Operators in the oil and gas industry today face a range of challenges, from criticisms to their pay governance, to negative commodity prices, to states trying to raid company profits in the name of climate change. The result is an industry environment where market volatility, political tensions, environmental concerns and an in-flight consolidation wave are pressuring board members and shareholders as they evaluate the merits of executive pay design. Zayla’s consulting team has been deeply entrenched in the oil and gas sector for over 2 decades, advising companies as they navigate hurdles to ensure talent is effectively retained and motivated and driving shareholder value. With proxy season in high gear, we thought we would review some trends on the industry’s executive compensation practices that we noticed from the latest round of disclosures from 21 of the largest publicly traded E&P companies in the US.
I. Fiscal 2023 Executive Compensation Highlights
E&P companies continued their trend of generating considerable cash from operations and delivering ample shareholder value in fiscal 2023, as this group of companies delivered over $26B in dividends back to shareholders. As such, it’s no surprise that executive compensation increased at the same time. As illustrated in the table below, we noted the following key trends:
- Limited salary increases for the c-suite (median increase of 4%)
- Above target performance on short-term incentives (median payout = 128% of target)
- Minimal increase in grant date fair value of long-term incentive opportunities (median increase of 6% over FY2022)
- Performance-vesting awards granted in 2021 saw a median vesting outcome of 162% of target
- Overall, a median increase in reported total direct compensation table of 6%, much lower than increases noted in other recent general industry studies
| SALARY | SHORT TERM INCENTIVE | LONG- TERM INCENTIVE | TOTAL DIRECT COMPENSATION | ||||
|---|---|---|---|---|---|---|---|
| COMPANY | 2023 Annualized | Change vs. 2022 | Target – % of Salary | 2023 Payout – % of Target | 2023 GDFV | Reported for 2023 | Change vs. 2022 |
| Antero Resources Corporation | $1,500,000 | 0% | 130% | 120% | $10,770,416 | $13,512,463 | -45% |
| APA Corporation | $1,065,350 | 13% | 130% | 146% | $9,384,742 | $13,763,441 | 0% |
| Chesapeake Energy Corporation | $1,300,000 | 0% | 125% | 126% | $5,149,927 | $7,404,561 | -10% |
| Chevron Corporation | $910,000 | 14% | 165% | 86% | $17,922,047 | $26,489,856 | 12% |
| Chord Energy Corporation | $850,000 | 42% | 120% | 109% | $1,005,143 | $2,985,651 | 60% |
| Civitas Resources, Inc. | $1,365,000 | 5% | 0% | 0% | $9,008,479 | $12,463,145 | 29% |
| ConocoPhillips | $1,751,000 | 3% | 165% | 130% | $14,842,125 | $20,770,673 | 4% |
| Coterra Energy Inc. | $1,125,000 | 0% | 130% | 137% | $11,071,724 | $14,547,853 | -5% |
| Devon Energy Corporation | $1,250,000 | 10% | 130% | 101% | $11,421,978 | $14,883,151 | 2% |
| Diamondback Energy, Inc. | $1,850,000 | 9% | 125% | 105% | $14,418,504 | $17,583,386 | 3% |
| EOG Resources, Inc. | $1,350,000 | 0% | 150% | 140% | $10,496,402 | $14,558,772 | 15% |
| EQT Corporation | $1,200,000 | 20% | n/a | 105% | $9,550,925 | $10,600,926 | -9% |
| Hess Corporation | $1 | 0% | 150% | 166% | $11,500,069 | $16,750,203 | 19% |
| Marathon Oil Corporation | $1,200,000 | 0% | 150% | 110% | $8,668,144 | $12,830,222 | 8% |
| Matador Resources Company | $1,350,000 | 0% | 100% | 230% | $3,575,900 | $8,056,599 | -10% |
| Murphy Oil Corporation | $1,070,000 | 3% | 135% | 105% | $8,826,424 | $13,261,841 | -1% |
| Ovintiv Inc. | $1,100,000 | 7% | 125% | 188% | $7,750,017 | $11,783,939 | 16% |
| Permian Resources Corporation | $0 | 0% | 0% | 133% | $0 | $0 | N/A |
| Range Resources Corporation | $750,000 | -21% | 130% | 163% | $3,925,016 | $6,181,944 | 86% |
| SM Energy Company | $826,800 | 6% | 120% | 165% | $4,999,989 | $11,060,630 | 64% |
| Southwestern Energy Company | $1,000,000 | 5% | 125% | 125% | $5,777,729 | $11,145,515 | 48% |
II. Short-Term Incentive Trends
E&P companies have evolved their compensation practices over time in response to shifting market dynamics and adjustments to business strategies. Incentive designs for oil and gas executives in fiscal 2023 highlighted a shift towards holistic performance metrics beyond the traditional financial indicators of recent years. As business models evolve in response to the investing world’s push for energy transition, short-term incentive programs for executives have exhibited a higher degree of complexity and “science” – said otherwise, a reliance on formulaic outcomes with less use of discretion.
In this data set, all companies that had a short-term incentive program for executives (excludes CIVI as executives are normally not eligible – but did receive a special one-time bonus related to M&A activity) used a formulaic approach to determine award outcomes, with an average number metrics equal to just over 6. Interestingly, while boards and compensation committees reserve the ability to apply discretion, Zayla noticed in its review that these companies demonstrated limited use of board discretion on incentive payouts. Where discretion was applied, Zayla found it was normally to the downside – contradicting the often-stated opinion that energy company boards consisted of “good ol’ boys.”
In terms of the types of metrics being used in oil and gas STI programs, Zayla found that while companies maintained a focus on metrics that measured earnings performance, they also grew their emphasis on financial returns, operational efficiency and employee and environmental sustainability – all of which should link back to shareholder value creation. We note that while public markets have seen a recent swell of anti-ESG opinions, this prevalence of ESG-focused metrics in executive compensation design suggests those measures will continue to be a part of the STI equation for the foreseeable future.
| Company | STI Metric Prevalence | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Production | Reserves | HSE | Other ESG | Strategic | Capital Budget | LOE | G&A | F&D | Other Op. Costs | Debt Mgmt. | EBITDA(X) | Cash Flow | Returns (ROIC, ROACE, etc.) | TSR | |
| Antero Resources Corporation | x | x | x | x | x | ||||||||||
| APA Corporation | x | x | x | x | x | ||||||||||
| Chesapeake Energy Corporation | x | x | x | x | x | x | x | ||||||||
| Chevron Corporation | x | x | x | x | x | x | x | x | x | ||||||
| Chord Energy Corporation | x | x | x | x | x | x | x | x | x | ||||||
| Civitas Resources, Inc. | |||||||||||||||
| ConocoPhillips | x | x | x | x | x | x | x | ||||||||
| Coterra Energy Inc. | x | x | x | x | |||||||||||
| Devon Energy Corporation | x | x | x | x | x | ||||||||||
| Diamondback Energy, Inc. | x | x | x | x | x | x | x | ||||||||
| EOG Resources, Inc. | x | x | x | x | x | x | x | ||||||||
| EQT Corporation | x | x | x | x | x | x | |||||||||
| Hess Corporation | x | x | x | x | x | x | x | x | |||||||
| Marathon Oil Corporation | x | x | x | x | |||||||||||
| Matador Resources Company | x | x | x | x | x | ||||||||||
| Murphy Oil Corporation | x | x | x | x | x | x | |||||||||
| Ovintiv Inc. | x | x | x | x | x | x | |||||||||
| Permian Resources Corporation | x | x | x | x | x | ||||||||||
| Range Resources Corporation | x | x | x | ||||||||||||
| SM Energy Company | x | x | x | x | x | x | x | ||||||||
| Southwestern Energy Company | x | x | x | x | |||||||||||
| Prevalence | 43% | 10% | 52% | 86% | 48% | 57% | 10% | 14% | 29% | 67% | 10% | 10% | 62% | 57% | 14% |
III. Long-Term Incentive Trends
Zayla noted a few key observations with respect to long-term incentive awards in fiscal 2023:
- Likely due to pressures from proxy advisory firm policies, the majority of the dataset intended to provide the majority of long-term incentive opportunities (median weighting of 60%) through performance-vesting awards – options continue to have minimal prevalence in energy;
- For performance-vesting awards:
- The use of 2 metrics to determine vesting outcomes was the most common practice – note that this datapoint excludes any instances where a company had a negative absolute total shareholder return (TSR) modifier that reduced relative TSR (rTSR) vesting outcomes when they are exceeding “target.” This increased complexity mirrors the increase in complexity previously noted for STI award design;
- rTSR continues to be the most prevalent metric, followed by other returns-based metrics and absolute TSR (aTSR). Zayla noted an increase in the prevalence of ESG metrics over previous years, representing the maturation of oil and gas companies’ governance efforts around ESG criteria. Interestingly, Zayla also noted a trend emerging where companies are beginning to “double weight” certain peers in performance peer groups that support relative performance metric calculations. This is an outcome of the consolidation wave that is impacting the industry; and
- The most common threshold and maximum vesting opportunities for performance-vesting awards is 50% and 200% of target, respectively – Zayla also noted that the median vesting of performance-based awards granted during COVID was 162%.
| LTI Vehicle Mix | Number of LTI Metrics | LTI Metric Weightings | PSU Payout Range | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Company | RSU | PSU | Options | 1 | 2 | 3 | 4 | aTSR | rTSR | Returns | Other Financial | ESG | Threshold | Maximum |
| Antero Resources Corporation | 50% | 50% | x | 50% | 50% | 0% | 200% | |||||||
| APA Corporation | 40% | 60% | x | 40% | 40% | 20% | 33% | 200% | ||||||
| Chesapeake Energy Corporation | 25% | 75% | x | 67% | 33% | 25% | 200% | |||||||
| Chevron Corporation | 25% | 50% | 25% | x | 70% | 30% | 0% | 200% | ||||||
| Chord Energy Corporation | 100% | |||||||||||||
| Civitas Resources, Inc. | 30% | 70% | x | 100% | 10% | 225% | ||||||||
| ConocoPhillips | 35% | 65% | x | 60% | 40% | 0% | 200% | |||||||
| Coterra Energy Inc. | 50% | 50% | x | 100% | 50% | 200% | ||||||||
| Devon Energy Corporation | 40% | 60% | x | 100% | 50% | 200% | ||||||||
| Diamondback Energy, Inc. | 40% | 60% | x | modifier | 100% | 0% | 250% | |||||||
| EOG Resources, Inc. | 40% | 60% | x | 100% | modifier | 0% | 200% | |||||||
| EQT Corporation | 40% | 60% | x | 50% | 50% | 25% | 200% | |||||||
| Hess Corporation | 60% | 40% | x | 100% | 40% | 210% | ||||||||
| Marathon Oil Corporation | 40% | 60% | x | 50% | 50% | 28% | 200% | |||||||
| Matador Resources Company | 50% | 50% | x | 100% | 20% | 200% | ||||||||
| Murphy Oil Corporation | 25% | 75% | x | 80% | 20% | 50% | 200% | |||||||
| Ovintiv Inc. | 50% | 50% | x | 50% | 50% | 55% | 200% | |||||||
| Permian Resources Corporation | ||||||||||||||
| Range Resources Corporation | 40% | 60% | x | 50% | 25% | 25% | 50% | 200% | ||||||
| SM Energy Company | 40% | 60% | x | 25% | 25% | 25% | 25% | 50% | 200% | |||||
| Southwestern Energy Company | 45% | 55% | x | 50% | 25% | 25% | 50% | 200% | ||||||
| Median | 40% | 60% | 33% | 50% | 60% | 35% | 25% | 25% | 28% | 200% | ||||
| Prevalence | 90% | 90% | 10% | 24% | 43% | 14% | 10% | 29% | 81% | 33% | 24% | 14% | 90% | 90% |
IV. How Oil and Gas Executive Compensation Compares
Zooming out of the details, we also note there has been continued criticism in the marketplace that oil and gas executives are paid too much for the value they bring to market. Zayla wanted to test if there was still validity to this claim, so it evaluated what relationship there was between oil and gas executive pay and that of a reasonable index of companies in other industries.
Leveraging data from S&P Capital IQ, Zayla aggregated total reported compensation for CEOs of companies in the S&P 500 Index (excluding oil and gas constituents), Zayla noted that the S&P 500 constituents generated a median of $2.6bn of EBITDA in 2023 compared to the subset of oil and gas companies’ median of $4.3bn in EBITDA in 2023, or a 1.66 multiple.
Median CEO pay for both groups: S&P 500 – $14,604,531; oil and gas – $12.820,222.
With CEO compensation expense of 0.3% of EBITDA for the O&G companies versus 0.57% of S&P 500 companies, we can safely conclude that any criticism on the quantum of pay in oil and gas companies does not have merit with respect to the most recently completed fiscal year.
