New Growth, New Metrics: Rethinking Oil & Gas Compensation When Strategy Changes

Jake: In this season of Pearl Meyer Unscripted, we're looking at executive compensation through an industry lens. Our cohosts, Mark Rosen and Aalap Shah, are joined by several colleagues who specialize in different industries, including technology, healthcare, oil and gas, and more, to examine the aspects of compensation design that are unique to each.

We're wrapping up our oil and gas discussions with a group conversation on how new sources of demand are creating new compensation questions for the sector. Mark and Aalap are joined again by managing directors Malcolm Adkins and Wes Hart from Pearl Meyer's Houston office. Together, they discuss how AI, data centers, power demand, and adjacent growth opportunities are influencing oil and gas business models, talent needs, and incentive design.

The group examines when traditional compensation programs may need to evolve, how companies can balance corporate and business unit performance, and what compensation committees should consider as new growth businesses begin to change the strategic profile of the organization. Let's listen in.

Mark: Hey guys, welcome Wes and Malcolm to the podcast. We really enjoyed the individual podcast we did with you guys earlier and now we're excited to have a combination of both of you to talk about some of the current trends in the oil and gas industry.

Malcolm: Thanks Mark and Aalap. It's great to be here again.

Wes: Yeah, thanks Mark.

Aalap: Yeah, really appreciated having you both here. Last episode, Wes, we talked about how incentive plans can help companies manage through a cyclical industry. One thing you mentioned briefly was that power demand is creating a new dynamic for oil and gas companies. Is this cycle different from the ones we've seen before?

Wes: Sure, Aalap. I think oil and gas has always been very cyclical. This new AI power demand data center situation is creating a new source of demand both for the energy itself but also for the skills some of the oil and gas companies bring to the table. So, across E&Ps, oil field services, and other infrastructure companies, things are different. It’s not just commodity pricing. There are other things happening. The build out and the data center world is really changing things.

Mark: Wes, hasn't that always been the case? I mean, oil and gas companies have been very entrepreneurial. And every time there's an opportunity to take their engineering skills to another area, they've attacked it and been very successful.

Wes: It's true. This has happened times before, but you know, right now, this is the thing. The AI data center build out is definitely the thing, so it's changing things.

Mark: And I guess it's creating more demand for basic products, but also for service companies, the ability to deploy some of their assets.

Wes: Yes, yes, it is.

Malcolm: It's also making quite the impact. If you look at some of these companies that are starting to pivot into power delivery, you know, it's making a really big impact on their stock price. And so, Mark, you make a great point that we see these things happen. We see oil and gas companies with an entrepreneurial spirit break into other product lines, other service offerings that make sense. So how do we think of these things strategically? How do we think about compensation when there's strategic pivots into other industries?

Mark: So how do we think about compensation? As some of these, what starts as a relatively small group within the organization or business unit is growing at a faster pace than the rest of the organization?

Wes: One of the things we've seen, I mean, quickly at some of the oil and gas service companies, the power delivery side of things may take half the efforts of the company. So, it becomes half legacy, half new business. So, the existing metrics really don't do enough to incent the right behaviors and motivate the growth engine.

Mark: But don't we see it across the organization, some starting with some smaller entrepreneurial business units that are looking at, “Hey, I've got an idea, let's go after this.” But it's also some of the traditional just supply—supply of natural gas to some of the power generation opportunities.

Wes: Well, it's interesting, Mark. On top of the new demand for power here in this country with the AI build out, you know, we've got all the disruptions in the Middle East and we're liquefying natural gas, so those demands are coming from different directions. The demand is way up, for things like this.

Malcolm: Yeah, I think the important thing is when there's these inflection points, it's taking a pause because it's so easy to use the things that have worked. You know, our comp programs have worked in the past, we haven't had to make many changes, why do we change now? And why wouldn't it work in the future? I think that can be a mistake. To really not, just take a moment, look at your programs, look at what's going on and maybe what's different, and do we need to rethink some things? Do we need to make some changes?

You know, Wes mentioned maybe the existing metrics aren't causing the behaviors that traditionally we've been trying to encourage, and we need to maybe add another metric or think about an existing metric a little bit differently.

Aalap: I think this harkens back to what Mark was talking about earlier, that this is not something that is necessarily new, but it is something that other companies have dealt with before. So, if a company suddenly has both a traditional business and a new growth opportunity, should executives still be measured the same way?

Wes: I think one of the things that comes up to the forefront of this is how to think about the corporate versus business line metrics. I think a lot of companies have moved to a more corporate centric metric basket, but maybe as we add these new businesses we go back to business lines being separate from each other, particularly on the annual incentive side.

Mark: Well Wes to that point, how do you think about the fact that the rest of the business might be more driven by commodity pricing? And so how do you balance the performance of that business unit and the fact that you could have a windfall or no bonus at all on the overall financial metric?

Wes: It's a challenge and it really depends on the resource allocation, how we want to weight corporate versus individual business lines. What will happen from time to time is, you'll have haves and have-nots. Certain business units will perform very well; they'll get rewarded for that. Other units may not be performing as well; they may not get as rewarded. And there can be some employees raising their hands saying, “I’m really in that unit or this unit or the other one,” that's not a good thing to have happen.

Malcolm: Yeah, I think in the end, you've got to think about who you're competing for that talent with. You can't just say we're an oil and gas company that has this new product line or new area of business that we're going to lean into.
But also, you might not be competing for talent in the oil and gas space for that same talent. So, you really got to think about that and how do we pay these? And it might require you to pay one group a little bit differently than you do, you know, your traditional group.

Wes: Yeah, another thing that comes to mind, Malcolm, is the time horizon and the level of specificity you can have. For the traditional oil and gas company, a portion of the company, you'll have your traditional cash flow or EBITDA metrics that are driving success, whereas a new business, maybe you're investing heavily, maybe there's not a lot of cash flow yet. So, it's a very different kind of measure, different time horizon.

Malcolm: Absolutely. I mean, that's always the challenge, isn't it? You know, whenever we think about the importance of individual business units within a company, we often use revenue generated as a barometer for the impact it has on the business. But for a growing business, you really got to think about it. You know, Mark, we always talk about this from an internal equity perspective. The current revenue might not tell the whole story in terms of how important that executive or that management team for that individual business unit is to the overall success, long-term success, of the company.

Mark: I think it's an interesting point that throughout our podcast series this season we're looking at different industries. And I think a lot of other industries have looked to the oil and gas industry to understand cyclicality and the kind of things that we do. But as we add different business units with complementary or even some different cycles, and are probably closer to the startup, maybe they're not as profitable at first because we're making large investments. It's interesting to look at other industries and how they pay and then find ways to bring some attributes of those plans into what we're doing. So, for example, for the business units, we might look at some of the metrics that are non-financial and more strategic.

Wes: Sure, I mean one of the things we're starting to see is the length of the contract being something that some companies are actually measuring in their incentive plan. So, if I can get a five-year contract with a future data center, that's better than a two-year contract. I can see that those horizons and hitting those horizons can actually create metrics that we're going to then measure against to see if we've got this longer tail in front of us or if it's going to be more of a quick hit kind of thing.

Mark: And that's a direct relationship to the value of the contract being longer. There's more certainty there, and obviously it has an increase in the value of our stock because we can discount that future cash flow into a stock price.

Wes: Exactly, exactly. We've seen some significant stock price changes and correlation changes happening when companies introduce some of these new areas of effort into their overall portfolio.

Malcolm: Wes, it occurs to me now, you know, and we've talked about this before, what do you do when you have the haves and have-nots this the stock price itself is something that we need to remember. If the new business is having a big impact on the stock price, your traditional oil and gas employees with that stock are benefiting from that indirectly as well, even if they're not involved. That’s a piece of comp that's often forgotten when we talk about haves and have-not., But they're not necessarily just have-not, they're benefiting from the stock price increase.

Mark: But Malcolm, isn't that getting at the issue of do we measure performance as an overall organization, one for all and all for one, versus looking at splitting the business unit versus, you know, we see a lot of companies with a hundred percent total organization, others will be fifty-fifty between overall organization performance and business unit performance and everything in between.

Wes: Yeah, I think the short-term incentive plan can be more focused on the business unit and long-term plan is going to ultimately track with the stock price of the overall corporation.

Malcolm: Yeah, you've got to find the appropriate balance. But I do think that the short-term plan is where you can differentiate a little bit more. You don't want to disincentivize your management team of this growing business unit.

Aalap: I just think, you know, one thing to consider is yes, the differentiation can happen in the bonus program and making sure that we have the appropriate weighting on what their line of sight is. However, given the significant potential for stock price growth, I think what companies probably need to do is examine how their equity eligibility currently calibrates to their new growth trajectory because many organizations may not have gone deep in the organization with equity, but if you are having the traditional business support a growth business, you may want to consider having like a seed grant or something like that. I don't know everyone's thoughts on that, if that's problematic or not in the sector.

Malcolm: No, it's a great point, Aalap. It's just another, you know, kind of lever that we can pull that you need to evaluate equity eligibility. How far down the organization do we want to go? Historically, and in such a volatile market, I think equity has been rolled up a little bit over the last several years in the oil and gas space. But do we reevaluate that? I mean, it comes back to what we're talking about here, you know, perhaps the old way of doing things isn't the best way of doing things going forward.

So, equity eligibility, reevaluating that. And then also, should we provide for special grants? You know, maybe something that's a special performance-based grant to the management team of your growing business unit that's linked to growing that business. Just keeping those things separate can provide for a cleaner solution than trying to incorporate it into your already existing programs.

Mark: You know, one of the things I would ask before you get too far along on this is, how big is this business unit going to be? What is the opportunity? Obviously, we've seen in the past some organizations growing so large that they become a spin-off opportunity and create a whole new entity.

But other organizations are simply going to integrate this into their existing portfolio of various different end markets. And this becomes one of many. So, I think it's an important question to ask: do the existing programs work, or do we need to do something special? And how long is this going to last? Is this something that is going to be forever, or is this something that is just an opportunity that we are looking at?

Malcolm: Yeah, absolutely. I think you've got to evaluate that as you come up with performance metrics. We talk about time horizons. But also, you make me think, you know, mentioning spin-offs that you really need to evaluate your change in control severance programs and what do those look like? And what's going to happen? Should you make the decision to spin off a portion of your business and what happens to those employees and that management team and what's that going to look like? That's another often overlooked piece of comp that we need to evaluate.

Wes: Yeah, I think part of that is the equity ownership level of the employees of the new business that may end up being a spinoff target, making sure there's enough equity for those folks to be holding on and to be rewarded properly should they have success and be spun off.

Mark: You know, it brings up an interesting question also, and Malcolm touched on it earlier, and that is who are we competing against for talent? Because while there might be some homegrown folks that are in the business unit, are we bringing in additional talent that has a slightly different skill set than our existing management? And who are we competing against?

Malcolm: Yeah, there's actually a great article that our colleague Will wrote on the different levels of AI talent. You could almost think about that in a different lens and with your oil and gas or power delivery talent. You know, what are the different levels? And I think what determines that is what's their skill set and who are we competing with for that talent? The answer is different if we're competing for other oil and gas companies versus we're competing for a really hot power delivery AI data center type market. Those are two very different markets for talent right now.

Mark: Guys, this has been a great conversation. Really some interesting things and some very specific issues that are quite frankly applicable both in oil and gas but even outside of it. So really appreciate the conversation.

Wes: Thank you.

Malcolm: It was a great conversation. Appreciate it, guys.

Aalap: Yeah, thank you all.

Jake: Well, that was a terrific way to close out our exploration of current compensation dynamics in the ever-evolving oil and gas sector. We're going to take a short summer break for the next couple of weeks, and then we'll be back with new episodes focused on technology and how firms in this volatile, high-growth sector are evolving their talent and compensation strategies. Until then, you can find all of our Unscripted episodes on Spotify, Apple Podcasts, pearlmeyer.com, or wherever you get your podcasts. Thanks as always for listening, and we'll meet you back here very soon.