It pays to be in oil & gas

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

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.