well and it might ultimately help increase corporate revenues, the mere act of completing the mobile project doesn't buy a CIO much, personally.
For a company, allowing too many individualized goals creates the risk that particular executives will focus on their own targets to the detriment of the corporation, says Vincent Milich, a compensation expert at Hay Group, a management consulting company. Metrics define behaviors, he says. "During the recession, we had people making millions in bonuses and grants while the organization was going down the tubes."
The recession has been a downer. Gone are country-club memberships and family use of the corporate jet, which were two popular perks for CIOs five or six years ago. Today, club membership, if you want it, is on you and the jet is usually reserved for the CEO and sometimes his family, thank you very much.
Discretionary cash bonuses are few and far between these days, too. Just 11 of the 45 CIOs in our study got such gifts last year, compared to 19 of the 52 CIOs listed in proxies in 2006. The drop from 37 percent to 24 percent receiving discretionary bonuses reflects a new activist attitude among board compensation committees, Milich says. "The oversight around compensation is more intense, focused on making sure we're getting something for the bonus dollars we're paying out."
Supervalu's Shurts, it must be said, did get some cash in fiscal 2011 that was unrelated to company performance: a $125,000 hiring bonus and a $50,000 discretionary bonus from his CEO.
Meeting financial metrics "is the fun part" of the CIO job, Shurts says. "Anything we do in IT must tangibly affect something that our customers can feel [or] that our P&L sheet can see," he says. "Even just five years ago, how much did we talk about IT and the [corporate] revenue line at a company? Very little. Today it's a big thing."
That attitude trickles down to his staff because he uses the financial targets to clarify IT's mission. When project ideas are assessed against corporate goals, it's easy to see what to work on and what to ignore, he says. "The question becomes, How do we not just do what's technically possible or cool, but how do we impact these metrics? It gives your IT effort focus and an agenda."
Fonseca uses a similar clarifying technique for her IT staff. The main way LabCorp makes money is by physicians ordering tests, she says. IT must work fast to get new customers connected to LabCorp and to supply them with the right electronic tools. "It's important they can start turning into revenue," she says. Like Home Depot, LabCorp set three levels of corporate goals--threshold, target and "superior"--and the company surpassed the top end of three out of four of its metrics last year. Fonseca took home $1.2 million.
Eyes on the Price
CIOs who earn multimillion-dollar payouts know that the value of their stock and options grants depends on the price of the company's stock. When it comes to awards of straight-up shares, it's the bigger, the better. Options, meanwhile, are worth the difference between the stock price on the day they're awarded and the day they vest. That means stock price may be the most-watched metric of all, Milich says.
"In the organization's lobby, a ticker shows it. People have it on laptops and desktops and mobile phones. When it's been a bad day for the company in terms of stock price, you feel it," he says. "Executives always look at it."
Monitoring share price is exactly what responsible executives should do, Gupta says. The idea is that if you, as part of the leadership team, hit all the financial metrics you're after, the company becomes more valuable, people want to invest in it and the stock price rises. Allstate's big financial goal now is 13 percent return on equity (ROE) by 2014, meaning the company wants to generate at least 13 percent in profits from the money people have invested by buying shares of stock. "ROE is all about shareholder value," he says.
Allstate, however, has a long way to go: ROE last year was 4.2 percent. The insurer posted just $788 million in profits on more than $32 billion in revenue. And many of those multi-policy households disappeared. Allstate had a target of selling 50,000 new policies to existing customers last year, but instead it lost more than 36,000 policies.
Gupta, who joined Allstate in April 2011, has ideas for how IT can help Allstate reverse those trends. He wants to upgrade the technology of insurance agents in local offices and centralize customer data from Allstate's many policy databases. This would allow agents to serve customers better and sell to them more efficiently, he says. He is also holding his group to 3,726 service-level agreements, which helps to improve IT's reputation within the company.
CEO Thomas Wilson likes Gupta's plans so much that he gave the new CIO $500,000 in bonus money last year for quickly re-aligning the IT group and "planning to enhance the use of technology" at the company, according to its latest proxy statement. Gupta's total compensation for 2011 was $2.9 million.
To entice high-performing executives to stay and commit to creating lasting value for the company and investors, companies offer long-term incentives of stock and options awards. It can take five years to reap the rewards of such grants. For example, Home Depot is only now paying out on stock granted in 2009. At Supervalu, Shurts won't see some of his options fully vest until 2014. That's why they call it "long-term."
Coming of Age
That CIOs are measured and paid in the same ways as other senior officers, Fonseca says, is a metric itself--of maturity. As CIO, she is the only IT member of a 15-leader team that approves and prioritizes company IT projects, and she is one of a smaller, more-exclusive group that strategizes about new business the company wants to create.
"For us, it's not just aligning with the business. IT has to be in the business," she says. "That has been a key driver in being an effective CIO."
As companies begin to make their CIO compensation similar to that of other senior business leaders, Shurts adds, "it is a coming of age." He relishes his role as a fellow C-level strategist at Supervalu. "My contribution is equal to any other executive's," he says. "You cannot buy stock in a company's IT, finance or marketing functions. A company is a team, and it either wins or loses together."
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