Energy Firms Turn Up Heat on Pay Policies

Half have more tightly tied compensation to performance since the SEC strengthened its proxy disclosure rules.

Almost half of energy companies have more closely aligned executive pay with performance since the Securities and Exchange Commission issued new proxy disclosure rules two years ago, according to a new survey by BDO Seidman.

The new rules, with which companies have become compliant only gradually, require that companies must disclose any specific performance goals that determine compensation, as well as the rationale for how those goals are determined. That’s not the same as requiring pay to be based on performance, but it appears to be having an effect in that direction, as companies know their policies are under increasing scrutiny from both the SEC and the investor community.

” It’s a natural outcome of being required of companies now. You know you’re being watched, so it makes you more vigilant about what you’re going to be disclosing,” Lance Froelich, a senior director in BDO Seidman’s energy-industry practice and a regional leader for the firm’s compensation and human capital consulting practice, told CFO.com. “Shareholders will have a microscope on executive pay in 2009, and companies that have not developed and communicated transparent programs that link compensation to performance will be feeling increased pressure to implement best practices.”

Among 100 oil-and-gas CFOs who responded to the survey, 49 said they’ve tightened the pay-performance link — and the same trend is playing out in other industries, according to Froelich. “Shareholders will have a microscope on executive pay in 2009, and companies that have not developed and communicated transparent programs that link compensation to performance will be feeling increased pressure to implement best practices.”

The objectives that determine whether executives will receive bonuses and how much they get, and the criteria for achieving those objectives, are becoming more distinct than in the past, Froelich noted. End-of-year discretionary decisions are far less common now.

“Prior to the proxy disclosure rules companies may have said they had a philosophy, but actually sitting down and deciding how pay should be delivered and linking up the program to that philosophy often done that well,” he said. “Now it is, because people are able to see what you say you believe and whether the program you have in place is actually consistent with that belief.

Meanwhile, it’s not just executives whose pay is up for evaluation at oil and gas companies. Nearly half of energy-company respondents (46 percent) are budgeting salary increases of less than 3 percent for employees at all levels in 2009.

BDO Seidman also asked respondents whether they expect shareholders to make a “Say on Pay” proposal in the next year, seeking a nonbinding vote on the aggregate pay package to be offered to the company’s top five executives. While Say on Pay has received a good deal of media attention and populist support over the past couple years, only 5 percent said they expect such resolutions to be made.

With the Obama administration set to take office, there is still a chance that the decision on Say on Pay will be taken out of shareholders’ hands. Legislation that would require public companies to let investors weigh in on executive compensation, proposed by Rep. Barney Frank (D-Mass.), was passed by the House of Representatives last year. It is has been awaiting action by the Senate all year, but President-elect Obama has said he’s in favor of it.

Other major findings from the BDO Seidman Natural Resources 2009 Outlook Survey:

• The SEC’s proposed modernization of oil and gas reserve reporting requirements. Although 58 percent think the proposed rules will provide investors with better information, approximately 54 percent believe the time required to comply with those proposed rules will be substantial or even unreasonable. The new rules would require oil and gas companies to report more information about their reserves and allow companies to report probable and possible reserves, rather than only “proved reserves.”

• IFRS Adoption: Only 13 percent of respondents expect to be early adopters of International Financial Reporting Standards. A little more than one-third (35 percent) think using IFRS will provide companies with a competitive advantage over companies using generally accepted accounting principles.

• FAS 141(R) Implementation: A majority (57 percent) of respondents believe implementation of the revised standard for business combinations will be moderately or highly difficult. The standard is effective for acquisitions finalized on or after December 15, 2008.

BDO Seidman released results of its oil-and-gas survey in two waves. CFO.com published an article on the first release on December 3.

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