Upset About Your Oil Stocks? Shed a Tear, Too, for the Poor CEOsby and
Stock options losing value as incentive for executive teams
Chesapeake, Linn and Antero among energy companies underwater
Doug Lawler is getting hammered by Chesapeake Energy Corp. -- and he runs the company.
Like investors the world over, Lawler and other energy industry executives have been hit hard by the plunge in their companies’ shares. On paper, their paychecks have plummeted -- in some cases, by more than half -- as their stock options have fallen deeply out of the money.
That’s the way it’s supposed to work, of course. Stocks go up, executives win alongside their shareholders; stocks go down, executives lose with everyone else.
But the development has left many oil and gas company boards, in particular, with a quandary: what, if anything, to do about the abrupt decline in the value of shares earmarked for executives brought on by the global commodities rout. Increasing stock awards with prices in the doldrums could agitate shareholders. Leaving things alone might discourage the bosses.
“Boards are in a real dilemma,” said John Ellerman, a founding partner at executive compensation consulting firm Pay Governance. “There is great concern about retaining key talent, especially in exploration and production companies.”
Scores of these executives, charged with leading their companies through tough times, are badly underwater. Stock grants comprise about 60 percent of total compensation for CEOs in the Standard & Poor’s 500, according to data compiled by Bloomberg, and the oil glut has driven the S&P 500 Energy Sector Index down by 22 percent this year.
Lawler could be the poster CEO. The petroleum engineer joined Oklahoma City-based Chesapeake as chief executive officer on June 17, 2013, when the natural-gas producer’s stock traded at just under $20. More than two-thirds of his compensation was intended to come as equity grants.
He has so far been awarded more than 1.36 million options with strike prices of $20.10, $24.57 and $18.37. With Chesapeake closing Wednesday at $4.47, that leaves his options way offside, although his restricted share units have retained some value.
The bottom line: Lawler’s 2014 reported pay was $14.7 million. The same package for 2015, based on Wednesday’s closing price, would leave him with closer to $6 million, according to a Bloomberg calculation.
It’s the same for most exploration and production companies. Linn Energy LLC has awarded CEO Mark Ellis 1.31 million stock options that are currently underwater, the bulk of them with a $40.01 strike price. Houston-based Linn’s shares have fallen 84 percent to $1.59 this year.
Antero Resources Corp. allotted CEO Paul Rady restricted stock worth $6 million in April. It’s now worth less than half that as the company’s stock has tumbled 53 percent since then. A $20 million equity grant from April 2014 now is worth one-third of its face value.
Gordon Pennoyer, a Chesapeake spokesman, declined to comment. Spokesmen at Linn and Denver-based Antero didn’t respond to requests for comment.
Some larger companies and private equity firms are starting to see this as a good time to scoop up “high-grade” employees from struggling competitors, said Brent Longnecker, CEO of Houston-based executive compensation consulting firm Longnecker & Associates.
“Private equity is out there smiling with this, because they’ll go out and try to hire teams away from companies that are struggling,” Longnecker said. “This is a great time for companies to figure out who are going to be teammates and who are the mercenaries.”
The trend of energy executives moving into private equity appears to be proceeding apace. Houston-based Quantum Energy Partners said in August it had hired two retired CEOs -- Anthony Best, formerly of SM Energy Co., and Charles Davidson, from Noble Energy Inc. In February, EOG Resources Inc.’s former chairman and CEO Mark Papa came out of retirement to join energy-focused Riverstone Holdings LLC.
On the other hand, some executives might be inclined to stay put and hope their grants will be “worth more once things turn around,” said Brandon Yerre, a principal at PricewaterhouseCoopers focused on executive compensation. A bounce in share prices could produce plenty of upside.
This potential windfall will also make directors at exploration and production companies cautious about boosting equity awards as a retention strategy, according to Longnecker.
Institutional investors and proxy advisers are another consideration. Hiking awards and diluting existing holdings could well draw their fire -- creating yet another reason to err on the side of caution, said Pay Governance’s Ellerman.
Shares for executive awards are drawn from an equity pool that’s maintained by the board with shareholder approval. Granting additional stock would deplete the pool faster, diluting existing shareholders. And many energy companies are in no shape to offset the dilutive effects with share buybacks.
Given current difficulties with options and the likelihood many CEOs will see their base salaries frozen, Ellerman said it will be critical that employers “keep the bonus string going” by shifting focus from total shareholder return to such measures as cost-cutting and safety.
“There’s no silver bullet to fix this,” Ellerman said. “It’s just whether executives have the patience to wait for a turnaround.”