- CEOs who hire their own CFOs have 10% higher income than those who don’t, forthcoming research from Duke University shows.
- The study is based on more than 20 years of data from S&P 1500 firms, and finds CEOs earned a median pay package of $3.19 million a year, which translates into a gain of about $300,000 a year if the CFO was hired after the CEO.
- "CEOs ultimately have power over CFOs, arguably more so when the CEO played a role in hiring the CFO," says Bill Mayew, professor of accounting at Duke's Fuqua School of Business and a co-author of the study. "They may pressure CFOs to manage earnings to help the firm meet, or just barely beat, earnings targets from financial analysts. Those reported earnings and the response in stock prices can then drive up a portion of the CEO’s compensation based on the firm’s performance."
The findings add to a growing body of research on co-option. A 2014 University of Louisiana study and a 2010 Arizona State University study are among studies finding CEOs exerting pressure through co-option on company board members. This new research studies co-option between CEOs and CFOs.
The researchers analyzed 18,000 data points between 1993 and 2015, and concluded co-opted CFOs used earnings management techniques to achieve analyst-based earnings targets, which in turn leads to higher CEO compensation.
CFOs "can decide to run their operations differently and in a way that promotes short-term earnings such as cutting spending on research and development," said John Heater, assistant professor of accounting at Fuqua. They can also use "overproduction or other methods that boost profits today but can hurt the firm tomorrow."
Pressure to please is probably higher for finance professionals new to the CFO seat, Mayew said.
"If you’re a new CFO, you don’t want to displease your boss and risk getting fired," he said. "Over time, a CFO builds up allies in the firm, which might give them more power to voice their opinion, and apply accounting rules neutrally, rather than pushing the boundary."
The study, "CFO Co-option and CEO Compensation," is forthcoming in Management Science, a peer-reviewed journal published by the Institute for Operations Research and the Management Sciences. In addition to Mayew and Heater, co-authors include Shane Dikolli of the University of Virginia and Mani Sethuraman of Cornell University.