March 14, 2019 / 4:33 PM / 5 months ago

Breakingviews - Shell CEO’s bonus problem less size than length

Ben van Beurden, chief executive officer of Royal Dutch Shell, speaks during the 26th World Gas Conference in Paris, France, June 2, 2015.

LONDON (Reuters Breakingviews) - There’s no getting around Ben van Beurden’s extremely large bonus. Royal Dutch Shell said on Thursday that its chief executive would receive 19.8 million euros in direct pay, more than double 2017’s 8.5 million euros, with the major shift via a near-quadrupling of his so-called long-term incentive plan. Unless one takes a moral approach to gargantuan pay awards, the bigger problem is not size but length.

Van Beurden’s 1.6 million euros salary didn’t change much year-on-year. Nor did his 3 million euros annual bonus, which is linked to oil and gas-specific production targets. What did change was his LTIP, a variable remuneration scheme that vests three years after it is announced. In 2018 that leapt from 4 million euros to 15.2 million euros.

Shell’s defence against critics of high pay is that its LTIP policy is hiding in plain sight. Its CEO has the potential to get an award equal to 680 percent of base salary if he does better than oil group peers in total shareholder return, return on average capital employed, earnings per share growth, and cash flow. In all but one, van Beurden did. The bumper payout was then augmented by Shell’s share price jumping about 35 percent since 2016, when he was awarded the LTIP. The company’s investors have shared in this upside as the oil price spiralled.

Shell does require a holding period before its boss gets to turn these shares into cash. Van Beurden has volunteered to hang on to them for three years, against a mandatory two-year holding period, and his total holding cannot fall below seven times his salary. So he can’t cash in his chips until 2022.

The catch is this isn’t that long in a sector where big changes are happening at uncertain speed. Climate change may cause demand for oil to peak, destroying the value of crude producers’ reserves. Notwithstanding a punchy pronouncement on March 13 that it intends to pivot to become the world’s largest electricity company by the 2030s, Shell is still spending only a small part of its $25 billion in annual capital expenditure on renewables and new energy. In a decade it will probably be clear whether this strategy was too fast, too slow, or just right. But, in the absence of longer holding periods, it is not really van Beurden’s financial problem.

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