Report: E&P CEOs Salaries Rose 5% Last Year

Average total compensation for CEOs and CFOs in E&P companies increased last year vs. 2017 primarily due to the value of long-term incentives, according to a report by Alvarez & Marsal’s compensation and benefits practice reviewing the 2018 proxy statements of the largest U.S. E&Ps. 

The practice also surveyed annual and long-term incentives for CEOs and CFOs; the benefits to which executives are entitled upon a change in control; and CEO pay ratios. Seventy-six companies were analyzed, ranging from $25 million in market cap to as high as $65.6 billion.

Overall, CEOs saw a 5% increase in average total compensation with $7,285,457 the average paid in 2018; CFOs enjoyed a 12% boost with the 2018 average at $3,160,614.

“On average, incentive compensation—including annual and long-term—comprises approximately 85% of a CEO’s and 80% of a CFO’s total compensation package,” the report noted.

In terms of annual incentive plans where payout is determined on a purely discretionary basis, just 5% of companies in the top two quartiles use this method, while about a quarter of those in the bottom two quartiles use such metrics. The most common metric in determining annual plans is production/production growth, with 87% of companies following this path. AS for long-term awards, time-vesting restricted stock/restricted stock units are used by 96% of companies.

Nearly three-quarters of companies grant long-term incentive awards where vesting or payout is determined by one or more performance metrics, according to the report. Of these companies, relative total shareholder return is the most common, and three years is the most common performance period employed.

When there is a change in control, the most common cash severance multiple is three times compensation or greater for CEOs (48%) and two to three times compensation for CFOs (66%). In this situation, the most valuable benefit received is accelerated vesting and payout of long-term incentives, making up 59% and 56% of the total value for CEOs and CFOs, respectively, according to the report.

Bankruptcy compensation is also highly relevant for energy firms given the industry’s up and down cycles. The report noted that more than 150 E&Ps have filed for bankruptcy since 2015, and even in 2018 energy had more than any other industry. 

“Incentive programs, when properly structured, can help bridge the compensation gap between the onset of financial hardship and a healthy go-forward restructuring,” the report’s authors said. They noted that equity granted upon emergence from bankruptcy is also used to motivate and retain employees.

IPOs have been sparse of late in the E&P industry, with just five over the 2017-2018 period. When planning an IPO, the authors said, among the compensation practices to consider are selecting a peer group, compensation and design benchmarking and governance policies.  

“By forming an IPO roadmap, however, a company can ensure that its executive compensation programs and policies are competitive with the market; within industry norms; compliant with various government requirements; and aligned with executive and shareholder interests.”