By Tim McLaughlin
(Reuters) – The CEOs of the biggest U.S. oil companies have been paid significantly more in the first year of the COVID crisis than initially estimated, thanks to equity-heavy compensation packages that have since soared in value, according to a review of compensation disclosures over three years.
The pandemic, with lockdowns the norm, has led to a sharp drop in oil and gas consumption and the loss of one in six jobs in the industry. Even so, a Reuters analysis of stock-based compensation given to CEOs of 20 U.S. oil and gas companies in 2020 more than doubled by 2023 when the shares were acquired. The sharp increase highlights a system that can amply reward executives amid mass layoffs, refinery closures and reduced capital spending.
Analysis of filings by S&P 500 companies in the energy sector shows equity-based CEO compensation is now worth nearly $500 million, up sharply from initial estimates of $187 millions of dollars.
Investors, shareholder advocates and professors who study CEO compensation say the eye-popping returns in COVID-era compensation reflect the issues of high equity compensation for energy CEOs, primarily that it ties pay is often tied too closely to external factors, including fluctuations in oil and gas prices rather than to long-term financial performance.
“Compensation committees need to do a better job of rewarding leaders for genuine outperformance and not just necessarily where the commodity price is,” said Aeisha Mastagni, portfolio manager at the California State Teachers’ Retirement System (CalSTRS ), worth $307 billion. response to Reuters analysis.
Public pension plans and popular index mutual funds have lagged in the U.S. energy sector for a decade. The total return of the S&P 500 energy sector index has been 38% since May 2013, far behind the 206% total return of the broader S&P 500 index.
The wage hike also comes after COVID-era damage to the oil industry, which has seen huge spending cuts and widespread job losses. Several hundred workers at a Marathon Petroleum refinery in California, for example, have been forced to find new jobs for much lower pay, said Virginia Parks, a professor at the University of California, Irvine who has studied the fate of dismissed workers.
Marathon declined to comment on the job cuts.
Meanwhile, rising executive pay is distorting the CEO pay ratios that companies are required to disclose to investors to demonstrate that executive compensation is reasonable relative to other employees. An example: Occidental Petroleum Corp said in 2020 CEO pay was 104 times higher than median employee pay, but Reuters reports show it was actually 230 times higher after stock gains over the three last years.
Occidental said its CEO pay ratio follows rules set by the U.S. Securities and Exchange Commission (SEC). Christina Noel, spokeswoman for the American Petroleum Institute, noted that the energy industry’s CEO pay ratio is the second lowest among 11 industry sectors that include S&P 500 companies.
IT’S RELATIVE WHEN IT COMES TO RETURNS
Certainly, the value of stock-based compensation declines when markets deteriorate. But most energy CEOs also have a built-in protection measure against steep declines. CEOs can receive 100% or more of the payout on stock awards linked to total shareholder return, even if investors lose money.
Indeed, around 90% of energy companies measure stock performance against others in the same industry that tend to suffer at similar times. They use a metric called relative total shareholder return (TSR) and compare it to a pre-determined group of peer companies, which allows executives to get big payouts even if their companies’ shares decline in value.
Some CEOs also receive dividends on unvested restricted stock that they don’t technically own yet. At ExxonMobil, CEO Darren Woods receives several million dollars a year in cash dividends on unvested restricted stock, according to the oil giant’s payroll information.
And since becoming CEO in 2017, the number of shares underlying Woods’ annual restricted stock grant has increased 70% to 225,000, bolstering his dividend payout, according to filings. by the Society.
The payment of dividends on unvested stock awards is opposed by lead proxy advisor Institutional Shareholder Services. Many large companies, including Coca-Cola and Microsoft, have disavowed this practice.
Exxon declined to say why it pays dividends on unvested shares, but it takes 10 years for each annual restricted stock award at Exxon to fully vest.
“We believe this unique long-term approach aligns the decisions and interests of our executives with those of our long-term shareholders,” Exxon said in an email.
The $242 billion New York State Common Retirement Fund, which held several billion dollars in oil and gas stocks at the end of March, agreed that the period of 3-year acquisition, common in the energy sector, was too short.
PAY METRICS ‘TOO EASY?’
Some CEOs have taken advantage when the timing of their stock awards coincided with sharp declines in their company’s stock price, giving them more room to benefit from a rebound.
Marathon Petroleum’s Michael Hennigan received $9.6 million in stock-based compensation, most of which was granted on March 17, 2020, the day he became CEO. The grant coincided with one of the lowest closing prices in the company’s history as a publicly traded company, according to Refinitiv data.
Hennigan’s stock-based salary for 2020 fully vested in March with a value of approximately $45 million, nearly 5 times the company’s original estimate. Marathon Petroleum’s total return was an industry leader, rising nearly 500% under Hennigan.
“If a CEO’s equity pay is more than double the original estimate, that’s excessive,” said Rosanna Landis Weaver, director of pay justice and executive compensation at As You Sow, a shareholder advocacy group that reviewed Reuters reports. “That tells me the metrics they use to base equity awards are too easy.”
Some energy CEOs also enjoyed strong performance relative to their peers that boosted the overall volume of restricted stock awards, according to proxy statements filed with the SEC.
EQT Corp CEO Toby Rice, for example, ultimately received nearly 1.1 million performance shares as part of his 2020 award, 32% more than the company’s estimated target amount. as EQT’s shares outperformed their peers and the company’s cash flow met the vesting conditions, EQT said. in its most recent proxy statement. This brought his overall stock-based salary to around $65 million.
The company did not return messages seeking comment.
Many energy companies are under pressure from investors to reform CEO compensation, according to information in their annual proxy statements. Phillips 66, for example, like many of its peers, now details their compensation discussions with investors to show that they are sensitive to their concerns and are making changes.
The company has also capped stock awards tied to total shareholder return if investors lose money after investors complain.
“…Recent changes to executive pay reflect investor feedback,” Phillips 66 told Reuters in an email.
CalSTRS’ Mastagni, however, said reforms on payments tied to negative shareholder returns still don’t go far enough.
“Why should we pay anything out of the shareholders’ coffers if you’ve made us lose money?” asked Mastagni.
(Editing by Richard Valdmanis and Anna Driver)