The massive revolt against the pay of BP’s chief executive, Bob Dudley, where almost 60 percent of the shareholders rejected the £14m (US$20 million) pay package is a stern warning to oil companies that investors aren’t pleased with the gaping disconnect between performance and pay structure.
Similarly, Royal Dutch Shell CEO Ben Van Beurden’s 2015 pay package, including pension and tax equalization of 5.576 million euros (US$6.1 million), is likely to face resistance from shareholders as two shareholder-advisory firms have urged them to oppose the CEO’s pay. Related: Are The Saudis Facing A Full-Blown Liquidity Crisis?
As part of the cost-cutting measures, the four Western oil majors have laid off around 25,000 workers. The disconnect is glaring, as the ratio of the CEO pay compared to average employee pay is 37:1, according to the adviser PIRC.
Oil companies are incentivizing their executives based on the amount of oil found and pumped, compared to the previous year, reports The Wall Street Journal. This can be one of the reasons why U.S. production has been resilient in the wake of the worst oil crisis in decades.
Oil companies have been treated as growth stocks, where the analysts gave importance to finding and producing more oil, rather than to profitability, as it was believed that oil prices would remain close to or above US$100 per barrel in the (then) foreseeable future.
Finding new oil is critical to the borrowing capabilities of these companies. Unless they continue to make new discoveries, borrowing power will take a hit--especially since the banks are tightening the noose on oil company funding.
Now, with shares of oil companies at multi-year lows, investors are questioning this method of incentivizing the executives.
After all, the investors of most major oil companies are nursing huge losses, because, though the crude oil prices have recovered from their lows, they are well below the highs of 2014. Related: Wildfire Nears Canada’s Major Oil Sands Plants
“There needs to be a more returns-focused element in this industry,” said Paul Grigel, a Macquarie Group Ltd. senior analyst who tracks pay-policy changes among energy producers. “This is an issue for a lot of longer-term investors; it’s something they’re becoming very impassioned about,” reports The Wall Street Journal.
A few companies have responded to the situation and have included capital efficiency, managing debt relative to profits and cost cutting for calculating the bonuses.
Nonetheless, the companies continue supporting the payment of bonuses to their executives even when the investors suffer from lower oil prices.
A Shell spokesman supported the company’s executive compensation policy stating that it "reflects delivery of our strategy, measured by both short-term and long-term targets. There is a clear alignment between the company's performance and our compensation policies," reports Reuters.
Similarly, Ann Dowling, the chair of BP’s remuneration committee, defended the level of pay at BP, saying it was “somewhere in the middle” of the industry standard. “We have to reward people appropriately to attract the talented employees who are important for the future health of the company,” she said, reports The Guardian.
The shareholders’ vote on pay is only advisory and not binding on the management in the UK. Related: Nigerian Oil Output Falls 800,000 Barrels As Militants Step Up Attacks
Roger Lawson, the deputy chairman of ShareSoc, the group of small shareholders that opposed Dudley’s pay, said: “In my experience the concessions you get after a company loses a remuneration vote are not very large. They say: ‘We’ve listened to shareholders and changed this and that’ and hope they can squeak it through next year,” reports The Guardian.
However, there is a ray of hope for small investors, because CEO Yngve Slyngstad of Norway’s $870 billion sovereign wealth fund—the world’s biggest—said they plan to target the excessively high salaries of executives in companies where they hold investments, reports Fortune.
Until then, investors will be left holding underperforming oil stocks, whereas oil company CEOs will continue to reward themselves with fat paychecks, disregarding shareholder’s sentiments.
By Rakesh Upadhyay for Oilprice.com
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