BP reward scheme misses the point
8 Mar 2010
London – BP’s recent award of a 40% pay rise to CEO Tony Hayward, and lesser but significant increases to other directors, has been cleared by the group’s remuneration committee despite a decline in profits of 33-45% – depending on how earnings are measured.
The pay increases, said the committee, derive mainly from a bonus element based on criteria ‘key safety measures’ (15% of bonus), ‘staff numbers and [employee] survey results’ (15%) and financial and operational targets (70%) – but to what extent does its explanation bridge the chasm between reward and result?
Looking at safety first: BP’s reported progress in areas such as recordable injury frequency, which includes employees and contractors combined. The rating was 0.34 in 2009 – down from 0.43 in 2008 and 0.48 in 2007.
However, it should be noted that such safety improvements are today being driven not by the management, but by regulatory measures and recommendations – including, ironically, those introduced following the fatal explosion at the BP refinery in Texas City.
On the people front, BP achieved a 65% rating in its ‘Employee Satisfaction Index’ survey, up from 59% in 2008, but still below 2006 level of 66%.
The better 2009 result reflected increases in ‘trust in management’ and ‘perceptions that BP is being effectively managed and well run’, noted the BP survey – though this, of course, was taken before the bosses pay rises were announced.
Meanwhile, instead of focussing on BP’s massive earnings drop, the remuneration committee chose other markers, such as the cost reduction programme, shareholder return, and performance versus that of competitors, such as Shell, Total and ExxonMobil.
While comments in its annual report suggested that BP’s ranking on financial metrics seem open to interpretation, the remuneration committee declared that BP board had met or exceeded its financial targets.
BP, meanwhile, reported a “sharp upturn” in profitability as recovery kicked in towards the end of 2009, suggesting that it is set to significantly improve its profitability in 2010.
Whatever the contribution of the board – as explained by the remuneration committee – to these achievements, BP’s leadership would have done much better to wait until an actual return to previous levels of profitability before claiming any reward.
