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ESG replaces oil, gas production growth in E&P CEO pay packages – study


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ESG replaces oil, gas production growth in E&P CEO pay packages – study

  • Author Bill Holland
  • Theme Energy

Compensation packages for the heads of independent U.S. oil and gas producers are increasingly tied to progress on environmental, social and governance issues and less to the traditional metric of production growth, according to a study by executive pay consultants.

In 2021, 80% of these exploration and production companies, or E&Ps, had health, safety and ESG goals included in their CEOs' pay agreements, while only 47% had incentives for production and volume growth, according to an Oct. 12 study by professional services firm Alvarez & Marsal Holdings LLC. Production incentives dropped 43% from 2020, while ESG metrics increased 33%, according to the study.

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"While there is a great deal of variation by company on the weighting of ESG metrics, the most prevalent weighting falls between 10 and 20 percent of the overall plan," the study noted. "Many companies do not assign a specific weighting to ESG metrics, but instead incorporate elements of ESG into the individual or discretionary performance sections of their annual incentive plan."

Boards of directors are also increasing their emphasis on cash discipline, with more CEO pay packages including targets for cash flow and spending, both capital and overhead, the study said.

"Companies shifted away from solely using growth metrics such as production and reserves to focus their efforts on existing, successful wells, scaling back on unprofitable production, promoting health and safety, and lowering overall costs," the study said, observing a shift from growth at any cost to growth with profits.

Overall, Alvarez & Marsal found that oil and gas driller CEO pay declined about 9% to an average of $6.5 million per year in 2021 because of COVID-19 and the March 2020 oil price collapse. "As the economy and the commodity price environment continue to recover, Alvarez & Marsal expects a gradual upward movement in compensation levels," the study said.

According to the compensation data consultants at Equilar Inc., which provided commentary on the study, CEO pay dipped slightly in 2020 across the 500 large companies it monitors, but energy's decline was the worst of any sector.

"This was largely a result of salary reductions and lower bonus payouts related to COVID-19," Equilar said.

On average, oil and gas CEO compensation in 2021 was heavily weighted toward long-term rewards of company stock vesting in the future, followed by annual bonuses of cash and stock pegged to specific metrics. Base pay was the smallest portion of the average E&P CEO compensation agreement, Alvarez & Marsal said.

Alvarez & Marsal surveyed the public filings of compensation packages by 64 U.S. independent E&Ps ranging in size from $70 million to $66 billion in enterprise value to make its findings.

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