In preparation to BP’s AGM tomorrow (17th May 2017), ShareSoc’s Remuneration spokesman has prepared this post on the company’s remuneration policy and many other issues.
Overall, the changes proposed by the Company, discussed in detail below, should be considered positive.
The discontinuation of the matching share awards and simplification is particularly welcomed, as is the downward discretion applied by the remuneration committee during the year to reduce pay. However, even after the reduction Dudley’s aggregate incentive forward-looking opportunity could still be deemed to be excessive at 725% of salary.
I have commented with more detail (available to full members of ShareSoc) in the Remuneration Forum: http://sharesoc.ning.com/xn/detail/6389471:Comment:43625 . Full members will also find the Manifest reports referred to below at that location.
At BP’s 2016 AGM, the remuneration report was defeated with 60.85% of the shareholder ballot failing to back its approval.
The defeat was connected to CEO Bob Dudley’s remuneration increasing by 20% to $19.4m during a year in which the Company reported record losses amid a global slump in oil prices, cut thousands of jobs and froze its employees’ pay. Following the defeat, the remuneration committee has undertaken consultation with shareholders and has put forward a revised remuneration policy for a binding shareholder vote at the 2017 AGM.
Revised Remuneration Policy
The Remuneration Committee has made several changes to the remuneration policy:
- Matching awards will cease to be granted from 2017 resulting in simplification;
- LTIP participation limit for the CEO decreased from 550% to 500% of salary. Under the old policy, the aggregate cap was 700% (matching shares + LTIP);
- LTIP participation limit for the CFO’s has been increased from 400% to 450% of salary;
- Post departure share retention policy of 250% of salary for two years introduced for executives;
- Pay-out for target performance under the annual bonus plan has been reduced by 25%;
- The mandatory deferral of bonus payouts has been increased from 33% to 50%;
- A maximum annual bonus will only be earned where stretch performance is delivered on every measure;
- The bonus performance scale for executive directors will be the same as the wider professional and managerial employee population; and
- The performance measures utilised in incentive pay have been amended.
The Company’s reported Single Figure for CEO Bob Dudley for the year stands at $11.6m, 40% lower than $19.4m in 2015. The fall in pay is due to lower performance-related pay and a discretionary reduction of $2.2m applied by the remuneration committee.
The bonus formula outcome was assessed at 81% of maximum, however, the Remuneration Committee reduced this to 61% of the maximum. In addition, the Committee exercised discretion to reduce the vesting outcomes of 2014 LTIP awards from 57% to 40% of the maximum. It should be noted that even after the fall in pay of $8m, Dudley’s pay remains above that of his European peers, including Royal Dutch Shell (£7m), Total SA (€3.8m).
The remuneration committee has amended the performance measures for incentive pay and removed overlap between plans.
From 2017, the annual bonus will be measured on:
- Safety measures (20%) – split between recordable injury frequency and tier 1 process safety events;
- Reliable Operations (30%) – split equally between upstream operating efficiency and downstream refining availability
- Financial performance (50%) – operating cash flow (excluding Gulf of Mexico oil spill payments) 20%; underlying replacement cost profit 20%; and upstream unit production costs 10%
During the year, the bonus was measured on Safety (30%, split between loss of primary containment events, recordable injury frequency and tier 1 process safety events) and value creation metrics (70% split between operating cash, underlying replacement cost profit, corporate and functional costs, major project delivery).
From 2017, awards will be measured on:
- Relative TSR (50%);
- Absolute ROCE (30%); and
- Corporate targets (20%). Corporate targets include; Shift to gas and advantaged oil in the upstream; Market led growth in the downstream; Venturing and low carbon across multiple fronts; Gas, power and renewables trading and marketing growth.
Previously, awards were measured on relative TSR (33%); operating cash flow (33%) and strategic imperatives (33%). The Company has provided forward-looking disclosure of performance targets this year whereas targets were not previously disclosed until at the end of performance-periods.
The Remuneration Committee will also incorporate the Group’s longer-term safety and environmental performance as an underpin as well as absolute TSR. This will include consideration of several measures, including loss of primary containment (LOPC) and input from the safety, ethics, and environment assurance committee (SEEAC) to inform the exercise of the committee’s discretion. Previously safety was used under the strategic imperatives condition. The environmental underpin for performance shares will include consideration of issues around carbon and climate change.
The TSR measure utilises a small peer group of only four companies (Chevron, ExxonMobil, Shell and Total). Threshold vesting of 25% of maximum occurs at 3rd place, 80% of maximum vests at 2nd place and 100% vests for 1st place.
The Remuneration Committee does not directly consult employees on executive pay.
Explanation: ‘The committee does not consult directly with employees when formulating the policy. However, feedback from employee surveys, that are regularly reported to the board, provide views on a wide range of employee matters including pay.’
The Company used an employee comparator group comprising professional/managerial grade employees based in the UK and US which represents some 22% of the global employee population. This may not be sufficiently representative.
The CEO to average employee pay multiple is estimated to be 131 times.
Although remuneration has been reduced there could still be perceived to be potential excessive levels of incentive pay;
- High pension contributions (35% salary for FD);
- No employee consultation and unrepresentative employee comparator group utilised; and
- There is a lack of disclosure regarding outstanding equity awards and the fair value of equity awards granted.
In response to ShareAction’s report “Analysis of BP’s 2017 Remuneration Policy”, we believe that BP is proposing a prudent overall business approach which is trying to foster climate change protection as well as profitability aims.
The company’s prudential approach may be a direct result of the tumbling oil prices, the tight OPEC grip over the oil market, the late UK full ratification of the Paris Agreement (18 Dec 2016), and political uncertainties.
The latest Manifest “Say on Sustainability” framework assesses BP as having:
- Good disclosure on GHG emissions (reporting available for the last 18 years);
- Disclosure of progress against GHG emissions; and
- Senior responsibility for ESG issues.
In addition, there is a public disclosure that the Company is investing into the low carbon economy and is implementing concerted efforts to address risks associated with climate change.
Whilst ShareAction’s report highlighting long-term climate change risks faced by BP and ways to address this via strategic alignment in pay policy is commendable, Manifest believes that some of the recommendations are set beyond current remuneration good practices, specifically extending performance measurement to reflect climate change risk horizons to 10-20 years; the Company’s current 6-year time-horizon (3 years-performance plus 3-years post-vesting holding is beyond best practice recommendation of 5-years) and may be technically challenging when remuneration awards are vested.
Comments by Cliff Weight, ShareSoc Director and Remuneration Spokesperson. Disclosure: Cliff Weight is also a non-executive director of Manifest, the global governance experts.