ConocoPhillips

Annual meeting:  May 16, 2017

On May 5, Conoco Phillips posted with the SEC an appeal to shareholders, filled with colorful graphs, urging them to read the supplement prior to voting.  Such a filing is an early indications that a company is anticipating a poor vote on its pay package. It isn’t surprising, CEO Ryan Lance has been on our overpaid CEO list for each of the three years since we began publishing the list. Total compensation for 2016 was $19,212,038.

Almost every element of pay at ConocoPhillips significantly higher than peers. Salary for the CEO is $1.7 million, up from $683,758 in 2010, and from $1,258,667 the year he was named CEO. This salary significantly above that of CEOs at companies with a higher market cap, including Microsoft, Johnson & Johnson and Alphabet.

Like many older companies, there is a lucrative pension/retirement package. Lance’s package, one of the 100 largest in the S&P 500, is valued at approximately $30 million.

But while the company supports a pension like the established company it is, it issues stock options like a start-up. For a new company options can reward employees for getting a creation off the ground and are best when used broadly. Options were intended not to reward executives in established company in a cyclical industry. One of the red flags that placed the company on As You Sow’s overpaid list is the excessive use of options over the last eight years. The extreme variation in stock price shows that more than the actions of an individual in the C Suite are driving company value (something companies are eager to note when there’s a cyclical downturn). Lance has options with a strike price of $33 and options with a stock price of $69 dollars.  This means Lance can benefit in a perverse way when the price of oil and the company stock price goes down: options granted in a bad year will have a low strike price. A temporary cyclical decline will likely reverse itself, and then he will have a windfall. Options expiring in 2018 may still be underwater when they expire, but the next tranche of 61,115 shares have an exercise price of $34, well below the current trading level.

Shareholders are also concerned about the large number of metrics used in calculating both short and long term incentives, and offers little disclosure of targets.

Last year the company received a relatively low level of support for its pay package, and the company trumpets the changes it has made since. For example, options have been reduced from 50% to 40% of long term incentive awards. The committee has “eliminated positive discretion by capping individual adjustments for stock options at target.” However, the committee retains broad discretion on many aspects of pay. In fact, the term “discretion” appears 31 times in the proxy statement (though the board has used negative discretion at times).

None of the changes the company has adopted has done much to address the fundamental issue of quantum of pay. While Lance’s pay is somewhat lower than it was two years ago, it remains excessive even by the standards of U.S. CEO pay.

NOTE: At the company’s anual meeting shareholders voted decisively against the pay package: http://www.houstonchronicle.com/business/article/Conoco-investors-reject-exec-pay-in-advisory-vote-11151120.php