- Oil major CEOs have raked in millions in compensation last year due to soaring energy prices.
- Capital Monitor’s analysis shows household names such as BP are ramping up their ESG-linked executive pay, but emissions reductions targets are a small proportion of the overall make-up.
- Just one of the four oil majors assessed link both their long-term incentive plans and annual bonuses to Scope 3 emissions.
Attaching ESG-linked targets to executive pay is an increasingly common phenomenon, and today, almost four in ten FTSE 100 companies incorporate ESG factors designed to influence how a CEO behaves, according to fresh research conducted by PwC.
Of those companies, typically around 15% of the bonus pool will be linked to at least one of the three letters of ESG. Social remuneration targets are by far the most common (32%), while 11% recognise governance and 10% incorporate some environmental component.
As Capital Monitor’s research on the subject has shown, 25% of the world’s 100 largest banks by assets link CEO compensation to at least one environmental target. Capital Monitor holds that linking executive pay to ESG targets can be a powerful tool for accelerating progress on the UN Sustainable Development Goals.
In this vein, we were curious to see how the CEOs of four of some of the largest oil majors in Europe and the US were incentivised to bring about positive environmental change. There is clear evidence that ESG plays a meaningful role in how an oil exec is motivated, but the finer details reveal metrics that lack in aspiration and scope, as is often the case for companies in other sectors too.
Last year proved very profitable for the top brass at Chevron, Shell, BP and TotalEnergies.
With energy prices skyrocketing, and oil and gas company profits soaring, Capital Monitor's analysis of the CEOs’ most recent pay packages reveals the four were compensated upwards of €28m a year in aggregate.
The CEOs’ base salary on average makes up just 16% of total pay, with the rest coming from either long-term incentive awards or annual bonuses, the majority of which is based on financials.
Focusing on these four companies, it’s clear that each has been ramping up the ESG share of their annual bonus targets since 2019. In Shell’s case it has been since 2018. It was the first oil major to make the jump.
Annual bonuses for oil majors
Breaking down their overall bonuses into ESG target weightings as of their latest reports, in 2022 Shell aligns 15% of annual targets to "progress in the energy transition". This is broken down into three equally weighted (5% each) parts: selling low-carbon products, absolute emissions reduction, and “partnering to decarbonise”. The latter is measured by the number of Shell-linked electric vehicle charging points there are.
BP aligns 15% of targets specifically to emissions reduction, according to its 2021 annual report. Chevron weighted 3.3% for emissions management out of a total of 10% dedicated to the energy transition, according to its 2021 annual report. TotalEnergies has a total weighting of 28% of the overall CEO bonus for ESG targets. This includes 5.56% apportioned to emissions reduction.
In terms of long-term incentive plans (LTIPs), there is a larger variation in how the four CEOs receive ESG payouts.
Nearly a third of BP’s LTIP (26.6%) is weighted towards general environmental targets and classed under “strategic progress”. This is defined as delivering a hydrocarbons business and a track record in low-carbon energy.
TotalEnergies’ CEO receives 15% of his LTIP from performance on Scope 1 and 2 emissions reductions (direct emissions and those generated indirectly by the likes of electricity, heating and cooling), and an additional 15% on Scope 3 emissions reductions (emissions connected with a company but outside its direct control).
The energy transition component of Shell’s long-term target sits at 20% of the total LTIP. The CEO’s payout depends on how far the Dutch company achieves a series of longer-term goals, such as a 6-8% reduction in intensity emissions in 2023 against a 2016 baseline.
But while the four oil majors are increasing the share of their bonuses linked to environmental targets, there is evidence they are reducing the proportion tied to sustainable outcomes. In 2021, BP cut the weightings focused on safety and sustainability each from 20% to 15%, adding an additional 10% weighting for ‘convenience and mobility’ in its annual bonus.
Targets too easy?
Annual filings reveal that these companies are generally either hitting or exceeding their annual targets linked to CEO pay.
On emissions reduction specifically, TotalEnergies beat its 2021 target of 42.4 million tonnes of CO2 Scope 1 and 2 emissions, reaching 37 million tonnes of CO2. As a result, the company’s CEO, Patrick Pouyanné, received the full amount available: 10% of his €140,000 base salary. In total, Capital Monitor calculates Pouyanné received just over half a million euros for hitting 100% of his environmental targets in 2021.
But do these targets go far enough? For starters, few incentives are focused on Scope 3 emissions, despite the fact these make up 88% of all oil and gas sector emissions, according to S&P global.
While Shell does incorporate Scope 3 emissions reductions into both its annual bonus and LTIP, BP just includes Scope 1 and 2 emissions in the annual bonus, with no reference to it within the LTIP. TotalEnergies includes Scope 3 emissions within its long-term plan (classed as the “performance shares attribution”), but only Scope 1 and 2 emissions targets in its CEO’s annual bonus.
In its 2022 proxy statement, Chevron’s CEO Michael Wirth is praised by the management compensation committee for his “efforts to advance [Chevron’s] lower-carbon future” by introducing a 2050 net-zero aspiration for upstream Scope 1 and Scope 2 emissions. The US oil company states: “An absolute Scope 3 target is incompatible with our strategy that includes increasing our oil and gas production while lowering carbon intensity and providing lower-carbon solutions for hard-to-abate sectors.”
According to a May report from think tank Oil Change International, BP is the only one of the four to have stopped exploration of new oil fields. In fact, BP has committed to stop fossil fuel extraction in new countries, but none of the four companies have stopped approving new extraction projects. That is despite the International Energy Agency's warning that no new oil and gas projects are needed in its Net Zero by 2050 scenario.
The report also finds that Shell is the only company among the four that has started to reduce oil and gas production (by dropping its forecast for future production rather than making any pledges), and only BP and Shell have forecast a drop in production by 2030. All of the above rely on carbon offsets as part of their transition plans.
As such, while incentivising the reduction of Scope 1 and 2 emissions is vital, oil majors have a long way to go in terms of sustainability, specifically on addressing Scope 3 targets and committing to stop new extraction and production.
Oil Change International concludes that each of these four companies’ climate pledges are, overall, "grossly insufficient", and earmarks Chevron as a bad actor with regards to oil lobbying and upholding indigenous rights.
With so much farther to go, oil majors could afford to increase the environmental aspirations of their CEO bonus targets.
Capital Monitor is hosting the Webinar series, Making Sense of Net Zero. Find out more information on NSMG.live.