Alvarez & Marsal’s Compensation and Benefits Practice recently released two studies on compensation practices in the oil and gas industry, one covering the exploration & production (E&P) sector and one covering the oilfield services (OFS) sector. Our studies analyzed the total value of CEO and CFO compensation packages, annual and long-term incentive pay practices, CEO pay ratios and the prevalence and value of change in control benefits to which these executives are entitled. We also address compensation arrangements at distressed E&P and OFS companies, as well as initial public offerings in the E&P and OFS sectors. Below are key takeaways from our research.
The full reports can be downloaded here:
Total Direct Compensation
- On average, incentive compensation — including annual and long-term incentives (LTI) — comprises over 80 percent of the total compensation package for CEOs and CFOs.
- Total compensation for CEOs and CFOs increased year-over-year in both sectors, as discussed in our reports.
Annual and Long-Term Incentive (LTI) Compensation
- Annual incentive plan payouts generally range from 50 percent to 200 percent of target.
- The prevalence of LTI awards varies by company size and our reports discuss the most common LTI vehicles used in the sectors.
- For performance-based LTI awards, relative total shareholder return is the most common performance metric.
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, as well as severance.
- Only a small percentage of CEOs and CFOs are entitled to receive excise tax “gross-up” payments. The vast majority of companies do not address excise tax protection at all.
- More than 250 E&P and OFS companies in the U.S. have filed for bankruptcy since 2015. In 2018, the oil and gas industry experienced more bankruptcies than any other industry — representing approximately 15 percent of all bankruptcies.
- Incentive programs, when properly structured, can help bridge the compensation gap between the onset of financial hardship and a healthy go-forward restructuring.
Initial Public Offerings (IPOs)
- The E&P and OFS sectors saw approximately 20 IPOs over the 2017-2018 period.
- There are many executive compensation considerations to address during an IPO, including plan design, legal disclosure, financial impact, plan rules and limits, and special compensation arrangements.
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. These reports are one step in that analysis.