Working Together as a Leadership Team in a Downturn - part 4
1. WORKING TOGETHER AS A LEADERSHIP TEAM IN A
DOWNTURN: HR, OPERATIONAL AND BUSINESS
PERSPECTIVES
Moderator: Brad MacLean Industry Culture Consultant, NOVA Cultural Improvement
Ray Gonzales VP of HR, Continental Resources
Marty Kunz VP of HR, C&J Energy
James Tastard VP of HR, Freeport LNG
Luis Jimenez HR and Total Rewards Executive
GENERAL SESSION
STRATEGIES & OPPORTUNITIES: MANAGING IN A
TURBULENT OIL & GAS WORLD
2. Luis A. Jimenez
2 April 2015
2015: A Year of Adjustment
Compensation Update
3. The regional economy has definitely evolved…
80% of the Houston area economy was driven by oil and gas at the start of the 1986 downturn.
Today the figure is about 40%. Over 3,700 oil and gas related companies are based here.
But it is definitely not “business as usual” for the Houston labor market:
Over 50 E&P companies released their 2015 exploration budgets in January, with an overall
projected decrease in spending of about 40% below 2014. Not everyone will feel it equally.
How deeply these cuts (ranging from 10% to 50%) will lead to realign HR and compensation
strategies in 2015 will likely be a direct function of financial and operational dynamics:
Those with a strong balance sheet will continue to seek opportunities for reduced labor costs;
Some at risk of a potential crunch, are implementing workforce reductions and limited hiring;
Others, especially in the upstream segment, have already announced massive layoffs.
Definitely Not “Business as Usual”
Time to adjust staffing forecasts and review performance plans
4. Last year, when other industries were projecting salary increases in the 3% range or lower,
O&G companies were planning for salary increases in the range of 4% or higher.
Decreased budgets will likely drive the overall 2015 figure closer to the national
median
The salary freeze –which was imposed by some O&G companies in response to the
2008 downturn– may be on its way back in 2015
Depending on the financial health of the organization, some 2015 budgets will remain
unchanged --while hiring restrictions or staff reductions are kept on the table, or some
employees might be eligible for discretionary increases, while others may receive no
increase at all
Competitive data should be used as a “reference” for base salary determinations,
rather than as a mandate for how much new hires should be paid. Understanding the
“market rate” is more important than ever!
Base Salaries: No Guarantees
Recalibrate salary increases to differentiate and reward high performers
5. Variable Pay…It’s All About Performance
Overall variable pay pools in the industry have been in the range of 18% to 20% of total payroll.
With continued layoffs and focus on cost controls, the rationale for widespread “retention payments”
has changed
Who do you want to retain? Focus on the demand for critical talent.
Individual performance plans provide opportunities for alignment / discretion.
Re-think your peer comparators: the competitive market references may change significantly.
Is your incentive model reconciled with the new financial and operational realities? Are your rewards
designed to support continued success?
How will you fund the plan(s) in 2015? Focus on growth or cost reductions? Profit margin vs.
cash flow metrics? Safety? Business Unit performance?
Is your target payout at, say, 80% of performance? Threshold at 25%? Time to re-validate
performance ranges
Is it feasible to make up for potential bonus opportunities with alternative rewards? Restricted
stock units? Discretionary awards?
Are you engaging your senior leadership team?
Drill down on the link between performance and bonus opportunities; reset your goals
6. 2015 LTIP Awards…Too Early to Tell
Early 2015 proxy filers have reported no change to their LTIP awards
7. Long Term Incentives
Understand the perceived value of LTIP awards; review eligibility
With depressed oil prices, share-price volatility and limited availability of shares in LTIPs pose a
major challenge:
How to adjust long term incentives grants to preserve value for recipients and align grants with
(a) competitive practices (b) Board perspectives and (c) shareholder interests
8. A Final Word…
The main compensation challenge for Human Resources professionals in O&G
companies in 2015 will be how to establish a consistent and transparent connection
between pay and value added, while at the same time controlling costs and considering
staff reductions.
In this tough economic environment, it is important to scrutinize all aspects of
rewards (salaries, variable pay, stock-based awards, benefits, recognition) and…
Take appropriate steps to strengthen the relationship between pay and
performance.