BP, Shell Investor Wants CEO Pay Policy Change After Revolt

  • Allianz proposes oil majors move to per-share metrics for pay
  • BP’s remuneration policy goes to shareholder vote this year

The pay of bosses at Europe’s biggest oil companies is back in focus as shareholders prepare to scrutinize BP Plc’s new policy after rejecting Chief Executive Officer Bob Dudley’s remuneration last year.

Allianz Global Investors, among the top 25 holders of BP and Royal Dutch Shell Plc shares, wants the companies to base top executives’ pay and bonuses on per-share metrics rather than absolute numbers for cash flow and profit, said Rohan Murphy, an analyst at the investment firm. This will help align the management with shareholders’ interests and ensure profitability becomes more important, he said.

“Per-share metric is the real key thing,” Murphy said in an interview. “We own shares. We don’t want it to grow just for the sake of it. We want management to be aware of the structural threats in the industry and for now they seem to be, but incorporating this into remuneration is tricky.”

BP shareholders last year voted against Dudley’s 20 percent pay increase after the company reported a record net loss and announced thousands of job cuts following the slump in oil. The outcome triggered investor discontent about compensation at other companies in Europe. Although the BP vote was only a recommendation, the company pledged to change the way it pays executives.

Over the past months, the chairman of BP’s remuneration committee Ann Dowling has “led an extensive program of engagement with shareholders to better understand and consider their views as we developed this new policy,” the company said in an emailed statement. “We won’t comment on the detail of this policy before it is published.”

BP and Shell seek shareholder approval for their remuneration policies every three years, with the latest due this year. Under BP’s current policy, the annual bonus will be based on value creation and may include operating cash flow, cost management and major project delivery, according to the company’s website.

Pension Payments

While shareholders had approved the policy in 2014, last year 59 percent voted against the CEO’s 2015 pay because it was seen as excessive.

Dudley’s total compensation, including salary, bonus, shares and pension, increased to $19.6 million in 2015, according to BP’s annual report. While his salary rose just 1.5 percent to $1.85 million, the bonus jumped 38 percent to $1.39 million and the contribution to pension and retirement benefits more than doubled to $6.52 million.

The CEO’s 2015 pay also included a deferred bonus from 2012 of $2.6 million, conditional on safety and environmental sustainability. The further award of $7.1 million of performance shares was linked to total shareholder return, operating cash flow and strategic imperatives ranging from operational risk to project delivery, the report showed.

“The pay figure was very large in absolute terms especially amid a backdrop of pain for the industry,” Murphy said. “We have spoken about per-share metrics in previous meetings but because of what happened last year, it was a wake-up moment and we expect them to be incorporated at some stage.”

Challenging Times

Shell chief Ben van Beurden received total remuneration of 5.58 million euros, or $6.19 million, in 2015, down from $32.2 million in 2014, when his pay was boosted by pension and tax equalization payments of 18.6 million euros relating to his promotion to CEO.

Dudley, 61, took over in the wake of the 2010 accident in the Gulf of Mexico that killed 11 people and resulted in the worst oil spill in U.S. history. The company set aside more than $50 billion to pay for the spill and in 2015 it agreed with the federal and local governments on final compensations.

“Yes, he worked in very challenging times but still the company is making very low returns,” said Iain Armstrong, a London-based analyst with Brewin Dolphin Ltd., which owns BP and Shell shares. “There was something wrong in the pay metric in place. Moving to a metric that prioritizes return on capital could be the way to go.”

BP’s Dowling met with Allianz officials in December regarding the new pay policy, Murphy said. Unlike previous meetings, he thinks BP is “on board” with Allianz’s recommendations. Shell has also been out seeking shareholder views on remuneration, he said.

“We have been pretty impressed that there hasn’t been a massive gap in what we want to see and what they have presented,” he said.

A spokesman for Shell declined to comment on the company’s executive remuneration policy.

BP’s annual shareholder meeting is scheduled for May 17, with Shell’s on May 23.

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