While financial executives play crucial roles in organizations, there can be hidden costs associated with their positions. A thoughtful approach to recruiting full-time CFOs is warranted as these cash and non-cash expenditures can impact the company’s bottom line in the short and long term.
Post by Aleksey Krylov Photo by Marek Studzinski on Unsplash
Here are a few items worth considering when assessing total costs of a financial chief:
CFO compensation and benefits
CFOs compensation package includes multiple elements which often encompass high salaries, bonuses, stock options, and other incentives as part of their compensation packages. While CFOs are rarely the highest paid employees, their direct compensation costs is nevertheless significant and can impact a company's financial resources.
CFO perks and allowances
Financial executives may be entitled to various perks and allowances, such as expense accounts, company cars, club memberships, executive retreats, and other benefits. While these perks may be intended to motivate and retain top talent, they can add to the overall cost of employing a CFO.
CFO severance packages
Severance can be a significant and non-obvious cost to the company, which can be a drag on financial performance over a long term. Unless specifically negotiated to have a delayed trigger (e.g., after 6 months after the start date or upon completion of pre-defined trial milestones), in the event of CFO turnover, severance packages and contractual obligations may require significant financial payouts. These costs can include severance pay, bonuses, stock options, and other benefits outlined in executive employment contracts and can run for 12 months or longer. In essence, due to the severance commitments, the company may have to pay for two (or sometimes more) financial executives at the same time.
CFO recruitment and onboarding
Hiring and onboarding CFOs is time-consuming. Because it is a C-level executive, the CEO and the Board members must be involved in recruiting, which is a distraction from governance. Furthermore, CFO recruiting is expensive. The costs associated with executive search firms, advertising, interviews, background checks, relocation assistance, and orientation programs can quickly accumulate.
CFO training and development
Financial executives often require specialized training and development programs to enhance their leadership skills and stay updated with industry trends. The cost of executive education, coaching, workshops, and mentoring can be substantial, especially for ongoing development initiatives. It is also non-transferable from one professional to another.
CFO risk of poor decision-making
If a CFO makes poor strategic decisions or fails to effectively manage the team or the entire organization, the resulting financial and reputational costs can be significant. This includes actual monetary losses, potential losses, missed opportunities, legal implications, damage to the brand, and decreased employee morale.
Finance team dynamics and turnover
A Chief Financial Officer is a leader within the organization and has a direct impact on their teams and the overall organizational culture. Poor financial executive leadership or management practices can lead to low employee morale, higher turnover rates, and associated costs of recruiting and training new employees.
Legal and compliance issues
With the exception of the CEO or General Counsel, relative to other C-level executives CFOs carry a disproportionately heavy burden for ensuring compliance with laws, regulations, and ethical standards. Failure to do so can result in legal disputes, fines, penalties, and damage to the company's reputation. Legal costs and potential settlements can have a substantial impact on the company's finances.
Reputational risk
CFOs are the face of the company in front of lenders and investors, and can significantly influence its public image. If an executive's actions or personal conduct negatively impact the company's reputation, it can lead to a loss of customer trust, decreased sales, and damage to the brand equity.
CFO opportunity costs
The high salaries and benefits provided to CFOs represent an opportunity cost, as those financial resources could have been allocated to other areas of the business, such as research and development, marketing, or expanding operations. These opportunity costs are dramatically higher when a bad-fit person is hired and subsequently needs to be replaced.
It's important to note that while executives can come with hidden costs, their leadership, strategic decision-making, and ability to drive organizational success can also generate substantial value for the company. The overall impact of these hidden costs must be weighed against the benefits that executives bring to the organization.
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