It pays to be in oil & gas

Colorado’s ex­ec­u­tives push their way back onto list of most lu­cra­tive com­pen­sa­tion

The Denver Post - - BUSINESS - By Aldo Svaldi

Colorado’s list of high­est-paid cor­po­rate ex­ec­u­tives usu­ally reads like the mem­ber­ship ros­ter of an ex­clu­sive coun­try club, one where the same names show up year after year.

But four new­com­ers from the oil and gas in­dus­try pushed their way into the ranks of the 10 high­est-paid Colorado ex­ec­u­tives last year, rep­re­sen­ta­tives of a down­trod­den in­dus­try try­ing to make a come­back.

Mark Erick­son, chair­man and chief ex­ec­u­tive of Ex­trac­tion Oil & Gas, and Matthew Owens, the com­pany’s pres­i­dent, came out of nowhere to claim the sec­ond and third spots on the high­est-paid list.

The pair, who launched Den­ver-based Ex­trac­tion in 2012, re­ported com­pen­sa­tion of $26.4 million and $26.3 million re­spec­tively in 2016, a 43-fold in­crease from what they made in 2015, when the com­pany was still pri­vate.

“Ex­trac­tion Oil & Gas was listed pub­licly on Nas­daq dur­ing Oc­to­ber 2016, in an eq­uity of­fer­ing that con­tin­ues to hold the record for the most suc­cess­ful en­ergy IPO since 2014,” said com­pany spokesman Brian Cain.

Ex­trac­tion was the first producer to go pub­lic after the col­lapse in oil prices in late 2014. High demand pushed its shares up 15 per­cent on the first day of trad­ing. The share price has dropped by a third since then, be­cause of a drop in oil prices.

Their ap­pear­ance on the list also re­flects a larger trend of surg­ing com­pen­sa­tion at nat­u­ral re­source com­pa­nies in the state.

En­ergy pay up

Us­ing com­pen­sa­tion data from com­pany prox­ies gath­ered by S&P Global Mar­ket In­tel­li­gence in Cen­ten­nial, The Den­ver Post looked at com­pen­sa­tion for 462 Colorado ex­ec­u­tives em­ployed at pub­lic com­pa­nies whose shares traded on a ma­jor stock ex­change. Among the 100 ex­ec­u­tives work­ing at nat­u­ral re­source firms in Colorado, av­er­age pay rose from $2.1 million in 2015 to $2.8 million last year, an in­crease of 34.2 per­cent. For all other industries, av­er­age ex­ec­u­tive pay fell 7.6 per­cent, from $2.4 million to $2.25 million.

Alvyn Schopp, chief ad­min­is­tra­tive of­fi­cer at An­tero Resources and Thomas Jor­den, chair­man, chief ex­ec­u­tive and pres­i­dent of Ci­marex En­ergy, were the two other en­ergy in­dus­try ex­ec­u­tives who en­tered the top 10, tak­ing the sev­enth and eight

spots with $13.7 million and $13.2 million, re­spec­tively.

Gary Gold­berg, chief ex­ec­u­tive of New­mont Min­ing, a reg­u­lar on in the high­est­paid list, re­ported com­pen­sa­tion of $16.6 million, claim­ing the fourth spot, which he also held on last year’s list.

Reg­u­lars filled the rest of the list. Gre­gory Maf­fei, chief ex­ec­u­tive and pres­i­dent of Lib­erty Me­dia and Lib­erty In­ter­ac­tive, re­mains the state’s high­est-paid ex­ec­u­tive, a spot he has held four of the past five years.

Maf­fei’s com­bined com­pen­sa­tion from the two com­pa­nies was $30.2 million, nearly half of that from stock-op­tion awards and a quar­ter in non­stock in­cen­tive plans. Lib­erty Broad­band, a third com­pany that Maf­fei over­sees, did not re­port pay­ing him.

Kent Thiry, chair­man and chief ex­ec­u­tive of Davita, a provider of kid­ney dial­y­sis ser­vices, ranked ninth with $11.9 million in re­ported com­pen­sa­tion. Thiry is weigh­ing whether to run for Colorado gov­er­nor as a Repub­li­can.

Steve Ells and Monty Mo­ran, the co-ceos of Chipo­tle Mex­i­can Grill, also made re­peat ap­pear­ances at $15.7 million and $15.5 million, re­spec­tively, claim­ing the fifth and six spots. But only Ells will likely be back next year.

Chipo­tle’s board came un­der fire for what ac­tivists called ex­ces­sive ex­ec­u­tive pay for the two chief ex­ec­u­tives, a po­si­tion one per­son han­dles at most com­pa­nies. Mo­ran stepped down in De­cem­ber.

Pay gap widens

To mea­sure changes in pay, The Den­ver Post de­ter­mined what the two high­est-paid ex­ec­u­tives at Colorado’s 50 largest com­pa­nies in mar­ket value made each year.

Av­er­age pay rose 4.5 per­cent last year from 2015. Me­dian pay, or the point where half the ex­ec­u­tives made more and half made less, came in at $3.85 million, or 4.8 per­cent lower than in 2015.

Com­pared with some years, the changes in both av­er­age and me­dian pay were fairly mod­est in Colorado in 2016. The AFLCIO’S Ex­ec­u­tive Pay Watch mea­sured a 6 per­cent bump in pay for the chief ex­ec­u­tives of the S&P 500, so Colorado ex­ec­u­tives weren’t too far off that mark either.

The prob­lem with that, said Bran­don Rees, deputy di­rec­tor of AFL-CIO Of­fice of In­vest­ment, is that rankand-file work­ers re­ceived pay in­creases of only 2 per­cent. Over time, the pay gap has con­tin­ued to widen and the chief ex­ec­u­tives of the na­tion’s largest cor­po­ra­tions make 347 times what their non­super­vi­sory and pro­duc­tion work­ers make.

Ex­ec­u­tive pay con­sul­tants counter that while com­pany prox­ies may re­port big­ger com­pen­sa­tion num­bers, ex­ec­u­tives face lower odds of re­al­iz­ing that pay­out com­pared to past years.

“More boards are set­ting met­rics at a point where ex­ec­u­tives won’t get tar­geted awards,” said Jonathan Marks, an ex­ec­u­tive com­pen­sa­tion at­tor­ney with Davis Gra­ham & Stubbs in Den­ver.

Proxy re­port­ing ser­vices such as Glass Lewis con­tinue to push com­pa­nies to lock up a larger share of ex­ec­u­tive pay in per­for­mance-based eq­uity awards with hurdles de­signed to lift the share price if the ex­ec­u­tive team clears them.

“It should be a stretch goal,” Marks said. That’s a change from the prac­tice in the past at some com­pa­nies of set­ting per­for­mance tar­gets so low they func­tioned more like the par­tic­i­pa­tion rib­bons handed out at el­e­men­tary schools.

Op­tions los­ing fa­vor

The mix of pay, as it has for the past sev­eral years, con­tin­ues to swing more heav­ily in fa­vor of stock awards in Colorado.

For the 462 Colorado ex­ec­u­tives stud­ied, just shy of 45 per­cent of pay last year came in the form of re­stricted stock awards, and an­other 13.3 per­cent came via stock op­tions. About 20.6 per­cent came in salary and bonuses paid out in cash.

Stock op­tion awards rep­re­sented 35.5 per­cent of the pay mix for Colorado ex­ec­u­tives in 2009, the year the mar­ket hit bot­tom. But re­stricted stock awards have re­placed them in pop­u­lar­ity in the years since, al­though a few com­pa­nies, like Lib­erty Me­dia, con­tinue to fa­vor op­tions.

San­jai Bha­gat, provost pro­fes­sor of fi­nance at the Univer­sity of Colorado Boul­der, sup­ports more com­pen­sa­tion com­ing in eq­uity awards. But he wants to see an­other stretch added — ex­ec­u­tives shouldn’t be al­lowed to cash in those awards un­til one to three years after they leave their post.

That re­stric­tion would help foster a longer-term per­spec­tive, the kind that might have kept Joseph Nac­chio, for­mer chief ex­ec­u­tive of Qwest Com­mu­ni­ca­tions, out of jail on il­le­gal in­sider trad­ing charges, he said. And in his new book “Fi­nan­cial Cri­sis, Cor­po­rate Gov­er­nance, and Bank Cap­i­tal,” Bha­gat ar­gues that de­lay­ing when fi­nan­cial ex­ec­u­tives can col­lect their rewards could also help pre­vent fu­ture fi­nan­cial crises.

In the case of Erick­son and Owens, each re­ceived re­stricted shares worth $14.9 million and stock op­tions val­ued at $10.13 million as part of Ex­trac­tion go­ing pub­lic.

Whether they col­lect the stated value of those shares and op­tions will de­pend on how the com­pany’s stock per­forms over time.

“It makes lot of sense to load the CEO with re­stricted stock be­fore the IPO rather than after,” Bha­gat said.

He cites re­search that shows in­vestors put a higher value on an IPO when the chief ex­ec­u­tive owns more shares. In­vestors also are less likely to dump the stock for a quick profit.

Where peo­ple should cry foul is when ex­ec­u­tives who al­ready con­trol a big chunk of eq­uity put their plate out for an­other slice, di­lut­ing share­hold­ers.

Grad­ual re­sponse to crit­ics

Prob­lems or abuses in ex­ec­u­tive com­pen­sa­tion, as they are high­lighted by out­side ob­servers, are slowly be­ing addressed.

“What we are see­ing are in­cre­men­tal changes as op­posed to cat­a­clysmic shifts,” Marks said. “It was an­other year of in­cre­men­tal dif­fer­ences.”

For ex­am­ple, in past surveys, ex­ec­u­tives leav­ing a com­pany would re­ceive a large pay pack­age on the way out, the prover­bial golden parachute. Those para­chutes aren’t as com­mon or gilded as they once were, Marks said, and the em­pha­sis now is more on “front-load­ing.”

Rees, how­ever, said he isn’t com­fort­able with the boards of pub­lic com­pa­nies pay­ing ex­ec­u­tives so much more than what pri­vate-eq­uity in­vestors are will­ing to tol­er­ate.

While run­ning a pub­lic com­pany might be slightly more com­pli­cated, it isn’t 10 or 20 or 40 times more so than run­ning a pri­vate one.

He also notes that with en­ergy com­pa­nies, fi­nan­cial and stock per­for­mance is driven strongly by the value of the un­der­ly­ing com­mod­ity, which is en­tirely out­side the con­trol of ex­ec­u­tives.

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