If executive compensation packages for the region’s largest energy companies were split on two sides of a scale — with incentives tied to the companies’ stock performance on one side and all other metrics on the other — the stock side would hit the ground.
The move to align executives’ pay with the money they generate for shareholders isn’t new and it isn’t unique to energy. But some executive compensation experts, such as Doug Branson, a professor of business law at the University of Pittsburgh, say it ignores a company’s other constituents: employees, suppliers and customers.
“We’re finding that excessive stock options are not a good thing,” he said, as they incentivize “taking excessive risk, and taking excessive risk is antithetical to sustainability.”
When it comes to natural resource companies, the value they place on environmental and safety performance, as reflected in executive pay packages, pales in comparison to the importance of stocks.
Last year, Cecil-based Consol Energy exceeded its goal for the number of environmental violation notices it thought acceptable for its coal division by 83 percent, yet its CEO J. Brett Harvey lost out on less than 2 percent of his paycheck for the year as a result.
Kevin Crutchfield, CEO of Virginia-based Alpha Natural Resources, however, missed out on 75 percent of his potential compensation because the company’s stock price was near five-year lows in 2013. The company did better than its target for safety last year.
The details are available in company proxy reports, which disclose how and how much executives of a company get paid. The reports are filed with the Securities and Exchange Commission typically each spring in advance of annual shareholder meetings.
The trend toward putting more and more executive pay “at risk” — meaning pay that is tied to performance goals and, more specifically, to stock price — has continued to balloon across public companies, according to Aaron Boyd, director of governance research at San Francisco executive data firm Equilar.
And the energy industry is no exception.
According to Bloomberg data, an average of 85 percent of all executive pay is equity-based at oil and gas companies. That corresponds to the growth of long-term incentives tied to a company’s stock performance. The figure has climbed about 3 percentage points per year since 2009. For oil and gas CEOs, it stands at 87 percent.
Other measurements of an executive’s performance, such as the amount of gas reserves a company has or how efficiently it is pulling fuel out of the ground, tend to fall into the cash bonus territory, as do safety and environmental considerations.
Take Consol as an example.
In the company’s sustainability report for 2013, it said its coal division boasted its “best year of environmental compliance performance to date, improving over 20 percent each year since 2011.” At least one factor driving that, the company said, was the decision to include environmental compliance in the executives’ pay formula.
About 5 percent of Consol executives’ total compensation depends on meeting safety and environmental goals.
The vast majority, 78 percent, is determined by the success of the company’s stock price.
The same is true of Alpha Natural Resources, another coal company with gas operations that also sets goals for safety, as measured by the number of incidents reported to the Occupational Safety and Health Administration.
Alpha’s safety metric accounts for 2.5 percent of the CEO’s total pay. Its environmental performance is part of a suite of strategic objectives that collectively make up another 2.5 percent. The largest portion, 69 percent, is tied to stock prices and cash flow.
And Alpha’s underperforming share price — it tumbled from about $65 in the beginning of 2011 to just more than $7 at the end of 2013 — cost Mr. Crutchfield $14.5 million in unrealized compensation.
“Our CEO’s compensation is strongly linked to the performance of our stock price and, in light of its performance, our CEO’s realizable compensation is significantly less than his target compensation for the last three years,” the company said in its most recent proxy statement.
Based on stock performance over the past three years, Mr. Crutchfield could have made as much as $25.1 million. He ended up making $10.6 million, something the company attributed to market conditions outside of his control, such as a weak market for coal in the U.S. and abroad.
Oil and gas companies tend to follow a similar pattern, leaving the long-term incentives to pivot on market performance while tying short-term bonuses to things like cost reductions and production growth.
At State College-based Rex Energy Corp., another Marcellus driller, executive bonuses revolve around five different metrics, all carrying about the same weight. They are: net oil and gas production, the cost to develop it, lease operating expenses, capital expenditures, and injections of water for secondary recovery.
Rex’s CEO Thomas Stabley was eligible for 100 percent of his $471,641 annual salary as an annual incentive for satisfying the company’s goals in those metrics, and he got it in 2013. The company did not disclose what its goals are.
Texas-based Range Resources, one of the most active producers in the Marcellus Shale, is more specific in its short-term performance goals.
Executives are judged on how much they were able to drive down the cost of producing oil and gas, earnings, the growth in production and reserves on a per share basis, and the company’s stock price performance, both on its own and by comparison with its peers.
For each of these metrics, Range sets a threshold, which triggers a minimum amount of the bonus payment; a target, which is the company’s goal; and an “excellent” score, which, if achieved yields a 200 percent bonus for the executives.
For the past four years, Range has set the thresholds and even the “excellent” scores for most metrics generously — they are based on industry averages and the company’s business plan tends to be below what the company actually achieved in the prior year.
As a result, Range’s CEO Jeff Ventura received an annual cash award of $1,440,143, or 167 percent of his base salary.
In the past, shareholders weren’t always apprised of exactly how compensation packages were structured. The granular data that some companies are putting out now follows a trend of greater disclosure and a more reader-friendly approach to proxies, said Mr. Boyd.
The so-called “say-on-pay” rules adopted by the Securities and Exchange Commission in 2011 paved the way for more disclosure and communication with investors as they require shareholder approval of executive compensation packages.
“We are seeing more companies make a greater effort to really spell out and explain their story to investors,” he said.
Whereas 10 years ago, proxies were dry, black and white legal statements, today many look alive, with color charts and graphs and compelling narrative, he said.
“We’re seeing an effort to turn it into a marketing document, to really to engage with the shareholders to get them to understand their perspective and the reasoning behind [executive compensation],” Mr. Boyd said.
Anya Litvak: firstname.lastname@example.org or 412-263-1455.