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As oil stocks have lagged behind the oil price rally, a growing number of U.S. oil companies are now tying the salaries and short-term bonuses of their top executives to shareholder returns rather than to production growth.
According to a Goldman Sachs survey of 39 companies, a total of 19 of them are now linking investor returns with senior management pay, compared to just 10 percent in 2017.
Goldman Sachs analyzed for a second year in a row the executive packages at the 39 oil producers it covers and found that now half of those companies are tying compensation—mostly salaries and annual bonuses—to shareholder returns, compared to just four companies that had executive pay linked to investor returns in 2017.
According to Goldman Sachs’s analysis, quoted by Bloomberg, investors see corporate returns as a much better metric than production growth because returns “can be compared across sectors, and can be better measured consistently using standard financial statements.”
“While there is substantial room for further adoption of debt-adjusted per share growth and corporate returns incentives, this is a clearly positive signal for improved U.S. producer discipline,” Goldman Sachs analysts said.
Occidental Petroleum, Hess Corp, EOG Resources, and Anadarko Petroleum are among the companies that began linking senior management pays with investor returns this year, the investment bank’s survey showed.
Occidental, GulfPort Energy, Cabot Oil & Gas, Cimarex Energy Co, Laredo Petroleum, Extraction Oil & Gas Inc, and Newfield Exploration Co were found to have made “above average” changes to pay incentives, Goldman says.
EOG, Devon Energy, and Anadarko made the biggest changes in their executive compensation packages based on a “shareholder alignment coefficient”, according to Everscore ISI.
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“For those that resist adoption of value-based strategies and CEO pay incentives, their equities will remain decoupled from crude oil prices,” Everscore Doug Terreson told Bloomberg.
Investors were right to press U.S. independent producers for stricter capital discipline and for basing decisions on value rather than volume, Wood Mackenzie’s Chairman and Chief Analyst Simon Flowers said earlier this year.
“Most tight oil companies are adhering to tighter investment budgets. Some have even changed compensation incentives for the CEOs to more value-based metrics,” Flowers wrote in March.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.