2020 was a tough year for big oil.  Short-term demand was hammered by the impacts of Covid-19, while the ever-growing recognition of the energy transition has forced oil and gas companies to accept that the business-as-usual world is behind us.  Critical to this transition is aligning executive pay with strategic goals.  In announcing their 2021 remuneration policy, and removing executive incentives that directly reward production growth, Shell have taken an important step forward in this regard.

Last year, BP announced a significant strategic shift away from oil, and Eni were the first major to introduce an upstream emissions goal on an absolute basis; both catalysed an arms race of emissions ambitions.  So far in 2021, Total has become Total Energies and Shell has updated its headline climate ambition less than a year after first announcing it. Recent ExxonMobil announcements indicate a shift away from growth. Yet amongst all this apparent shift in corporate strategy and raison d’être, one thing had remained constant: oil and gas executives are incentivised to grow hydrocarbon production volumes.

Ultimately a corporate strategy, with goals far in the future, is of questionable value when it conflicts with the incentives set for those responsible for its execution. Claims of “Paris-compliance” or a goal of “net-zero” emissions some decades hence sound rather hollow while executives are encouraged to pump more in the here and how.

Shell setting the pace on executive remuneration

We have long argued that executive incentives should be focused on shareholder value creation rather than just pursuing growth. In our most recent report on remuneration, Groundhog Pay[1], we showed that for 2020, 25% of Shell’s annual bonus for executive directors was linked to metrics which directly incentivised growth (“production volume” and LNG liquefaction volume”); an overall proportion that has remained unchanged for at least four years.

Even in the absence of the climate emergency, production targets potentially drive short-termism, encouraging pursuit of volume over value; this is even more important for an industry in decline. In finally acknowledging this and eliminating such metrics from its 2021 annual bonus structure, Shell has taken a stride forward by aligning corporate goals with the personal incentives of those at the helm.

Accordingly, this shift in policy is a big win for Shell’s investors, whether their goals are maximising value from their investment through the transition, or from the universal owner perspective of acting to minimise the impacts of climate change. Or both.

Scope for improvement remains

Looking in more detail at Shell’s announcement, the increase in the weighting attached (35%, up from 30%) to cash flow from operations in the annual bonus is a negative; we see such metrics as still incentivising production volumes growth albeit indirectly (as opposed to managing fields to maximise value over their lifetime).  Given this, we encourage investors to push for such indirect growth metrics to also be phased out.

Time for the industry to follow suit

Other major peers all have direct growth metrics within their variable remuneration structure to some degree.  For example, despite having arguably one of the most pro-transition corporate strategies, Eni have 25% of annual pay linked to production volumes and exploration success, both metrics which directly encourage growth.

Aligning remuneration with corporate strategy seems a simple win; in Groundhog Pay we encouraged shareholders to engage with companies to:

  • Discourage direct growth metrics
  • Favour efficiency over raw absolutes through return-based metrics
  • Ask for specificity on the weightings applied to individual metrics to move away from bundles
  • Ask for internally consistent climate metrics

Shell’s updated policy is a step in the right direction, and we encourage others to follow suit. For example, we would like to see BP back up its announced strategic shift[2] away from oil and gas by removing direct growth incentives; metrics which have – in various forms – conflicted with its stated “value over volume” strategy since 2013[3].  We hope to see positive updates from them, and others, in the coming weeks.

For companies who persist with rewarding growth, we urge investors to ensure they voice their concerns, and seek to align the actions of those at the top with corporate strategy.


[1] Groundhog Pay, Carbon Tracker, December 2020. Available at: https://carbontracker.org/reports/groundhog-pay-how-executive-incentives-trap-companies-in-a-loop-of-fossil-growth/

[2] BP Strategy “From Integrated Oil Company to International Energy Company”, announced August 2020

[3] BP Annual Report 2013