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Executive compensation in the energy sector is seriously suffering...what's the relief?
Over the last year, the energy sector has been plagued with low commodity prices. The plunge in crude oil and natural gas prices has in many cases shaved over 50% off stock prices of many exploration and production (E&P) companies. Taxand USA discusses alternative approaches to incentivise the executive team in market conditions where more traditional incentives are not effective.
In a market where executive compensation has traditionally been tied to equity prices or total shareholder return, company boards and compensation committees are facing a quandary. With equity prices so depressed, long-term incentive awards have lost much, if not all, of their value. Restricted share awards, initially granted based on a value that compensation committees believed would support competitive compensation packages for their executives, are worth significantly less. Stock options, in many cases, are now so far “underwater” that they have become virtually worthless.
One alternative for dealing with depressed share prices would be to simply increase the number of shares granted in order to deliver the same competitive market compensation to the executives. There are several problems with this approach, including the additional dilution that other shareholders would be absorbing, whether enough shares would be available under the incentive plans (since this approach would greatly increase the “burn rate” of shares available for issuance under such plans) and the “upside risk”— that a sudden bounce in share prices could result in an unintended windfall for the executives.
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