Effective compensation programs are critical to attract, retain and drive 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.
To understand compensation practices in the energy sector, specifically for exploration & production (E&P) companies, the Compensation and Benefits Practice of Alvarez & Marsal (A&M) examined the 2021 proxy statements of the largest E&P companies in the U.S.
Compared to last year, the average total compensation for CEOs and CFOs decreased slightly, primarily due to the temporary compensation reductions relating to COVID-19 and the Russia-Saudi Arabia oil price war. As the economy and the commodity price environment continue to recover, A&M expects a gradual upward movement in compensation levels.
For board of director compensation, A&M observed similar reductions in cash and equity retainers for similar reasons as the reductions for CEO and CFO compensation.
On average, incentive compensation—including annual and long-term incentives (LTI)—comprises approximately 81% of a CEO’s and 75% of a CFO’s total compensation package.
Only 16% of companies in the top two quartiles utilize annual incentive plans (AIPs) where payout is determined on a purely discretionary basis while approximately 52% of companies in the bottom two quartiles utilize totally discretionary AIPs.
The types of AIP metrics utilized within the sector are varied and diverse. Health/safety/environmental is the most prevalent performance metric (80%). The next three most prevalent metrics are lease operating expense (53%), SG&A expense (51%) and cash flow (49%). Use of environmental, social and governance (ESG) metrics continues to grow, and the typical weighting for such metrics is between 10% and 20% of the overall AIP.
The prevalence of LTI awards varies by company size, but time-vesting restricted stock/restricted stock units and performance-vesting awards are most common, utilized by 67% and 59% of companies, respectively.
For performance-based LTI awards, relative total shareholder return (TSR) is the most common performance metric—used by 89% of companies with performance plans.
Continued uncertainty and consolidation in the E&P industry has brought attention to the need for market-based severance programs for executives.
The most common non-change in control involuntary termination (Non-CIC Involuntary Termination) cash severance multiples for CEOs are between 2 and 2.99 (applicable to 59% of the CEOs), and for CFOs the most common multiples are between 1 and 1.99 (applicable to 74% of CFOs).
The most common change in control involuntary termination (CIC Involuntary Termination) cash severance multiples for CEOs and CFOs are between 2 and 2.99 times compensation (applicable to 50% of the CEOs and 55% of the CFOs in this report).
The most valuable benefit received in connection with a Non-CIC Involuntary Termination for CEOs is accelerated vesting and payout of LTI, making up 50% of the total severance benefit for CEOs. For CFOs, the most valuable benefit is severance, making up 44% of the total severance benefits for CFOs.
The most valuable benefit received in connection with a CIC Involuntary Termination is accelerated vesting and payout of LTI, making up 48% and 49% of the total severance benefit for CEOs and CFOs, respectively.
Double trigger equity vesting (termination required) is most prevalent (53%), while single trigger equity vesting (no termination required) is slightly less common (46%).
As shown in Figure 3, excise tax gross-ups are not very prevalent among E&P companies.
Incentive programs, when properly structured, can help bridge the compensation gap between the onset of financial hardship and a healthy go-forward restructuring.
When emerging from bankruptcy, equity awards held by employees pre-bankruptcy generally have no value. Lack of meaningful equity ownership in the go-forward entity, coupled with an uncertain company future, leads to difficulties in retaining and motivating key executives post-emergence.
Emergence equity grants (sometimes referred to as a Management Incentive Plan (MIP)) are a way to ensure that companies retain motivated personnel who are vital to a successful post-emergence entity.
Addressing compensation-related issues is crucial when preparing for an IPO.
As commodity prices have rebounded since 2020, the market for IPOs has seen more private energy companies looking to go public via special purpose acquisition companies (SPACs) or a more traditional IPO route.
Alvarez & Marsal’s Compensation and Benefits Practice has partnered with Equilar and is pleased to provide this latest edition of their study on E&P Compensation. Their mission is to help companies understand the current environment surrounding compensation in the E&P sector. Read the full report and learn more at bit.ly/3vGPmVB.