Alvarez & Marsal’s Compensation and Benefits Practice recently released its 2020 study on compensation practices in the oil and gas exploration & production (E&P) industry. Our study analyzed the total value of CEO, CFO, and board of director 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 companies, as well as initial public offerings in the E&P sector. 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) — comprises approximately 83% of a CEO’s and 81% of a CFO’s total compensation package.
- While it remains unclear what constitutes a “good” CEO pay ratio, the data indicates that a ratio of 25x to 100x is most prevalent.
Annual and Long-Term Incentive Compensation
- Annual incentive plan metrics are varied and diverse. Production is the most prevalent metric, followed by health, safety and environmental, lease operating expenses, and general & administrative expenses.
- The prevalence of LTI awards varies by company size, and our report discusses the most common LTI vehicles used in the sector.
- 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, and 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 170 E&P companies in the U.S. have filed for bankruptcy since 2015.
- 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 sector saw approximately 5 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. This report is one step in that analysis.