We reported last week that BP Plc (BP) is facing a revolt from its shareholders over the salary of its CEO Bob Dudley. What happened was BP’s Board approved an executive compensation package including a 20% raise in 2015 to nearly $20 million for its CEO Bob Dudley. Although we do not have the detail of other executive compensations, they must be pretty generous judging from Dudley’s 20% raise.
The Board Does Not Have to Listen
On Friday, BBC reported that 59% of BP shareholders voted against the company’s executive pay policy for 2015 including the proposed 20% raise for CEO Dudley. BBC also reported that the vote is at or above the fifth-largest in the UK against a boardroom remuneration deal.
Baupost’s Seth Klarman: the Fed has broken the stock market [Q4 Letter]
Baupost founder Seth Klarman told investors that the large amounts of stimulus that have been poured into the world's economies are masking the severity of the problems caused by COVID-19. Q4 2020 hedge fund letters, conferences and more In a letter seen by the
Do you think this vote means anything? Nope, as BBC said, “BP’s pay policy is subject to a binding shareholder vote every three years. It was last set in 2014 meaning new proposals are due to be put forward for shareholder approval again in 2017.”
The formula that rewarded almost $20 mm for Bob Dudley was approved in 2014 by 96% of shareholders (before the oil price crash, talk about impeccable timing that only a major oil company with a team of full time oil economists and analysts can do….Just speculating here)
No use crying over the spilled milk now as the rejection vote in 2016 is “non-binding” on BP, and Dudley and executives still get their disproportionate raise regardless.
Not to be too despair though, BP chairman Carl-Henric Svanberg promised to “review future pay terms” and said “Let me be clear. We hear you…..We will sit down with our largest shareholders to make sure we understand their concerns and return to seek your support for a renewed policy.”
Svanberg’s statement is totally moronic for a Chairman of a major multi-international corporation. I mean do you really need to have a sit-down with institutional shareholders to understand their concerns? But again what can you expect? Svanberg is the one who said “We [BP] care about the small people” during the BP Gulf Oil Spill disaster.
Dividend Cut, More Layoffs Coming to BP
In the heyday of $100+ oil, a 20% raise for an oil executive was nothing. However, this came right after BP just reported a record loss of $6.4 billion and laid off 5,000 workers in 2015 (7,000 more jobs to be cut in 2016).
To top it off, WSJ also reported that earlier in the day of the shareholder vote, BP also “signaled in its clearest terms yet that it may have to reduce its dividend, as low oil prices continue to threaten the once-sacrosanct investor payouts across the industry.”
A 20% Raise After the Worst Loss in 20 Years?
Typically corporation executive compensation is performance-based tied directly to company’s performance. So why are BP executives getting rewarded after BP reported its worst annual loss in 20 years? It is almost like laying off thousands of workers just so the company could give fat raises to executives. You can see why BP shareholders have a problem with this.
Shareholder Activism: Europe vs. U.S.
Many experts argue that Dudley is merely “earning the market rate for international executives” as bosses at Exxon and Chevron got paid even more than Bob Dudley even though the value of their companies fell by more than BP.
I think this is just a matter that shareholder activism and rebellion over executive pay is more “robust” in Europe and hasn’t yet really spread to the U.S. Shareholders in U.S. are used to rubber-stamping proposals by the company board including executive compensation plan.
In contrast, BP’s European rival, Royal Dutch Shell probably has learned its lesson not to “incite” shareholders during an economic downturn. Back in 2009, Shell suffered a stunning rebuke when investors shot down its executive compensation plan (the voting was broadcast live in London to UK). Fast forward to 2015, the salary package of Ben van Beurden, chief executive at Shell, fell from €24.2m in 2014 to €5.58m last year.
Arrogant and Out of Touch
Some experts were also quick to point out that it can be difficult to compare apple-to-apple with regards to exec compensation and incentive package. Well, regardless of whatever complicated formula is involved, it is very obvious that BP’s board and executives are arrogant and so very out of touch with reality and “small people”.
The Board Is NOT Responsible for Shareholder’s Interest
People usually have the wrong impression that the Board is supposed to oversea the executives and safe-guard shareholder’s interest. In most cases, corporate executives are close buddies with board members, so all of them are riding the very same corporate gravy train.
Attacking the Corporate Gravy Train
Governments do have an excuse to act over outrageous executive pay packages, but usually not very effective. For example, according to the Economist, the U.S. government had two unsuccessful attempts (1984 and 1993) to cap executive severance pay, and imposing a special tax. But corporate army of legal and tax experts quickly structure executive employment agreements to include other forms of share options and pay outside of the limits set by the government.
Unfortunately, within the current existing system, shareholder activists (particularly led by large institutions) are the only ones that can put pressure on the Board to influence executive pay decisions….or until “say on pay” votes by shareholders becomes mandatory at public companies.