When public oil and gas companies are doing relatively well, many are happy to adopt a pay-for-performance model to reward CEOs and executives. However, the tables are quickly turned when things go to the dogs. When these companies go bankrupt, the misery is shared by employees who lose their jobs; retirees see their benefits and pensions go up in smoke, while shareholders and bondholders get wiped out. In sharp contrast, it's very common for blue-chip executives who have run their companies to the ground to receive multi-million dollar golden sendoffs. Indeed, top executives of oil and gas companies going through Chapter 11 frequently receive very fat payouts in the form of cash bonuses, stock grants, and other benefits that often exceed payments during the good times.
It's not any different this time around.
At a time when hundreds of thousands of employees in the U.S. shale industry have lost their jobs, Bloomberg has reported that some 35 executives at Whiting Petroleum Inc.(NYSE:WLL), Chesapeake Energy Corp.(NYSE:CHK) and Diamond Offshore Drilling Inc.(OTCMKTS: DOFSQ) are set to receive nearly $50 million after their companies declared bankruptcy or are on the verge of doing so.
It's the manner in which these head honchos continue to award themselves fat bonuses despite federal legislation to crack down on the practice that really grates.
The board at Whiting, an oil and gas producer that filed for Chapter 11 in April, approved a $6.4M bonus for CEO Brad Holly just days before the company went under, exceeding his previous annual compensation package by nearly a million dollars.
In May, California Resources Corp. (NYSE:CRC) warned investors about "...a substantial doubt about the company's ability to continue as a going concern..." but still went ahead and guaranteed company executives their 2020 bonuses.
Related: Oil Market Heading For Months Of Deficit So, what's the justification for this egregious, bizarre, and perverse practice?
According to Kelly Mitchell, an analyst at corporate watchdog group Documented, companies do it so as to incentivize these executives to stick around because they understand the company better and, ostensibly, have better odds of pulling them through. Never mind the fact that their decisions are very often to blame for the company's sad situation in the first place. They also do it in a bid to cut costs and maximize value for creditors using tools such as tax credits or untapped resources.
You could argue that this practice is not unique to the energy industry and is, in fact, common in corporate America--and you would be right.
Last year, former Equifax CEO Richard Smith, walked away with a very generous ~$19.6 million in stock bonuses, $24-million pension and $50,000 in tax and financial planning services after the credit agency suffered one of the worst data breaches in the history of the U.S. Interestingly, none of Smith's compensation was docked under the company's clawback provision meant to hold top executives accountable for their actions or inactions, which was negligence in this case.
In 2014, American retailing giant, Target Corp., paid ex-CEO Steinhafel more than $30 million after he handed in his resignation following another massive hacking attack that saw millions of customers' personal records stolen.
You can also rationalize that energy executives are not individually responsible for the oil price collapse that has adversely impacted their companies (though they share collective responsibility for the overproduction that triggered the collapse).
But whichever way you slice it, it's clear that oil and gas companies go too far with their bonus payments to executives. Over the past decade, the leaders of 15 large E&P companies collected more than US$2 billion in aggregate compensation despite their companies posting total returns of -15% compared to a 150% gain by the S&P 500 Index over the timeframe.
Related: Will There Be Another Oil Price War?
It's hard to justify the hefty rewards being awarded to executives of fallen energy companies. In the case of Equifax and Target, their respective stocks did suffer big selloffs after the hacks but quickly recovered and have actually outperformed their peers by quite a wide margin since the events. In contrast, WLL shares are down 89% in the year-to-date; CRC has lost 83.5%, CHK has returned -91.5% while DOFSQ is down 95% YTD, much worse compared to the sector benchmark, XLE, which is down a more modest 30.5% YTD. Bloomberg has reported that energy companies use their peers, not the broad market, as the benchmark, and executives of companies that perform less badly than others tend to be rewarded--bankruptcy is the ultimate underperformance, meaning these guys should not be getting such huge bonuses.
Energy companies need to have some level of accountability for their executives when things go awry. They have a willing accomplice, though. According to Patrick Hughes, judges tend to sign off on these fat payouts more often than not despite laws introduced in 2005 to limit their size.
By Alex Kimani for Oilprice.com
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The global oil industry will emerge leaner from the coronavirus ordeal but it will have no alternative but to cut dividends and CEOs fat bonuses drastically if it is to survive rather than sink under the weight of its outstanding debts. Many of the oil majors are already opting for cutting dividends but so far they have spared their CEOs the loss of their fat bonuses despite great financial losses and thousands of their employees being made redundant.
Moreover, the industry is set to see its total annual revenues plunge by $1 trillion this year from $2.47 trillion in 2019 to $1.47 trillion this year. The projection for 2021 is $1.79 trillion. This means that the industry will have to focus all its reduced resources on its core business, namely oil and gas without the extravagance of huge dividends and fat bonuses. The alternative is bankruptcy.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London