Despite being challenged on climate, top oil companies still link production increases with executive compensation

To maintain a 2°C trajectory, it is a known fact that two-thirds of all fossil reserves have to be kept underground. However, the majority of oil and gas companies screened by Carbon Tracker continue to base executive compensation on the growth of hydrocarbon production and the increase in their reserves, all while developing low-carbon strategies.

Companies with limited growth criteria outperformed others by 7%.
@Total

Most oil and gas companies are jeopardizing shareholder returns by rewarding ever-growing businesses in a world marked by dwindling demand for fossil fuels. Such is the conclusion of the latest Carbon Tracker report .

The financial think tank analysed the compensation policies of the top 40 oil and gas companies in North America, Europe and Australia on various criteria: production, reserves, cash flow, share value, profits, etc. In 2018, only one of these companies did not propose an incentive for production growth, the US-based Diamondback Energy company. For them, executive compensation is based solely on costs and returns. But for more than 90% of the other companies analysed, executives were rewarded based on their increase in fossil fuel production and hydrocarbon reserves.

According to the study, this policy is less profitable for shareholders. In the two years following the 2014 oil shock, American companies with the least criteria related to growth (less than 20% of compensation) had growth rates 7% higher than those with had strong criteria in this area (more than 50% of compensation). This is explained by the fact that these companies chose to favour criteria related to financial returns and not just volume increases.

Growth criteria as important as climate criteria

"Compensation systems in today's energy industry must be radically different from those of the past. Signatories to the Paris agreement committed themselves to moving the world to a zero-carbon economy and leaders that best serve their shareholders are those who will create and implement low-carbon strategies," stated Edward Mason, Head of Responsible Investment for the Church of England.

Nine companies have, however, incorporated compensation criteria related to climate change. At Total, for example, there is a performance criterion called "Corporate Social Responsibility" which assesses climate consideration in overall business strategy and CSR or diversity policies. It weighs as heavily as achieving production or reserve objectives.

Employees rewarded for reducing emissions

In February, BP announced that it was incorporating criteria for reducing greenhouse gas emissions in 36,000 employee salaries, which amounts to roughly half of the group’s workforce, including the executive directors. "The integration of such an objective reflects the importance we attach to climate issues, and we hope it will catalyse even more ideas and activities to address the dual challenge of providing better climate change and emitting energy as little as possible,” explained Bob Dudley, CEO of BP Group.

Amidst investor pressure, Shell has decided to link the achievement of its climate objectives to executive compensation. This would potentially impact 1,200 executives, according to the Financial Times. This new policy will be put to vote by shareholders at the annual general meeting in 2020. Among the other companies to introduce climate criteria, are Repsol, ExxonMobil, Suncor and Eni.

Concepcion Alvarez, @conce1