Alvarez & Marsal’s Compensation and Benefits Practice recently released its 2020/2021 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 compensation arrangements during times of recovery. Below are key takeaways from our research. The full report can be downloaded here.

Key Takeaways

COVID-19 and Russia-Saudi Arabia Oil Price War

• As a result of plummeting oil prices caused by the COVID-19 pandemic and the Russia-Saudi Arabia oil price war, many exploration & production companies have announced changes to their 2020 executive compensation programs.
• Through the first two quarters of 2020, 44% of the companies in the study have announced a reduction in executive compensation. Many of these reductions though are temporary and apply only to base salary.
• In terms of announced base salary reductions, 39% of companies have disclosed an equal reduction across the board for all executives while 61% disclosed a greater percent reduction for the CEO.

Total Direct Compensation

• On average, incentive compensation — including annual and long-term incentives (LTI) — comprises approximately 81% of a CEO’s and 78% 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 50x–200x 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 strategic plans.
• 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.

Compensation in Distressed Times

• More than 240 E&P companies in the U.S. have filed for bankruptcy since 2015.
• Adjusting and implementing annual incentives, long-term incentives, and retention awards should be considered in distressed times to ensure that executives stay engaged and motivated.
• Incentive programs, when properly structured, can help bridge the compensation gap between the onset of financial hardship and a healthy go-forward restructuring.

Compensation in Recovery

• When emerging from bankruptcy, equity awards held by employees pre-bankruptcy generally have no value. 
• Emergence equity grants are a way to ensure that companies retain motivated personnel who are vital to a successful post-emergence entity.
• Due to the oil price environment that has existed in the first half of 2020 the market for IPOs in the E&P sector will continue to be slow. However, as prices improve and opportunities arise, we would expect to see more private energy companies looking to go public.

Alvarez & Marsal Taxand Says:

Effective compensation programs are critical to attract, retain, and drive the performance of executives. Companies should ensure that their executive compensation programs are aligned with the market throughout each potential phase of a company’s life cycle, including initial public offering (IPO), transaction/merger, steady state, and bankruptcy. This report is one step in that analysis.