BP 2009 Annual Report Download - page 84

Part 1 Summary
In a volatile year for the world economy, the BP executive team produced
excellent results. While salaries were frozen for all directors in 2009, the
variable performance-related pay reflected the impressive achievements
of the year and the turnaround of performance over the past three years.
The details of executive director remuneration are set out in the table on
the opposite page.
The remuneration committee sets the measures and targets for
the annual bonus element of variable pay at the beginning of the year,
based on the strategy and annual plan accepted by the board. The
strategy is built around safety, people and performance. The measures
included key safety measures (15% of bonus), staff numbers and survey
results to reflect the people priorities (15%) and a set of financial and
operational targets to measure performance (70%). Nearly all targets
were exceeded, some substantially, with particularly strong performance
on cost reduction, exploration success, production start-ups and refining
performance. This overall excellent performance was also reflected in the
market, where BP shareholders recorded the highest total shareholder
return (TSR) of all the oil majors for the year.
The other element of variable pay is awarded in shares based on
BP’s performance over three years, compared with the other oil majors.
Following the process approved by shareholders in the Executive
Directors’ Incentive Plan (EDIP), the committee first reviews the three-
year TSR of BP compared with its peers and then considers a set of
underlying business metrics, again in comparison with peers. When there
is a difference between the two comparisons, the committee decides
which level of vesting best represents BP’s relative three-year
performance. This year the TSR result was tightly clustered and sensitive
to calculation methodology. For example, based on a three-month
averaging of endpoints, BP came fourth whereas on a one-month
averaging it came second. On underlying metrics, BP ranked first on four
of the six reviewed (production growth, earnings per share growth,
change in return on average capital employed and free cash flow) and
second or third on the others (Refining and Marketing earnings per barrel
and net income growth). Following the process set out in the EDIP, the
committee judged BP to be tied for third place and thus shared the
vesting outcome for third and fourth place to result in a vesting of 17.5%
of the maximum award.
During the year the committee conducted a full review of BP’s
remuneration policy, and particularly the EDIP, which is being put before
shareholders for renewal this year. We consulted with a number of our
shareholders, reviewed the actual experience with applying EDIP rules
over the past five years and considered recent developments in the
marketplace. Overall we concluded that the basic structure of the EDIP
remains appropriate, but that some rebalancing of elements is warranted.
The key change we propose is to require a portion of the annual bonus to
be deferred, paid in shares and matched after three years subject to an
assessment of safety and environmental sustainability over the three-
year period. This change would place more focus on the long term,
highlight the importance of safety and build a larger equity stake for
executives that we believe aligns their interests well with shareholders.
To balance this additional bonus element, we propose to reduce the
maximum award of performance shares in the renewed EDIP so as to
maintain the current quantum of total remuneration. These changes are
summarized in the table below.
It has been an excellent year for BP and its shareholders. In
determining annual and long-term awards, the committee has recognized
the very real achievements of the executive team. For the future, we
believe our revised EDIP provides a sound framework with which to
competitively reward our top executives for continued success in this
long-term business.
Dr DeAnne S Julius
Chairman, Remuneration Committee
26 February 2010
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BP Annual Report and Accounts 2009
Directors’ remuneration report
Summary of future remuneration components
Salary • Normally reviewed mid-year (no increases in 2009). Current salaries: Dr Hayward £1,045,000, Mr Conn £690,000,
Mr Dudley $1,000,000, Dr Grote $1,380,000, Mr Inglis £690,000.
Bonus • On-target bonus of 150% of salary and maximum of 225% of salary based on performance relative to targets set at
start of year relating to financial and operational metrics.
Deferred bonus and • One-third of actual bonus awarded as shares with three-year deferral, with ability to voluntarily defer an additional
match one-third.
• All deferred shares matched one-for-one, both subject to an assessment of safety and environmental performance over
the three-year period.
Performance shares • Following EDIP renewal, award of shares of up to 5.5 times salary for group chief executive, 4.75 times for the chief
executive of Exploration and Production, and 4 times for other executive directors.
• Vesting after three years based on performance relative to other oil majors.
• Three-year retention period after vesting before release of shares.
Pension • Final salary scheme appropriate to home country of executive.