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February 6, 2017

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.

Key Takeaways

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.

Bankruptcy Compensation

  • 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.

Disclaimer

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.

About Alvarez & Marsal Taxand

Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the U.S., and serves the U.K. from its base in London.

Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.

To learn more, visit www.alvarezandmarsal.com or www.taxand.com

Related Issues:

Despite Strong Winds, Golden Parachutes Still Holding Steady

Executive compensation continues to be bombarded with scrutiny by shareholders, shareholder advisory firms, politicians and the media. With say-on-pay voting now well established, the voices of shareholders are getting louder, and companies are listening. Many companies have made significant changes to their compensation strategy in recent years to appease stakeholders. In particular, companies have altered their course on benefits provided to executives in connection with a change in control, commonly called "golden parachutes."

Executive Compensation in the Energy Sector is Seriously Suffering. What's the Relief?

Over the last year, the energy sector has been plagued with low commodity prices. The plunge in crude oil and natural gas prices has in many cases shaved over 50 percent off stock prices of many exploration and production (E&P) companies. In a market where executive compensation has traditionally been tied to equity prices or total shareholder return, company boards and compensation committees are facing a quandary.

KEIPing Key Employees Motivated in Bankruptcy and Beyond

It is critical for distressed companies to retain and motivate key talent both during the bankruptcy process and upon emergence from bankruptcy. The implementation of key employee incentive plans during the bankruptcy process and the granting of equity compensation upon (or shortly following) emergence from bankruptcy are two ways in which companies may accomplish these retention and motivation goals.