What’s the best way for a shale executive to see a bigger pay check? Prove that you’re focused on cash flows and spending discipline, not drilling more oil.
That’s the latest finding from a study by consulting firm Oil & Gas Financial Analytics, which found that pay packages at the c-suite level increasingly depend on how well oil executives deliver on free cash flow targets and cash return on capital employed.
Profitability and cash flow are now the top component in executive’s compensation, accounting for 39% of earnings, up from 22% eight years ago, the study found. The incentive to grow production and oil reserves, formerly a top priority, now accounts for only 6% of compensation.
“It’s no surprise that the dramatic strategic shift implemented by US E&Ps and integrated energy companies over the last decade has been steered by an equally dramatic change in their compensation incentives,” says Nick Cacchione, founder of Oil & Gas Financial Analytics.
Oil production growth has a diminished role in compensation, smaller than that of safety and ESG performance. Only 3 out of the 10 companies analyzed have production targets as part of their compensation packages, down from 9 eight years ago, the study showed.
Almost a quarter of the annual bonus awarded to executives now depends on meeting environmental targets, including lower oil spill rates and reduction in emissions.
