BP 2009 Annual Report Download - page 86

Part 2 Executive directors’ remuneration
2009 remuneration
Salary
Executive directors have had no salary increases since July 2008, with
the exception of Mr Dudley who was appointed to the board in April
2009. Dr Hayward’s salary remains £1,045,000, Mr Conn’s £690,000,
Mr Dudley’s $1,000,000, Dr Grote’s $1,380,000, and Mr Inglis’s
£690,000.
Annual bonus
The annual bonus awards for 2009 reflect the excellent performance
achieved across the business and are set out in the table on page 83.
Performance measures and targets were set at the beginning of
the year based on the group’s annual plan. Group results formed the
basis for Dr Hayward’s, Mr Dudley’s and Dr Grote’s annual bonus and
were weighted 70% on financial and operating results (including profit,
cash flow, cash costs, production, reserves replacement, Refining and
Marketing profitability, refining availability, and installed wind capacity),
15% on safety (both metrics and progress on plans), and 15% on people
(including organizational changes and employee attitudes). Mr Conn’s and
Mr Inglis’s annual bonuses were based 50% on the group results as
above, and 50% on their respective business unit results (also a mix of
financial, operating, safety and people measures). The target level of
bonus for executive directors was 120% of salary with committee
judgement to award up to 150% for exceeding targets and above that
level to recognize exceptional performance.
Targets were exceeded on virtually all key measures during 2009,
a number by a substantial margin and resulting in bonuses averaging
170% of salary.
All key safety and operating metrics (including days away from
work case frequency (DAFWCF), recordable injury frequency (RIF), oil
spills, loss of primary containment, and process safety high potential
incidents) showed good results and significant improvements in all cases
from 2008. Implementation of the operating management system (OMS)
progressed ahead of plan and is now successfully installed at
70 operating entities including all major downstream sites. People
metrics were also exceeded. Major organizational restructuring was
completed including reducing the number of group leaders and senior
level leaders in excess of plan. The employee survey results showed
significant improvement in key aspects such as safety and compliance
and performance culture, as well as overall employee satisfaction.
Exceptional results were achieved on financial and operating
measures. Replacement cost profit was some $5 billion above plan after
adjusting for the oil price and other environmental factors. Cash costs
were reduced substantially. Production increased by more than 4% while
unit production costs reduced by 12%. The reserves replacement ratio
was 129%, continuing an industry-leading peformance. Refining and
Marketing cash costs were reduced by 15%, and refining availability
increased to 94%. Refining and Marketing profitability exceeded plan
after adjusting for a dramatically weaker industry environment.
Exploration and Production achieved major project start-ups in the Gulf of
Mexico, Indonesia and Trinidad & Tobago. Exploration successes included
the Tiber discovery in the Gulf of Mexico and new access for future
growth was secured in Iraq, Indonesia and Jordan as well as new
acreage in the Gulf of Mexico.
The excellent results achieved during 2009 reflect the strong
leadership of the executive team and their continuing focus on safety,
people and performance.
2007-2009 share element
This momentum of improvement is also apparent over the three-year
performance period covered by the 2007-2009 share element under the
EDIP. Performance for the share element is assessed relative to the
other oil majors – ExxonMobil, Shell, Total and Chevron. The committee
follows the assessment process approved by shareholders in
determining the vesting of shares that had been awarded at the start of
2007. It first compares the total shareholder return (TSR) of each of the
majors and then reviews underlying performance metrics across the
same group. Given the small peer group, similarity of their businesses,
and general imperfections in measurement, there will be occasions when
results of some or all of the companies are tightly clustered. In such
circumstances, a small difference in TSR performance or calculation
methodology could produce a large, and inappropriate, difference in
vesting level. To counter this the committee has the obligation to review
both relative TSR and underlying performance to ensure a balanced
judgement is made. Such was the case with regard to the 2007-2009
metrics.
The TSR result was tightly clustered for 2007-2009 with BP
coming fourth based on our established methodology but very close to
third place. As required by the plan, the committee reviewed a number of
financial and operating metrics to assess relative underlying
performance. These included the average change over the three years of
EPS, ROACE, free cash flow, net income, production growth and Refining
and Marketing profitability. The review of underlying performance showed
BP in a strong relative position. BP came first on change in EPS growth,
ROACE, free cash flow and production, on adjusted net income BP
ranked second and on Refining and Marketing profitability it came third.
Based on the full review and combining both the TSR and underlying
analysis, the committee judged BP to be tied for third place and thus
shared the vesting outcome for third and fourth place (35% and 0%
respectively) as set out in the plan rules. The resulting 17.5% vesting for
eligible participants is also shown in the table on page 83.
Remuneration policy review
During 2009 the committee carried out a comprehensive review of its
remuneration policy for executive directors. The review covered all
components of remuneration, both fixed and variable, short term and
long term. It focused especially on the EDIP which provides the
framework for long-term, variable pay. The current EDIP was approved by
shareholders in 2005 and will expire in April 2010, when a renewal will be
put to shareholder vote. As part of its review the committee met with
key shareholders to assess the current pay structure and test areas for
change.
The basic principles that guide remuneration policy for executive
directors in BP formed the starting point for the review. These include:
• A substantial portion of executive remuneration should be linked to
success in implementing the company’s business strategy to
maximize long-term shareholder value.
• Executives should develop and be required to hold a significant
shareholding as this represents the best way to align their interests
with those of shareholders.
• The structure of pay should reflect the long-term nature of BP’s
business and the significance of safety and environmental risks.
• Performance conditions for variable pay should be set independently
by the committee at the outset of each year and assessed by the
committee both quantitatively and qualitatively at the end of each
performance period.
• Performance assessment should take into account material changes
in the market environment (predominantly oil prices) and BP’s
competitive position (primarily vis-à-vis other oil majors).
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BP Annual Report and Accounts 2009
Directors’ remuneration report