Lambert here: These looters ought to be thinking about their neighborhood.
By Alex Kimani, a veteran finance writer, investor, engineer and researcher for Safehaven.com. Originally published at OilPrice.com.
When public oil and gas companies are doing relatively well, many are happy to adopt a pay-for-performance model to reward CEOs and executives. However, the tables are quickly turned when things go to the dogs. When these companies go bankrupt, the misery is shared by employees who lose their jobs; retirees see their benefits and pensions go up in smoke, while shareholders and bondholders get wiped out. In sharp contrast, it’s very common for blue-chip executives who have run their companies to the ground to receive multi-million dollar golden sendoffs. Indeed, top executives of oil and gas companies going through Chapter 11 frequently receive very fat payouts in the form of cash bonuses, stock grants, and other benefits that often exceed payments during the good times.
It’s not any different this time around.
At a time when hundreds of thousands of employees in the U.S. shale industry have lost their jobs, Bloomberg has reported that some 35 executives at Whiting Petroleum Inc.(NYSE:WLL), Chesapeake Energy Corp.(NYSE:CHK) and Diamond Offshore Drilling Inc.(OTCMKTS: DOFSQ) are set to receive nearly $50 million after their companies declared bankruptcy or are on the verge of doing so.
Rewarding Failure
It’s the manner in which these head honchos continue to award themselves fat bonuses despite federal legislation to crack down on the practice that really grates.
The board at Whiting, an oil and gas producer that filed for Chapter 11 in April, approved a $6.4M bonus for CEO Brad Holly just days before the company went under, exceeding his previous annual compensation package by nearly a million dollars.
In May, California Resources Corp. (NYSE:CRC) warned investors about “…a substantial doubt about the company’s ability to continue as a going concern…” but still went ahead and guaranteed company executives their 2020 bonuses.
According to Kelly Mitchell, an analyst at corporate watchdog group Documented, companies do it so as to incentivize these executives to stick around because they understand the company better and, ostensibly, have better odds of pulling them through. Never mind the fact that their decisions are very often to blame for the company’s sad situation in the first place. They also do it in a bid to cut costs and maximize value for creditors using tools such as tax credits or untapped resources.
No Accountability
You could argue that this practice is not unique to the energy industry and is, in fact, common in corporate America–and you would be right.
Last year, former Equifax CEO Richard Smith, walked away with a very generous ~$19.6 million in stock bonuses, $24-million pension and $50,000 in tax and financial planning services after the credit agency suffered one of the worst data breaches in the history of the U.S. Interestingly, none of Smith’s compensation was docked under the company’s clawback provision meant to hold top executives accountable for their actions or inactions, which was negligence in this case.
In 2014, American retailing giant, Target Corp., paid ex-CEO Steinhafel more than $30 million after he handed in his resignation following another massive hacking attack that saw millions of customers’ personal records stolen.
You can also rationalize that energy executives are not individually responsible for the oil price collapse that has adversely impacted their companies (though they share collective responsibility for the overproduction that triggered the collapse).
But whichever way you slice it, it’s clear that oil and gas companies go too far with their bonus payments to executives. Over the past decade, the leaders of 15 large E&P companies collected more than US$2 billion in aggregate compensation despite their companies posting total returns of -15% compared to a 150% gain by the S&P 500 Index over the timeframe.
It’s hard to justify the hefty rewards being awarded to executives of fallen energy companies. In the case of Equifax and Target, their respective stocks did suffer big selloffs after the hacks but quickly recovered and have actually outperformed their peers by quite a wide margin since the events. In contrast, WLL shares are down 89% in the year-to-date; CRC has lost 83.5%, CHK has returned -91.5% while DOFSQ is down 95% YTD, much worse compared to the sector benchmark, XLE, which is down a more modest 30.5% YTD. Bloomberg has reported that energy companies use their peers, not the broad market, as the benchmark, and executives of companies that perform less badly than others tend to be rewarded–bankruptcy is the ultimate underperformance, meaning these guys should not be getting such huge bonuses.
Energy companies need to have some level of accountability for their executives when things go awry. They have a willing accomplice, though. According to Patrick Hughes, judges tend to sign off on these fat payouts more often than not despite laws introduced in 2005 to limit their size.
13 comments
Comments are closed.
Rats; Sinking ships. My favorite example of parasitic management greed destroying the company is Mr. Fuld of Lehman Bros., who during his tenure as CEO pulled over $500 million in personal compensation out of the company. This is just him, not counting all the other management comp. And then he was mystified when the company went bankrupt in 2008, and basically took no personal responsibility but acted as if the whole thing was an act of G-d!
Now between Bush’s Goldman Sachs Treasury Secretary and Obama’s Goldman Sachs Treasury Secretary, they made sure that after their competitor Lehman’s bankruptcy that Goldman Sachs got bailed out but this is another issue of self-dealing and corruption.
The Marie- Antoinette levels of entitlement and utter obliviousness of these critters is flipping unbelievable,
Unfair to rats that comparison – the rats aren’t responsible for sinking the ship. The executives are frequently the ones responsible for destroying the company.
Perhaps a new Bankruptcy Reform Act is needed: (1) Allow all non-dischargeabale debts to be discharged, (2) Eliminate means-testing, (3) Eliminate reaffirmation for unsecured debt, (4) Reduce Chapter 13 to two years versus the current 3-5 years, (4) Prohibit post-filed retention bonuses to all officers and directors under Chapter 11
Here’s Amerikas favorite bankster doing dogs work.
https://www.rt.com/usa/491017-jpmorgan-jamie-dimon-kneel-blm/
“I can hire one half of the working class to kill the other” – Jay Gould, ~ 130 years ago.
Playing out again in real time. Big Politics, Big Corps & Wall Street laughing merrily all the way.
Big City D Mayors whisked away Occupy Wall Street and Suburban / small town Chamber of Commerce did the same with the early, non-AstroTurf Tea Party.
Anybody flinging bricks or burning anything near Jamie’s house(s) this past week? It was oh so convenient of those nice Presidents Dubya and Obama to not only bail out rats like Jamie, but further enrich them in 2008-2009 and beyond, continuing with Trump/Jared/Mnuchin/Powell. Main stream media working hard to keep the narrative going.
FYI – check Max Keiser interview on QTR podcast yesterday, second half, for more of the same about public being robbed and duped, blaming the wrong people.
When even Cramer, of all people, had to admit that the bailouts this year are the biggest upward transfer of wealth in history and that Covid was a convenient distraction / excuse, it speaks volumes that we are near collapse.
Yes, the whole world is near collapse and complete destruction at the hands of Gods Kingdom who is going to clear all this away forever and install its reign here on this planet. I look forward to the day it is accomplished and its not too far in the near future.
As long a poor performance is rewarded and huge financial chaos losses are socialized the current form of Capitalism will continue to be a scam and a cruel joke on the American people
They wouldn’t do it if they knew they couldn’t get away with it. The message for more than a generation has been, bankers and corporate executives have relative impunity. Ultimately though, that says more about we American people than it does about these executives.
Ask yourself if faced with the same situation, would you take the huge bonus or would you take a small amount, which would surely see you through retirement and put the rest back into the company that has treated you so well over the years ? Greed is a funny thing. People have been engaged in trying to justify greed for a very long time. Nobody has been successful though, have they ? Nobody ever seems to say, “Oh Hell Yeah, he earned every penny ” do they ? (possible exception, person in question)
No wonder why inequality explodes when things go to the dogs.
https://americanaffairsjournal.org/2020/05/managing-decline-the-economy-of-value-extraction/
In a review of the book by William Lazonick and Jang-Sup Shin (“How the Looting of the Business Corporation Became the U.S. Norm and How Sustainable Prosperity Can Be Restored”), Duff McDonald highlights the following from Lazonick’s and Shin’s book. The quote is about MBA-driven/neoclassical economists’ ideology of maximizing shareholder value. Neatly compliments one of NCs recurring, and apt demolishing, use of the term “disruption”. Industrial base be damned as long as Johnny CEO can buy another island.
“Lazonick is at his best when he’s demolishing other people’s silly economic theories, in particular agency theory per Harvard Business School’s Michael Jensen and the neoclassical economists’ ideology of maximizing shareholder value, or MSV. MSV’s cheerleaders, he writes, ‘railed against the evils of incumbent management but did not offer a theory of the value-creation process that could guide good managerial practice.’
Neoclassical theory, he says, ‘posits the entrepreneur as an arbitrageur who exploits disequilibrium conditions, rather than as someone whose actions create disequilibrium conditions.’ It also ‘assumes that the entrepreneur requires no special expertise to compete in one industry rather than another.’ I agree with Lazonick about all that. I wrote about the second point myself at great length, particularly with regard to MBAs, in my 2017 book The Golden Passport. “
Thank you so much for the link — that piece is so very outstanding on so many levels.
I have to wonder how many workers will die from differed maintenance.