Industry

Oil and Gas Firms Challenged on Short-termism

Executive pay is still largely tied to oil and gas production as opposed to climate targets, Carbon Tracker claims. 

Oil and gas companies are prioritising short-term productivity goals over long-term sustainability ambitions in their executive remuneration schemes, according to new research. 

The report, published by financial think tank Carbon Tracker, analysed the remuneration policies of 25 of the largest listed oil and gas companies to understand how different performance metrics are weighted when determining executive pay on a given year. 

Findings from the report showed that all of the assessed firms – apart from Occidental Petroleum – were still prioritising fossil fuel production growth over climate transition efforts. 

“Oil and gas companies have incorporated growth metrics into their remuneration policies that both explicitly and implicitly incentivise oil and gas production, meaning that the focus of executives is likely to be on expanding future production,” said Saidrasul Ashrafkhanov, report author and Associate Analyst for the Oil, Gas and Mining Team at Carbon Tracker. “It’s important to pay attention to this and engage companies on their executive policies, challenging them on the inclusion of these growth metrics.” 

Last year, BP’s CEO Bernard Looney was paid just over £10 million (US$12.7 million), while Shell’s former head Ben van Beurden received £9.7 million and ExxonMobil’s Chief Executive Darren Woods £28.86 million. Additionally, all three companies handed out executive bonuses for hitting climate targets in 2023 – despite their continued expansion of carbon-intensive production. 

CEO pay in the oil and gas sector has returned to pre-pandemic levels, with research noting that, in some cases, it has risen by as much as 75%. 

In 2022, Carbon Tracker developed a Global Registry of Fossil Fuels to serve as a public database on emissions from fossil fuel reserves and production worldwide and track their impact on the global carbon budget. 

Rewarding climate change 

Although oil and gas firms Eni and Repsol have pledged to cut emissions by 30-35% by 2030, carbon-intensive production growth targets still determine 29% and 23% of their respective management pay, Carbon Tracker’s research highlighted.  

In addition, only five companies included in the report incorporated metrics that matched their overarching emissions reductions targets. Four of those were focused on Scopes 1 and 2 emissions, while Shell’s remuneration incentives supported Scope 3 emissions reduction, but only on an emissions intensity basis. 

“[TotalEnergies] used to have an emissions reduction metric that met most, if not all, of the most important Carbon Tracker Hallmarks of Paris-aligned Emissions Targets – but it removed it in 2023,” said Ashrafkhanov. 

Some remuneration metrics claiming to incentivise low-carbon investment have been driving growth in natural gas instead – which the oil and gas majors claim is a low-carbon or transition fuel, the report suggested.

“It remains unclear how these executive packages currently incentivise the longevity of a company,” added Ashrafkhanov. 

Assessed corporate timelines for longer-term incentive plans typically only span three to five years, but taking such a short-term view for remuneration targets at a time when the International Energy Agency (IEA) has projected that oil and gas demand will peak by 2030, may be problematic. 

“These are very short-lived measures that change every year, sending a signal [to executives] that short-term production volumes will dictate how much executives get paid,” Ashrafkhanov added. “It’s not necessarily company performance that increases profitability, and therefore, executive pay – but the state of the market.” 

Maintaining coherence 

Carbon Tracker’s report also highlighted oil and gas firms’ lack of transparency around pay, as only six of the surveyed companies prospectively disclosed their remuneration policies for 2023. As such, the think tank suggested that investors should engage with oil and gas companies on the disconnect between executive incentives and overarching climate transition goals.

Further, it recommended that investors consider companies’ prospective disclosure on compensation plans and call for full transparency, encourage the use of relative rather than absolute metrics to account for market conditions, and ensure alignment between incentives and strategic timelines to discourage short-term thinking. 

“The reality today is that some corporate strategies and executive remuneration policies are misaligned,” said Ashrafkhanov. “[This] means an executive may not necessarily be rewarded for delivering on all corporate objectives.” 

Misalignment between executive pay and performance, especially in the longer term, is an ongoing issue across sectors. Earlier this month, members of the Investment Association (IA) sent a letter to FTSE 350 companies’ remuneration committee chairs, touching on how investors will look to engage with investee companies on executive pay in the 2024 proxy season. 

“Ultimately, investors want to see companies succeed and deliver long-term returns to their shareholders, with management and the wider workforce being rewarded for delivering that success,” said Andrew Ninian, Director of Stewardship, Risk and Tax at the IA.

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