Energy Insights

Oil & Gas Crisis Response: 2020 Compensation Responses will lead to Sustained Changes

2020’s significant downturn already shows some marked differences from the 2008-2009 and 2015-2016 downturns (the last instances where oil prices fell more than 50% over a short time period).

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Mere weeks after boards approved compensation outcomes from 2019 performance, there’s a temptation to revisit or change those outcomes under the lens of 2020 performance. We believe that in the large majority of cases, those 2019 outcomes should stand on…

Long-Term Incentives and Stock Ownership Ensure Alignment with Shareholders

Annual incentive metrics serve an important purpose: communicate a company’s priorities and provide incremental annual feedback on performance.

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Much of the commentary on energy industry pay programs has focused on annual bonus metrics. Annual incentives are easier to analyze because the payouts are clearly disclosed each year in the Summary Compensation Table, and those payments can communicate how…

Relative TSR Still Delivers Real Pay-for-Performance Alignment in the Oil & Gas Industry

Among the ten largest Oil & Gas production companies that have reported 2017-2018 compensation actions, each has either implemented or enhanced a financial returns metric for 2018 incentive compensation.

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The menu of industry annual incentive metrics (and some long-term incentive metrics) now includes several instances of ROCE, Cash ROCE, ROIC, estimated wellhead returns, and other non-GAAP measures of investment returns. Investors may welcome the incentive accountability to financial returns,…

Measuring E&P Capital Decisions in an Annual Incentive Plan is Complicated

Are E&P companies using the right metrics in their annual incentive programs?

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There has been a lot of attention (both from the media and investors) focused on whether E&P companies are using the right metrics in their annual incentive programs. E&P companies have been criticized for a heavy focus on production and…

Controlling Activist Investors

Potential Texas legislation would curtail activist investors and proxy advisors.

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While we wait to see what deregulation might come out of the new administration regarding Dodd-Frank or other executive compensation regulations, the Texas legislature might take a huge step in favor of corporate boards and management. A bill currently pending…

Effective Use of Discretion in Annual Incentives

Analyzing bonus payout outcomes of publicly traded E&P companies.

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Going into 2015, annual incentive goal-setting was challenging for oil & gas companies, to say the least. E&P companies were wrestling with lowering production, where production growth is traditionally a cornerstone E&P bonus metric. Services and drilling companies were experiencing…

The BP Shareholder Vote: A Cautionary Tale

Despite using the "correct" process, BP shareholders still took issue with the company's compensation programs.

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Compensation is often more about the message than the money. BP’s recent shareholder vote offered some valuable lessons for other energy companies about sending the right messages to shareholders when commodity prices impact business results. On April 14th, nearly 60%…

The Impact of Lower Stock Prices on 2016 Say on Pay

Many energy companies should anticipate tripping ISS's absolute stock price test.

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The current industry downturn is already impacting compensation programs and will likely also impact the upcoming Say on Pay season. Based on our research, the market decline will cause an increased number of energy companies to trip a key ISS…

The Impact of Lower for Longer

Oil prices seem to be remaining "lower for longer," so what does that mean for compensation?

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In a previous Energy Insights post, Jim Wolf discussed the impact of $40 oil prices on early 2015 compensation decisions. At the time, energy companies speculated whether we’d see a “V”-shaped or “U”-shaped recovery. After a volatile summer – doubts…

ISS’s Say on Pay Vote Recommendations Surprisingly Similar to Last Year

Some experts expected more "against" votes for the energy industry this year, but that did not come to fruition.

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Heading into this recently past proxy season, experts speculated that ISS might recommend “against” say on pay proposals among the energy industry at a higher rate compared to last year assuming the dramatic decline in stock prices, driven by the…

The Line Between Ownership and Compensation

Cheniere Energy’s recent challenges offer interesting lessons in understanding the differences between “ownership” and “compensation”.

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Cheniere Energy’s recent challenges offer interesting lessons in understanding the differences between “ownership” and “compensation”. Cheniere has faced notable public challenges to its executive compensation program, including the withdrawal of an incentive plan proposal to shareholders and failed Say on…

Looking for Shareholder Value Drivers

Analyzing Common Annual Bonus Metrics to Predict Shareholder Value

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Annual incentive metrics should be key drivers of long-term shareholder value. Most energy companies include this in their philosophy statements, and it sounds straightforward. But what are the drivers of long-term shareholder value? The answer to that question obviously varies…

The End of Deferred Compensation?

Proposed Legislation Could Render the Tax Saving Effectiveness of Deferred Compensation Inert

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Our last post introduced some thoughts around proposed legislation by the Republican Chair of the House Ways and Means Committee that would effectively end tax deductibility of compensation under IRC Section 162(m). I’d like to explore the other aspect of…

Compensation Implications of CEO Transitions

Executive Compensation Plays an Important Role in Planning for CEO Transitions

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It’s no secret that CEO succession and transition planning has become an increasingly hot topic in the boardroom and a focus of outside investors. Board committees responsible for succession planning are including this topic as a part of the ongoing…

Keeping Pace During Growth

How to Avoid the Lag in Compensation Practices That Occurs When Firms Grow Quickly

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Recent headlines of Aubrey McClendon’s American Energy Partners LP receiving a $5 billion equity valuation and a flurry of energy IPOs in the last 12-24 months are reminders that change and growth can occur quickly, especially in the energy industry.…

What if there were no annual bonuses?

Removing Annual Bonuses Could Help Companies Avoid Time-Consuming Discussions

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Each February, boards and management spend thousands of hours on their annual bonus programs. Energy companies in particular can struggle to evaluate annual performance in what is inherently a long-term business. Arguing over an incremental handful of bonus points can…

Commodity Price Impact on Evaluating Performance

How to Manage Pay for Performance Measures in a Volatile Commodity Market

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Commodity prices can have a significant effect on share price and also on financial performance measures used by energy companies. This makes paying for performance at energy companies challenging because commodity price volatility can create misalignment between management efforts, management…

Using Realizable Pay to Test Pay and Performance Alignment

Testing the Link Between Pay and Performance Can Help Firms in Many Ways

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With the calendar year completed, many of our energy clients are taking this opportunity to test the long-term historical link of pay and performance. This historical analysis serves a few purposes: Helping the compensation committee understand whether they have an…

Questioning Total Shareholder Return

While Total Shareholder Return is Under Scrutiny, it Remains the Best Metric to Evaluate Performance

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Relative Total Shareholder Return (TSR) has become the most common performance metric in long-term incentive plans across the energy industry. TSR is also the primary metric used by shareholders and proxy advisors like ISS to evaluate performance and test the…

Under the Microscope

8 Keys to Benchmarking Pay to Withstand Stakeholder Scrutiny

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Say on Pay, ISS and activist investors have increased their focus on how companies benchmark pay and have raised the question whether benchmarking is used to inflate executive pay. This is particularly important in the energy sectors where pay levels…