BOSTON Sun Feb 8, 2015 8:21am EST
These are nervous times at the top of North America’s oil companies. Executives are trying to cope with the plunge in oil prices and are slashing costs as they watch earnings and revenue drop. Their own compensation, though, may not yet be on the chopping block.
According to compensation consultants and some investors, the mostly generous packages executives were receiving when the oil price was much higher, and the U.S. shale oil boom was roaring away, are in most cases going to survive – at least for awards based on their performance in 2014. Those will be announced in the next few months.
“2014 is going to look like a pretty good year for most," said Mike Halloran, senior partner and executive compensation specialist at the Dallas office of consulting firm Mercer.
This is largely because the oil price decline did not push down company profits until well into the second half of 2014 and some shares finished the year around where they began.
Given the substantial increases many of them received in 2013, compensation that is little changed should not be much of a hardship. The median increase in total compensation packages for oil and gas company CEOs was 11 percent for 2013, according to Institutional Shareholder Services, compared with a 7 percent median increase for all Russell 3000 CEOs. In dollar terms, energy company CEOs made an average of $7.3 million in 2013 compared with an average of $5.3 million among all Russell 3000 CEOs, ISS found.
Still, the C-suite won’t be altogether unscarred. Some CEOs and other top executives have already seen the value of the stocks and options they hold in their companies drop in the past few months.
And Halloran warned that in a year’s time total compensation – which mainly consists of base pay, bonus and long-term incentive payments - may be a different story. If oil prices stay low throughout the year then executive packages could shrink by 30 percent as bonus goals become harder to reach, while stocks and options may not keep their value if shares fail to recover or sink further.
INVESTOR PRESSURE
There are signs that investor pressure to rein in excessive compensation may be having an impact at a handful of oil and gas companies.
Drilling contractor Nabors Industries Ltd, which faced a shareholder backlash last spring over its high level of executive compensation, said in a December securities filing that it reduced the annual base salary of Chairman and CEO Anthony Petrello to $1.53 million from $1.7 million for the first six months of 2015, which would be a decline of $85,000.
Nabors spokesman Denny Smith said via email that Petrello initiated the cut and that his direct reports also took voluntary 10 percent salary reductions. “This was done in light of a weaker industry outlook precipitated by the decline in crude oil prices which are a significant driver of our business,” Smith said.
Oil and other resource companies traditionally tend to buffer executives from being directly affected by commodity prices that are out of their control. Incentive pay tends to be linked to metrics - like share price performance - that are pegged against peers who would also be affected by oil prices.
A few boards may even compensate for depreciation in stock and option awards earned in previous years by providing bigger bonuses or even by repricing stock options that have gone underwater – meaning that they will expire worthless unless the share price recovers. Most companies, though, will be wary of the optics of such moves as perceived by employees and shareholders who have seen jobs cut and share prices fall, the consultants said.
The CEOs with most at stake could be from the exploration and production companies who don’t have operations such as refining and pipelines that are affected less by moves in the oil price.
Take for instance Houston oil producer Anadarko Petroleum Corp . In a November securities filing the company said its board's compensation committee decided in its annual pay review that "targeted total compensation should remain flat year-over-year as compared to 2013."
Anadarko CEO and Chairman Al Walker may, though, feel the impact of a decline in the company’s share price.
Walker's 2013 compensation totaling $16.9 million included stock and options together estimated to be worth $11 million when the awards were made in November that year. The company’s share price was at $92 then but closed on Friday at $82.70, meaning the options, which expire in 2020, are currently underwater. The lower share price would cut the value of the restricted shares Walker received to $2.48 million from $2.76 million.
In addition, the share price decline likely puts at risk at least some of the estimated value of stock that Walker could earn as the final amount he will receive is tied to performance targets, according to an analysis by Houston executive pay consulting firm Longnecker & Associates. Anadarko declined to comment on the analysis.
"TONE DEAF"
The oil industry does not seem to be headed for a major showdown with activist investors over compensation just yet.
Boards are unlikely to make up for the lower value of stock awards by boosting bonuses or sweetening packages in other major ways, said Chris Crawford, president of Longnecker. "That would be tone deaf" at a time when the industry is already cutting capital expenditures and laying off workers, he said.
David Winters, the Wintergreen Advisers fund manager known for raising concerns about whether executive compensation at Coca-Cola Co was too high, said he is satisfied with executive compensation plans at two Canadian oil companies he holds, Birchcliff Energy Ltd and Canadian Natural Resources, whose share prices through Friday had fallen 49 percent and 21 percent respectively off their highs from last summer.
Winters said via email: “We like the way their pay is structured. It rewards them for adding value for shareholders, not riding the swings in oil prices.”