Oil CEOs: High Prices, Fat Paychecks

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ExxonMobil spokesperson Alan Jeffers points to the company's annual proxy statements, which say executive pay is scaled to "attract and retain executives for the long term with the corporation's best interests primary." Tillerson's predecessor, Lee Raymond, received a pension worth $98.4 million when he retired in 2006, part of an overall retirement compensation package approaching $400 million (BusinessWeek.com, 12/22/06).

Right Suite at the Right Time

Some shareholder activists say it's unfair that executives are reaping the benefits as consumers struggle to meet higher fuel costs. "These executives are price takers and not price makers," says Daniel Pedrotty, director of the investment office of the umbrella union group AFL-CIO. "Shareholder return was strong, but that's more to do with macroeconomic factors than CEO performance. They were in the CEO suite at the right time."

Activist shareholders' dissatisfaction has translated into changes in oil-company compensation policy. The AFL-CIO managed to win two shareholder votes this proxy season at Occidental and Devon Energy (DVN) aimed at preventing conflicts of interest for compensation consultants. That is, compensation consultants can't provide services to these companies or their management while they're consulting for the board on executive pay.

To be sure, oil prices rose at a much faster clip than U.S. energy executive pay. From January, 2006, to December, 2007—the same time frame of data Equilar analyzed—oil prices shot up 63%, from $38.58 to $61.06 per barrel.

More striking than the rate of pay increases for executives is the size of bonuses. For U.S. companies studied, total bonuses increased by 71% year over year, from $2.1 million in 2006 to $3.5 million in 2007. Over the same period, bonuses for chief executives overall in the S&P 500 shrank 4.9%, from $1.93 million to $1.84 million.

Boom-Bust Pay Cycle

Meanwhile, the value of bonuses for CEOs in sectors that performed less well than energy was down for 2006-07. In finance, for example, CEO bonuses fell 42%, says Equilar research director Alexander Cwirko-Godycki. He points out that the 5.8% increase in total compensation for U.S. energy executives is "modest."

Other analysts agree that oil executives' pay is not out of proportion with the performance of their companies from 2006 to 2007. "I am not surprised that energy-sector CEOs saw more compensation, because that sector has performed better than the S&P as a whole," says Eric Nielsen, director of compensation firm Korn/Ferry's (KFY) Houston office. "[Energy] is the darling space right now."

Compensation experts also say that commodities-related industries that undergo boom-bust cycles pay executives accordingly. "These are high-risk, high-reward jobs, and their companies are having their best years ever," says Don Linder, a spokesperson for WorldatWork, a professional organization for executive compensation advisers.

Equilar also analyzed compensation of top energy executives of non-U.S. companies. While making less than their American counterparts, these 13 executives saw their median compensation increase by 85.8% from 2006 to 2007, from $4.8 million in 2006 to $8.9 million in 2007. Equilar's Cwirko-Godycki says that the weakening of the U.S. dollar plays a "very large" role in this increase, since all values are converted to U.S. dollars.

An American Edge

Topping the list of non-U.S. executives was Chairman John C.S. Lau of Canada's Husky Energy (HSE), who was awarded $26.25 million in 2007, up from just $4.25 million in 2006. Husky Energy spokesperson Graham White notes that stock options are not awarded annually by the company, and none had been awarded in 2006, accounting for the 518% jump. "Lau is one of the top-performing executives in the industry," says White. "Since he took over the company in 1992, market capitalization is up more than 1,000%. Husky is where it is today largely through the vision and leadership of Lau."

Still, on the whole, U.S. energy executives in the study were paid more than double their foreign competitors. "This figure is very telling," says the AFL-CIO's Pedrotty. "Companies outside the U.S. pay much less for the same performance."

The Corporate Library's Hodgson says that the market for CEOs is international, so U.S. companies don't have a competitive need to pay executives more. "American boards that fall for it are demonstrating a lack of backbone," he says.

But whether in the U.S. or overseas, energy executives in Equilar's survey all did well from 2006 to 2007. Cwirko-Godycki says that while for now the increases seem reasonable, companies need to structure executive incentives carefully. "There's always concern that executives will get outsize pay regardless of how they do vs. their peers," says Cwirko-Godycki. "Companies need to put in fail-safe provisions to ensure pay is tied to performance."

With crude oil continuing to trade at nosebleed levels—and oil-company profits strengthening—the pay of the energy bigwigs will be under ever more scrutiny.

Herbst is a reporter for BusinessWeek in New York.