Latest Trends in Compensation Practices at the Top U.S. Oil and Gas E&P Companies
Alvarez & Marsal’s Executive Compensation and Benefits Practice recently released its 2017 study on compensation practices in the oil and gas exploration and production (E&P) industry. 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 depression in the commodity markets, we also address compensation arrangements at distressed E&P 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) — makes up about 80 percent of a CEO’s and CFO’s total compensation package.
- Total compensation for CEOs increased 13 percent compared with our prior study, while total compensation for CFOs remained relatively flat.
Annual and Long-Term Incentive Compensation
- With the continued depression in the energy sector, we have seen a substantial increase in the use of cost control metrics in annual incentive plans, while the use of growth metrics such as production and reserves has slightly decreased.
- The prevalence of long-term incentive awards varies by company size, but time-vesting restricted stock/restricted stock units are the most common form of award granted (used by 77 percent of all companies).
- 59 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 (used in 92 percent of performance awards).
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) and double-trigger equity vesting (termination required) are nearly identical in prevalence (47 and 46 percent, respectively).
- Only 18 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; 48 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. Some common metrics for E&P bankruptcy incentive plans include production, expense reduction (lease operating expenses [LOE] or general and administrative [G&A]) and 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.
- Executive compensation programs are one of the most important levers that can be used 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.
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 advisors. 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 advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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