(Bloomberg Opinion) -- Depending on how you look at it, now is either the best or worst time for oil and gas companies to make their annual proxy filings. On one hand, who’s really paying attention what with everything going on? On the other, what with everything going on, the industry is even less popular with investors, slashing payrolls and even calling for government help. So now would be a really bad time to, say, disclose big, incongruous payouts to the c-suite.
This is a basic issue of double-take dissonance. Your average energy investor looks at the executive bonus payments; then looks at their own wrecked portfolio; maybe looks back at the bonuses; then looks again at the old portfolio; and then maybe sits back with an expression like that mystified emoji. Judging from the filings that have begun to trickle out, we should expect more of this.
Bonuses are supposed to reward management for the company’s short-term achievements on various metrics or qualitative things (as opposed to the bigger stock awards notionally tied to longer-term performance). Typically, a bonus target is set as a percentage of base salary (usually above 100%), and then the final payment comes in above or below that level — often well above, even as investors count their losses.
Here are the adjusted bonus awards along with last year’s total return for 12 companies filing so far. I’ve also added the S&P 500’s total return for comparison.
Your average investor might prefer it if more of those pairs of bars ran in the same direction. Your average E&P board (or their compensation consultant) might argue that markets are fickle things and it would be unfair to punish a CEO who had done everything right but whose stock got caught in a downdraft. Which would be fine if there wasn’t a long-standing misalignment between the sector’s pay practices and investors’ experience (see this, this and this), underpinning chronic underperformance. Also, things weren’t any better in 2018. Here are our 12 companies’ average bonus payment versus total return across the past two years:
Besides placing too much emphasis on things like production growth, a persistent problem is the use of relative total shareholder return as a metric. Relative return doesn’t do much for shareholders when the peer group is dropping through the floor (partly because they’re all watching each other, too). More importantly, it is less and less relevant in a world where energy scrapes below 3% of the market and ownership is very much optional.
All the pages of commentary and tables in the proxy laying out methodologies for getting to the boss’s number are worthless if that number doesn’t relate to the investor’s number. Consider one of the 12, Continental Resources Inc., whose chairman Harold Hamm has called for government intervention. His short-term bonus target for 2019 was 150% of salary, translating to just under $2 million. Now factor in a “company multiplier” of 123% as well as an “individual multiplier” that appears to be 125%(1). Actual bonus award: Just over $3 million. Continental’s total return last year was negative 14.5%, underperforming the S&P 500 by 46 percentage points (and even lagging the sector ETF)(2). So far this year, the stock has dropped another 70%, in part because a lack of production hedges leave it exposed to the oil crash.
If Congress plans any hand-outs to the suffering oil and gas industry, it should take a moment to see who in the industry is truly suffering. Would it really make sense to shovel more money into the top of this business model rather than into the hands of the laid-off workers at the bottom? As for the E&P industry itself: If it doesn’t get a grip on how it rewards the people running it, it can expect investors to keep up the social distancing long after the current crisis passes.
(1) The individual multiplier isn't spelled out in the proxy statement but can be inferred from the other data.
(2) TheSPDR S&P Oil & Gas Exploration & Production ETF's total return in 2019 was negative 9.4%.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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