Alvarez & Marsal’s Compensation and Benefits Practice recently released its 2018 study on compensation practices in the oil and gas exploration and production (E&P) industry. Our study analyzes 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 volatility in the commodity markets, we 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 (LTIs) — makes up 85 percent of a CEO’s and 82 percent of a CFO’s total compensation package.
- Total compensation for CEOs increased 18 percent over the previous year, while total compensation for CFOs increased 30 percent.
Annual and Long-Term Incentive Compensation
- With the volatility in the energy sector, we have seen a notable increase in the use of cost control and safety metrics in annual incentive plans, while the use of growth metrics such as production and reserves has 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 86 percent of all companies).
- 70 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 91 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) is most prevalent (51 percent), although double trigger equity vesting (termination required) is also common (43 percent).
- Only 15 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, 85 percent of companies do not provide any excise tax protection, either utilizing a valley provision or not addressing it 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 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.
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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