Alvarez & Marsal’s Compensation and Benefits Practice recently released its 2018 study on compensation practices in the oil and gas oilfield services (OFS) industry. Our study analyzed the total value of CEO and CFO compensation packages, annual and long-term incentive pay practices, as well as the prevalence and value of change in control benefits to which these executives are entitled. Additionally, given the volatility in the commodity markets, we also address compensation arrangements at distressed OFS companies. Below are key takeaways from our research. The full report can be downloaded here.
Total Direct Compensation
- On average, incentive compensation — including annual and long-term incentives (LTI) — comprises 76 percent of a CEO’s and CFO’s total compensation package.
- Total compensation for CEOs is approximately $5.7 million, while total compensation for CFOs is approximately $2 million.
Annual and Long-Term Incentive Compensation
- The types of annual incentive plan metrics utilized within the sector are varied and diverse. EBITDA is the most prevalent metric (utilized by 71 percent of companies), followed by health, safety, and environmental (utilized by 57 percent of companies). The next three most prevalent metrics are financial metrics (cash flow, return on capital and earnings), utilized by 26 percent, 17 percent and 14 percent of companies, respectively.
- The prevalence of long-term incentive awards varies by company size, but time-vesting restricted stock/restricted stock units and performance-vesting awards are most common (each used by 88 percent of all companies).
- For performance-based LTI awards, relative total shareholder return is the most common performance metric (used by 74 percent of companies).
Change in Control Benefits
- The most valuable benefits received in connection with a change in control are accelerated vesting and payout of long-term incentives, and severance.
- Single trigger equity vesting (no termination required) is most prevalent (59 percent), although double trigger equity vesting (termination required) is also common (38 percent).
- Only 16 percent of CEOs and CFOs are entitled to receive excise tax “gross-up” payments — meaning the company pays the executive the amount of any excise tax imposed, thereby making the executive “whole” on an after-tax basis. 61 percent of companies do not address excise tax protection at all.
- Incentive programs, when properly structured, can help bridge the compensation gap between the onset of financial hardship and a healthy go-forward restructuring.
- Just as incentive plans may be effective tools prior to and during the bankruptcy process, equity granted by companies upon emergence from bankruptcy is used to motivate and retain employees after the company has emerged from bankruptcy protection.
- Executive compensation programs are among the most important tools that can be utilized in a restructuring.
Alvarez & Marsal Taxand Says:
Incentive-based compensation makes up a significant portion of an executive’s total compensation package. Therefore, to remain competitive, it is important for compensation committees to analyze how other companies in the industry are structuring their programs. This report is one step in that analysis.