BP 2011 Annual Report Download - page 149

Directors’ remuneration report
Directors’ remuneration report
BP Annual Report and Form 20-F 2011 147
The maximum number of shares that can be awarded will be 5.5 times
salary for the group chief executive and 4 times salary for the other
executive directors. Performance shares will only vest to the extent that
performance conditions, as described below, are met and subject to the
committee concluding that this is appropriate. The history of vesting of
the share element is shown below.
100
80
60
40
20
History of share element vesting
2006-20082004-2006 2005-2007 2007-2009 2008-2010 2009-2011
% of maximum vested
Performance conditions
Performance conditions for the 2012-2014 share element will be aligned
with the company’s strategic agenda which continues to focus on value
creation, reinforcing safety and risk management, and rebuilding trust.
Vesting of shares will be based one-third on BP’s total shareholder return
(TSR) compared to the other oil majors, reflecting the central importance
of restoring the value of the company. A further one-third will be based
on the operating cash flow of the company, reflecting a central element
of value creation. The final one-third will be based on a set of strategic
imperatives; in particular, reserves replacement, process safety, and
rebuilding trust.
For the relative measures, TSR and the reserves replacement ratio,
the comparator group will consist of ExxonMobil, Shell, Total and Chevron.
This group can be altered if circumstances change, for example, if there is
significant consolidation in the industry. While a narrow group, it continues
to represent the comparators that both shareholders and management
use in assessing relative performance.
The TSR will be calculated as the share price performance over
the three-year period, assuming dividends are re-invested. All share prices
will be averaged over the three-month period before the beginning and
end of the performance period. They will be measured in US dollars.
The reserves replacement ratio is defined according to industry standard
specifications and its calculation is audited. As in previous years, the
methodology used for the relative measures will rank each of the five
oil majors on each measure. Performance shares for each component
will vest at levels of 100%, 70% and 35% respectively, for performance
equivalent to first, second and third rank. No shares will vest for fourth or
fifth place.
Operating cash flow has been identified as a core strategic priority
of the company. As has been communicated publicly, the target is to
grow operating cash flow to $33 billion by 2014 based on $100/bbl oil
price assumption. Below $31 billion, there will be no vesting under this
component. Between $31 billion and $35 billion there will be a straight
line vesting from 60% to 100% respectively.
Finally the remaining strategic imperatives relating to process
safety and rebuilding trust will be determined by a mixture of internal
targets and external assessment. In the case of process safety, high
potential incidents and major incident announcements will provide
the key factual data as well as the input of the SEEAC. The rebuilding
trust component will include both external and internal surveys that
will be used by the committee, along with input from the other board
committees, to judge performance. The results will be explained in
subsequent directors’ remuneration reports.
The committee considers that this combination of quantitative
and qualitative measures reflects the long-term value creation priorities of
the company as well as the key underpinnings for business sustainability.
As in previous years, the committee may exercise its discretion, in a
reasonable and informed manner, to adjust vesting levels upwards or
downwards if it concludes that the formulaic approach does not reflect
the true underlying health and performance of BP’s business relative to its
peers. It will explain any adjustments in the directors’ remuneration report
following vesting, in line with its commitment to transparency.
Shareholding policy
The committee’s policy, reflected in the Executive Directors’ Incentive
Plan (EDIP), continues to be that each executive director builds and
maintains a significant personal shareholding in BP to create strong
alignment with shareholders. Executive directors, under the policy, are
required to build a share base equating to five times salary, within a
reasonable time from their appointment. Each director’s shareholding as
at 31 December 2011 is set out on page 117.