An ongoing shift to certain performance-based awards boosted oil and gas executives’ compensation last year following record production and consistently strong oil prices.
The change is producing a complex mix of compensation structures that reward those executive officers for safety, environmental measures and share price performance relative to various benchmarks, among other markers — a transition from the more volatile days when much of their pay was decided by companies’ stock performance during the most recent year.
Calgary’s oilpatch bosses still dominate the ranks of the province’s best-paid executives, according to Postmedia’s annual survey of compensation at Alberta’s 100 largest publicly traded companies, done in partnership with consulting firm Global Governance Advisors (GGA).
Stock options, after decades as one of the more popular compensation structures across Canada, have been partly replaced by performance-based awards as a preferred method for compensating executives at large companies.
Performance-based rewards, known as Performance Stock Units (PSUs), are often based on a company’s stock performance relative to a specific benchmark as opposed to its share price performance over the year.
Companies focused on physical capital such as pipelines, for example, will tie compensation to return on invested capital, said Peter Landers, senior partner for GGA, or its stock performance relative to an index or minimum threshold.
They differ from stock options, which reward employees if the company’s stock price increases from the price at which they were granted to the executive.
These decisions weigh heavily on compensation, as bonuses and stock-based awards usually exceed executives’ base salaries several times over. (Consider CPKC’s Keith Creel’s $1.8-million base salary, comprising about nine per cent of his total earnings in 2023.)
“The gold standard expected nowadays for those companies, for PSUs, is 50 per cent or more weighting,” Landers said. “If you’re granting a CEO $1 million, they want to see at least $500,000 of more of that in the form of PSU.”
One example in 2023 was Enbridge Inc. CEO Greg Ebel, who earned $18.7 million in total compensation during his first year leading the Calgary-based energy company. About $6.9 million of his pay package came from PSUs — an award that gave weighting to discounted cash flow per share growth, total shareholder return relative to a peer group of companies and emissions-reduction targets.
Enbridge’s performance in those categories is correlated with a multiplier depending on its performance, giving a commensurate boost to executives when it overperforms those baseline targets.
Another $4.4 million of Ebel’s compensation was earned through short-term awards focused on safety, emissions reductions, progress on diversity, equity and inclusion initiatives, alongside capital growth and individual performance measures.
The remainder of his earnings came from his $1.7 million base salary; $2.3 million in restricted share units (RSU), a time-based conditional form of compensation; and $2.3 million in stock options.
Large companies shying away from stock options
Stock options have increasingly fallen out of favour among large companies due to the view they incentivize riskier behaviour and don’t retain value in downward share environments, Landers said — though they’re still popular at smaller and mid-sized companies.
Changes to Canadian tax law such as this year’s increase to the capital gains inclusion rate and other less recent changes to how stock options are taxed have also made them less attractive, he said.
Many institutional investors have led the charge on this change, he added.
Overall, 42 per cent of incentive plans in the Top 100 consisted of PSUs or RSUs. Only 17 per cent of companies solely rewarded executives using stock options.
The trend favouring performance-based compensation has been adopted in equal parts among oil and gas companies and other industries, Landers said.
This shift has dampened energy executives’ vulnerability to wild swings in compensation, said Arden Dalik, senior partner at GGA.
“It is less volatile now that we don’t have stock options because it could really drive things up, but it’s still there,” Dalik said. “And on the other side, when things are down as they were a few years ago in Alberta, there is this acceptance that you may not get a bonus.”
Energy executives’ earnings last year paint a rosy picture, but there are few more volatile industries where fortunes can turn in an instant.
Fast forward to 2023 and 96 per cent of energy executives received bonuses, six percentage points higher than in 2022.
Among all named executive officers (NEOs) — which includes companies’ broader executive class of chief financial officers, chief operating officers and others — energy executives saw their bonuses increase 13.3 per cent. And across all industries in the Top 100, the median NEOs’ bonus rose 16 per cent.
There’s an overall greater acceptance of these swings in the oil and gas sector, Landers said, whether the consequences are salary rollbacks or major earnings boosts.
Even so, the energy industry continues to pay a premium for executives, exemplified during its long-standing dominance at the top of Alberta’s earnings charts. In 2020, despite the pandemic’s devastating effect on the industry, former Enbridge CEO Al Monaco topped the board with $17 million in earnings, which in 2023 would place him fourth among Alberta CEOs.
Companies are generally more hesitant to go public, Landers said, meaning Alberta’s larger private companies — likely including some in the tech sector — are not featured in this year’s list.
Oil and gas sector remains highest-paying industry in Alberta
Oil and gas executives meanwhile remain far-and-away the most prominent high earners in Alberta, the rankings showed.
For many years the energy industry has made up about three-quarters of Alberta’s top earners. That was no different in 2023, when 73 per cent of companies came from the oil, gas and consumable fuels or energy equipment and services industries. (Capital markets is the province’s next-most prominent industry at four per cent, and eight industries respectively have a two-per-cent share in the rankings.)
“(Oil and gas) is by far the dominant industry,” Dalik said.
Energy companies rewarded their slate of executives with multimillion-dollar earnings in 2023. Suncor Energy Inc. led the pack, paying its six NEOs a combined $67.7 million. That figure was skewed by CEO Rich Kruger’s one-time $36.8-million award for exiting retirement to lead the company.
Canadian Natural Resources Ltd., led by executive chair Murray Edwards, paid its executive team $45.6 million — the next-highest total compensation among Alberta oil and gas companies.
Steady oil prices have buoyed positivity in the industry through the first half of 2024, which, if continued, would give yet another boost to executives’ pay this year.
West Texas Intermediate (WTI) crude averaged just under US$80 a barrel last year, with some companies reporting record production.
Suncor has posted nearly 26 per cent total shareholder return between Dec. 31, 2023, and June 30, 2024, increasing its market capitalization — or total stock value — by $11.9 billion. Canadian Natural Resources Ltd. has seen its market capitalization increase by $10 billion over that period — an almost 15 per cent increase.
Cenovus Energy Inc. and Imperial Oil Ltd. have both posted similarly high percentage increases to their market caps in the first six months of the year.