Preparing pay plans for what’s next

Preparing pay plans for what’s nextZoom inDownload PDF

In a ‘lower for longer’ price environment, such as in the energy industry’s upstream sector, boards face key issues.

The oil environment over the past 18 months has raised a stiff challenge to energy-company compensation committees. In 2015, typical industry pay plans that were neatly crafted to reward executives for increased production and exploration paid off when executives delivered on their promises. But the payoff was often misaligned with share price performance, which fell dramatically across the industry.

This situation raises the question as to how compensation committees should respond when commodity-price-driven bottom-line performance doesn’t deliver to investors in the same degree as it does to executives.

In the Short-Term . . .
With the future of oil prices still unknown and potential that the market reverses course, resist drastic changes to incentive plan design. Instead, look to adjust weightings in the annual incentive plan to match the company’s current strategy. For example, if the company is limiting new exploration and focusing on maximizing current opportunities, lower the weighting on reserve additions and encourage more efficient capital spending. If commodity prices stay low, you may also want to add goals tied to debt reduction, such as debt-to-capital ratio or interest expense per barrel.

Read the rest of the article, “Preparing pay plans for what’s next” by Stephen Charlebois and Andrew Platt. This article originally appeared in Directors and Boards 2016 Q3 issue.