CFO compensation: Evidence from Australia

• We examine which theory best explains the variation in Australian CFO compensation.
• We find some evidence to support the incentive alignment view.
• The measure of CFO-specific performance gives contrary evidence to the incentive alignment view.
• All managerial power variables are significantly positive with the level of CFO compensation.
• The managerial power approach explains more variation in CFO compensation.

We investigate the extent to which the incentive alignment theory and the managerial power theory explain the variability of CFO compensation in Australia. We find a positive relationship between the level of CFO compensation and measures of job complexity and firm stock market performance. However, we do not find the pay-for-performance link when performance is measured at the CFO-specific level. CFOs actually receive higher non-cash compensation when reporting quality is lower, suggesting a sharp contrast to predictions of the incentive alignment approach. Conversely, we find that CFOs who have more managerial power (the CFO is on the board of directors, or holds a higher level of stock ownership, or stays longer in their position) receive significantly higher compensation. For example, a CFO who has board membership receives on average $323,590 more than the total compensation of a CFO who is not a board insider. Overall both theories are important in determining Australian CFO compensation but the managerial power hypothesis explains a larger fraction of variation in CFO pay than the incentive alignment view.