2016-Issue 10 – To understand compensation practices in the energy sector, specifically, for exploration and production (E&P) companies, Alvarez & Marsal’s Executive Compensation and Benefits Practice examined the latest proxy statements for 100 of the largest E&P companies in the United States. Our study analyzed the total value of CEO and CFO compensation packages, annual and long-term incentive pay practices, and the prevalence and value of change in control benefits to which these executives are entitled. Additionally, given the sustained downturn in the commodity markets, we also addressed compensation arrangements at distressed E&P companies. This edition of Tax Advisor Weekly highlights 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) — makes up approximately 80 percent of a CEO’s or CFO’s total compensation package.
- The average total direct compensation for all CEOs was $5,899,439. The average total direct compensation for all CFOs was $2,786,292
Annual and Long-Term Incentive Compensation
- Among the largest E&P companies, 84 percent utilize annual incentive plans where payout is at least partially determined in a formulaic manner, while only 60 percent of the smallest E&P companies utilize formulaic performance metrics.
- The prevalence of long-term incentive awards varies by company size, but time-vesting restricted stock or restricted stock units are the most common form of award granted (used by 82 percent of all companies).
- More than half (56 percent) of companies grant long-term incentive awards where vesting or payout is determined by one or more performance metrics. Relative total shareholder return is the most commonly used performance metric and is used in 83 percent of such awards.
Change in Control Benefits
- The most common cash severance multiple for CEOs is three times compensation or greater (51 percent). The most common multiple for CFOs is between two and three times compensation (59 percent).
- The most valuable benefit received in connection with a change in control is accelerated vesting and payout of long-term incentives.
- Single-trigger equity vesting (no termination required) is most prevalent (51 percent), although double-trigger vesting provisions are nearly as common (45 percent).
- Only 19 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. Meanwhile, 47 percent of companies do not provide any 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. The most common metrics for E&P bankruptcy incentive plans are production, expense reduction (lease operating expenses [LOE] or general and administrative [G&A]) and earnings before interest, taxes, depreciation and amortization (EBITDA).
- 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.
Alvarez & Marsal Taxand Says:
Incentive-based compensation makes up a significant portion of an executive’s total compensation package. Therefore, for companies to remain competitive, it is important for their compensation committees to analyze how other companies in the industry are structuring their programs. This report is one step in that analysis.
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The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisers. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisers before determining if any information contained herein remains applicable to their facts and circumstances.
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