“Despite the downturn in commodity prices, the
oil and gas industry continues to outpace general
industry in projected spending on variable pay
for their non-executive population, reflecting the
importance of aligning industry employees with
the company’s financial success to drive individual
and team performance.”
on business results compared to general industry.
It is important to note that while 27% of all participants were
unsure of their financial performance for the year, 40% of upstream
producers remained unsure at the time of our research, indicating
many firms are taking a wait-and-see approach to finalizing funding
for their employee bonus pools and other discretionary spending
in 2017, with several firms indicating an expectation of delaying
base pay increases for at least a few months from the previous year.
A long-term incentive, or equity compensation, is highly prevalent
throughout the oil and gas industry beyond solely executives in
the board room. While executives will receive a significant portion
of their total direct compensation in equity, even at lesser values,
it continues to serve as a retention device that aligns employees
with the financial success of the company.
Most companies began planning for their 2017 long-term in-
centive grants in the fourth quarter of 2016. Long-term incentive
practices vary significant by company due to corporate structure,
share availability and company culture; however, the following
• Upstream producers often grant long term incentives to em-
ployees below the management level to key contributors in
technical disciplines, with half the sector granting shares to
employees at all levels in the organization.
• Privately held companies generally will restrict access to long-term incentives higher in the organization than publicly traded
companies, as vehicles are either more complex or
• For publicly traded companies, the predominant form of equity
compensation is a mix of time-based restricted stock and performance-based restricted stock, with executive compensation
more heavily aligned with performance-based restricted stock.
• Since many performance-based restricted stock grants vest
based on performance relative to peer organizations, executives
of companies with better relative performance may see significant value delivered despite depressed market values for
• Vesting periods for time-based vehicles will vary between three
and five years from the date of grant, generally vesting in equal
tranches throughout the vesting period.
• Performance-based grants generally will vest on a cliff date,
where performance is assessed through a lookback period.
During 2016, many upstream producers, mainly due to their
historic granting practices, ran into the conundrum of insufficient
shares or a dilution rate that may alert investor watchdog organi-
zations to sustain historic granting practices. According to our
research, in the fourth quarter of 2016, upstream producers were
significantly more likely to adjust their methodology for determining
long-term incentive grant values for employees in 2016, with 41%
employing some alternative methodology to reduce the number
of shares required.
Most organizations employed some discretion by managers on
who should receive grants, while others chose more quantitative
ways of using fewer shares, while some organizations chose to
utilize an alternative cash-based vehicle, despite not knowing how
long prices would stay depressed and knowing three years from
now, these grants will come due.
Other adjustments that upstream producers deployed in their
grant valuations included:
• Maintaining the same level of dilution from outstanding shares
as the previous year
• Reducing eligibility for grants
• Using a historical or average stock price from an earlier
• Reducing prevalence of grants
• Fixed dollars budget
Long-term incentive compensation continues to be an important
element in the overall rewards for employees in the oil and gas
industry. As equity valuations improve with the global landscape,
companies have to remember the impact of these awards on
employees nearing retirement and key successors to their roles.
Organizations throughout the industry have to remain nimble
and focused on the timing of execution. Much of this timing requires
talent to be engaged in the process, understanding how each organization can maximize on movements in the market and capitalizing at the right time. Rewards programs are just one lever to
use to engage employees, and with budgets more constrained,
organizations often need to find different tools to help them achieve
Developing stretch roles for high-performing employees to
further their knowledge and capabilities; investing in employee
development and mentorship programs; and employee recognition
can all have as great, or even greater, impact than monetary rewards
on employees’ overall satisfaction and engagement.
ABOUT THE AUTHOR
Joshua Ross is an associate partner in Aon Hewitt’s Talent, Reward
& Performance practice and is responsible for Aon’s Southwest
Region and North American Energy Vertical. With more than 14
years of consulting experience on compensation-related projects,
he works primarily with organizations in the energy industry. He
has led and served as a senior contributor on several large global
and domestic integration projects. Ross completed the business/
economics program at the University of Texas with a concentration
in quantitative methods. He is based in Houston.