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Energy Sector Decline Influences Incentive Plans in Executive Pay


April 22, 2016

Flailing oil prices have not necessarily indicated a drop in CEO pay across the board for the largest energy, oil and gas companies for 2015—at least not yet. Among the oil and gas companies that will be included on Equilar’s study of the 100 largest companies by revenue, CEOs at Schlumberger, Marathon Petroleum, Phillips 66, ConocoPhillips and Valero Energy each saw revenue declines in the double digits—in some cases more than 33%—but most saw CEO pay increase. In fact, of those companies, ConocoPhillips’ CEO was the only one to see a decline.

According to Noble Corporation’s proxy statement filed on Friday, April 8, however, the tide may be turning for some companies depending how their executive pay plans are structured, particularly when it comes to future equity compensation. Though Noble held its executives’ base salary at the same level in 2015 and plans to in 2016 as well, CEO pay fell by 19% year over year in terms of total reported compensation.

Executive pay may be affected further in 2016 if the company is not granted new shares to award equity. Noble had already requested shares in 2015, but didn’t anticipate the further decline in stock price. As a result, the company has gone to its shareholders for an additional request in 2016 in light of the need to grant more shares to deliver a similar level of value without running out.

The table below shows how the declining stock price has affected Noble’s share granting over the last three years. The average grant date fair value has declined, so share grants have had to increase. Even so, grants have not increased at the same rate that the stock price is declining, so there is some drop in value delivered to employees.

Shares Granted at Noble Corporation, 2013-2015

2013 2014 2015
Units Granted 1,598,659 2,357,898 3,209,441
Weighted average grant date fair value of units $35.53 $27.82 $13.35

Source:Equilar, Inc.

In its proxy, Noble explicitly requested an increase of 9.5 million shares for its incentive plan, and provides reasons why it believes shareholders should approve the grant, despite an ISS recommendation against the measure citing “negative TSR.”

“At current share price, the requested number of shares would likely be sufficient to allow us to make two years of equity awards,” the statement noted. “If the increase is not approved, we will effectively be unable to provide equity compensation in the next annual granting cycle in 2017 and beyond. If equity compensation is not available, we could lose high performing employees or be forced to use cash-based long-term incentives.”

Noble’s predicament brings to light elements that compensation committees and other pay plan designers must consider when facing a volatile market. In particular, lowering executive pay based on market factors and failing to incentivize its leaders to help improve company performance could put them at a disadvantage in attracting and maintaining top performers.

This is one of the chief arguments against TSR and other outcome metrics being tied exclusively to executive pay. When outside market elements not directly within the control of the company’s leaders come into play, boards have to consider how to incentivize and retain their top talent in order to lead them through the business cycle into better times ahead.


For more details on incentive plan design and disclosure, or to learn more about custom research available through Equilar’s Research Services, please contact the Equilar research team at researchservices@equilar.com.

For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content & Marketing Communications at dmarcec@equilar.com. Andrew Gordon, Associate Director of Research Services and Innovation, contributed to this post.

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