BP’s Hayward Stokes The Executive Pay Fire

BP CEO Tony Hayward is out with a pay package the Times of London is reporting at $18 million. That’s not huge by some recent exit standards, as noted in a post at the Washington Post’s PostLeadership blog.  Lee Raymond, for example,  got $351 million when he left Exxon Mobil in 2006, though that wasn’t on the heels of an historic environmental calamity. So why should investors care?

Provisions in the recent financial reform legislation will require investors to pay close attention to pay and how it is properly assessed. Not only will they have to vote on the matter, but large institutional investors could may have to explain those votes too. For both reasons, the 2011 proxy season promises to be the year investors focus squarely on compensation. It’s not just BP that’s going to have the executive pay issue firmly in investors’ cross hairs over the coming year.

In a piece published today, Eric Rosenbaum of The Street asks whether Hayward should “relinquish any golden parachute in the spirit of accepting his personal role in the Gulf of Mexico oil spill?”:

CEO compensation hasn’t really gone away as an issue on Main Street or for Washington. The BP oil spill just provides another means for examining the contentious issue.

Just days before the April 20 Gulf of Mexico oil spill, BP shareholders were already up in arms about Hayward and other executive’s pay. At the company’s 100th shareholder meeting April 16, questions were raised about the board’s decision to award a bonus to Hayward despite the company’s weak shareholder return. Shareholders had seen their returns decline 35% at that point (and are now far worse off).

What is the kind of executive compensation an investor can support?

Interestingly, in the very same remuneration committee annual report, in which BP’s board had sought to explain the bonuses, the pay committee outlined some changes to future executive compensation that seem quite strong.  Moving forward (meaning beginning with 2010 pay) a portion of top executive’s annual bonus will be deferred, paid in stock, and matched after three years, but only if the company’s safety and environmental sustainability record had been good over the three-year period. This change, the board wrote, “would place more focus on the long-term, highlight the importance of safety and build a larger equity stake for executives that we believe aligns their interests well with shareholders.”

The move earned the company a “well done” from Paul Hodgson, the pay expert, and frequent pay critic, at The Corporate Library. It will be interesting to see how other company’s compensation committees address increasing investor focus on executive pay and whether it’s  structured properly.

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