Energy chief executives got raises last year much bigger than in other industries. Was it pay for performance—or pay for high oil prices?
As consumers around the world struggle to fill their gas tanks, captains of the oil industry are getting a raise.
Starting with info provided by Capital IQ (which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP)), BusinessWeek asked executive compensation research firm Equilar to analyze compensation of the chief executives of the 25 largest publicly traded global oil and gas companies (see the accompanying slide show for the full list of CEOs and what they were paid). Equilar's study found that for the 12 CEOs at the largest U.S.-based, publicly traded oil companies, median total compensation increased by more than four times the rate of that of executives in the Standard & Poor's 500-stock index as a whole.
Oil executives' pay is rising at the same time consumers are spending more on everything from gasoline to food, and movie tickets to airline fares. Crude oil prices reached an all-time trading high of $139.89 on June 16, before settling at $134.44 on the New York Mercantile Exchange—double the price of one year ago. Also on June 16, gasoline prices set another all-time record of $4.08 per gallon.
Some analysts say these CEOs are receiving pay raises based more on factors they don't control—such as sharply rising oil prices—than on managerial prowess. "Energy companies' improved performance is almost entirely due to high oil prices," says Paul Hodgson, an executive pay expert for Corporate Library, a Portland (Me.) corporate governance research organization. "But if [their executives] deny culpability for high oil prices, why are they getting rewarded for them?"
Equilar found that executive compensation for the CEOs of the 12 largest U.S. oil outfits rose by 5.8% from 2006 to 2007, from a median of $14.6 million to a median of $15.4 million. That's more than four times the increase of compensation for S&P 500 CEOs, whose median increased by 1.3% from 2006 to 2007, or $8.7 million to $8.8 million, according to Equilar.
For the U.S. companies in the study, total compensation includes base salary, bonus, payouts form short-term and long-term incentive plans, the grant-date value of new stock and option awards, and other compensation.
The Top Two
Topping the list for 2007 compensation in the sector was Occidental Petroleum's (OXY) longtime chief Ray Irani, who received a $33.62 million package in 2007, actually down from $52.14 million in 2006. The head of the No. 1 U.S. energy major had the No. 2 compensation package: ExxonMobil's (XOM) Rex Tillerson, with $21.66 million in 2007, up from $18.37 million in 2006.
Occidental spokesperson Richard Kline says Irani's pay is well deserved. "Last year the company hit the ball out of the park with a record performance, and the best in the industry," says Kline. "This is superior pay for superior performance, and it serves the best interests of the corporation and its shareholders."
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.