Executive Compensation: The Increasing Importance of Equity

By Jamie Ferguson, VP of Global Business Development, Maxwell Drummond

In today’s economy and amidst the global war on talent within the oil and gas industry, companies must leverage their equity and executive compensation offerings to maintain a competitive edge. As current executive leadership approaches retirement age, a company’s ability to retain the next generation of senior leaders will be crucial to their ability to succeed. Boards of Directors have a heightened pressure to address these issues and compensating these leaders with equity is an increasingly important trend.

Equity is a non-cash composition that represents a form of ownership interest in a company. One common form of equity is stock options, giving employees the right to purchase shares of the companies’ stocks at a predetermined price. This right can “vest” with time or performance, so employees can gain control of the option over time. When the option vests, they gain the right to sell or transfer the option thus motivating employees to stay with the company long term. Other popular forms of equity include incentive stock options and nonqualified stock option plans, restricted stock and restricted stock unit awards, performance shares and employee stock ownership elements.

Equity is used in large part to align recipients with shareholder interests. It is also a way of providing appropriate performance incentives and rewarding top talent. It is a critical element and an important way to retain top talent and reduce the risk of employees being lured by other companies. Shareholders welcome this contingent, performance-based compensation and appreciated the necessity of retaining/rewarding the talent that drives their interests in the company.

In a recent survey by Price Waterhouse Cooper (PwC), the majority of companies surveyed projected a continuing rise in compensation; however there will be a shift to compensation being contingent on performance. 43% of companies are expecting an increase in equity compensation levels to executive and senior management in the coming year and 28% expect to increase equity compensation levels to middle management through vice president levels as well. It is also reported that in an effort to move towards linking compensation to performance, companies will base vesting conditions for restricted share units and restricted share awards on performance or market condition.

As talent competition intensifies, oil and gas companies will face pressure to continue creating inventive and appealing compensation packagesMaxwell Drummond urges clients to continually sweep the market, acknowledge trends in compensation packages and adapt theirs to continue attracting the industry’s top talent.

About the author
Jamie Ferguson joined Maxwell Drummond’s Aberdeen team in 2006 and by July 2011 was promoted to Vice President of Global Business Development. Jamie has extensive experience managing executive level searches for clients spanning the oil and gas value chain and has deep industry networks developed from working on assignments in over 20 countries on 6 continents.

Maxwell Drummond International is a world leading retained search consultancy offering professional search services to clients in all sectors of the energy and natural resources industries.