Unlike most of us, CEOs and other senior executives at U.S. oil and gas companies derive the lion’s share of their compensation not from salaries, but from bonus and incentive programs tied to performance targets set by their boards of directors. So it’s no surprise that the dramatic strategic shift implemented by U.S. E&Ps and integrated energy companies over the last decade has been steered by an equally dramatic change in their compensation incentives. In today’s RBN blog, we review how top executives at oil and gas companies are compensated and analyze the shift in the incentives they are motivated to meet.
Over the past decade, the oil and gas industry has undergone a significant change in operating philosophy. Under the old way of thinking, production growth was the most important criteria. Today, E&Ps and integrated energy companies are most concerned with financial performance. The dramatic strategic shift was triggered by two gut-wrenching oil and gas price declines that raised such serious concerns about the industry’s viability that investors largely fled the sector. To win them back, producers shifted to a model based on maximizing cash flow and profits to accelerate shareholder returns. This involved an intense focus on cost control and high-grading portfolios rather than rapid production growth. Environmental, social, and governance (ESG) issues also became higher priorities for employees and investors.
The strategic shift resulted in a remarkably rapid recovery in share prices and industry liquidity. Higher commodity prices were one significant factor. But another, less-visible driver was that company boards steered the recovery by changing executive compensation incentives to motivate CEOs and NEOs (named executive officers; i.e., the top brass) to keep their eyes on the ball. Before we discuss the specific changes in criteria, let’s look at the impact of incentives on total executive compensation.
