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(Reuters) – The CEOs of America’s biggest oil companies were paid a lot more in the first year of the COVID crisis than initially estimated, thanks to stock-heavy compensation packages that have since soared in value, according to an examination of pay disclosures over three years.
The pandemic, with lockdowns the norm, resulted in a steep decline in oil and gas consumption and the loss of one in six jobs in the industry. Even so, a Reuters analysis of stock-based pay granted to CEOs at 20 U.S. oil and gas companies in 2020 more than doubled by 2023 when shares vested. That steep increase highlights a system that can richly reward executives amid mass layoffs, refinery closures and slashed capital spending.
The analysis of filings by companies in the S&P 500 Energy Sector Index shows stock-based CEO pay is now worth nearly $500 million, up sharply from initial estimates of $187 million.
Investors, shareholder advocates and professors who study CEO pay say the eye-popping returns on COVID-era compensation reflect the problems of stock-heavy pay for energy CEOs, chiefly that it often links pay too closely to external factors including oil and gas price swings instead of to long-term financial performance.
“Compensation committees need to do a better job of rewarding executives for true out-performance and not just necessarily where the commodity price is,” Aeisha Mastagni, a portfolio manager at the $307 billion California State Teachers’ Retirement System (CalSTRS), said in response to the Reuters analysis.
Public pensions and popular index mutual funds have endured lagging performance in the U.S. energy sector for a decade. The S&P 500 Energy Sector Index’s total return has been 38% since May 2013, far behind the broader S&P 500’s total return of 206%.
The pay jump also comes after COVID-era damage across the oil industry, which saw huge spending cuts and widespread job losses. Several hundred employees at a Marathon Petroleum (NYSE:MPC) refinery in California, for example, were forced to find new jobs for much less pay, said Virginia Parks, a University of California Irvine professor who studied the plight of the laid off workers.
Marathon declined to comment about the job cuts.
Meanwhile, the executives’ compensation surge distorts the CEO pay ratios that companies are required to disclose to investors to demonstrate executive pay is reasonable compared to other employees. One example: Occidental Petroleum Corp (NYSE:OXY) said in 2020 that CEO compensation was 104 times higher than median employee pay, but Reuters reporting shows it was in fact 230 times higher after stock gains over the past three years.
Occidental said its CEO pay ratio follows the rules laid out by the U.S. Securities and Exchange Commission (SEC). Christina Noel, a spokesperson for the American Petroleum Institute, noted the energy industry’s CEO pay ratio is the second lowest among 11 industry sectors featuring S&P 500 companies.
IT’S RELATIVE WHEN IT COMES TO RETURNS
To be sure, the value of stock-based pay shrinks when markets sour. But most energy CEOs also have a measure of built-in protection from steep declines. CEOs can receive 100% or more of the payout on stock grants tied to total shareholder return even if investors lose money.
That’s because about 90% of energy companies measure stock performance against others in the same industry who tend to suffer at similar times. They use a metric called relative total shareholder return (TSR) and benchmark it against a pre-determined group of peer companies – making it possible for executives to get big payouts even if their companies’ stocks lose value.
Some CEOs are also paid dividends on unvested restricted stock they technically don’t own yet. At ExxonMobil (NYSE:XOM), CEO Darren Woods receives several million dollars a year in cash dividends on unvested restricted stock, according to the oil giant’s pay disclosures.
And since becoming CEO in 2017, the number of shares underlying Woods’ annual restricted stock grant has grown 70% to 225,000, bolstering his dividend payout, company filings show.
Paying dividends on unvested stock grants is opposed by top proxy adviser Institutional Shareholder Services. Many large companies, including Coca-Cola (NYSE:KO) and Microsoft (NASDAQ:MSFT), have disavowed the practice.
Exxon declined to comment on why it pays dividends on unvested stock, but it takes 10 years for each annual grant of restricted stock at Exxon to fully vest.
“We believe this unique, long-term approach aligns our executives’ decisions and interests with those of our long-term shareholders,” Exxon said in an email.
The $242 billion New York State Common Retirement Fund, which owned several billion dollars worth of oil and gas stocks at the end of March, agreed the 3-year vesting period that’s common in the energy sector is too short.
PAY METRICS ‘TOO EASY?’
Some CEOs profited when the timing of their stock grants coincided with sharp declines in their companies’ share price, giving them more room to benefit from a rebound.
Marathon Petroleum’s Michael Hennigan received $9.6 million in stock-based pay, most of it granted on March 17, 2020, the day he became CEO. The grant coincided with one of the lowest closing stock prices in the company’s history as a publicly traded company, according to Refinitiv data.
Hennigan’s 2020 stock-based pay fully vested this March with a value of about $45 million, or nearly 5 times the company’s initial estimate. Marathon Petroleum’s total return has been a sector leader, rising nearly 500% under Hennigan.
“If a CEO’s stock-based pay more than doubles from the initial estimate, it is excessive,” said Rosanna Landis Weaver, director of wage justice and executive pay at As You Sow, a shareholder advocacy group that reviewed the Reuters reporting. “It tells me that the metrics they are using to base the awards of stock on are too easy.”
Some energy CEOs, also benefited from a good performance compared to peers that boosted the overall volume of restricted shares granted, according to proxy statements filed with the SEC.
EQT Corp (NYSE:EQT) CEO Toby Rice, for example, ultimately received nearly 1.1 million performance shares as part of his 2020 grant, 32% more than the target amount estimated by the company because EQT’s stock outperformed peers and the company’s cash flow satisfied vesting conditions, EQT said in its latest proxy statement. That lifted his overall stock-based pay to about $65 million.
The company did not return messages seeking comment.
Many energy companies are under pressure from investors to reform CEO pay, according to disclosures in their annual proxy statements. Phillips 66 (NYSE:PSX), for example, like many of its peers, now details their compensation discussions with investors to show they’re responsive to their concerns and making changes.
The company also capped stock awards linked to total shareholder return if investors lose money after investors complained.
“…Recent changes to executive compensation reflect investor feedback,” Phillips 66 told Reuters in an email.
Mastagni at CalSTRS, however, said reforms on payouts linked to negative shareholder returns still do not go far enough.
“Why should we be paying anything out of shareholder coffers if you lost us money?” Mastagni asked.
