BP 2013 Annual Report Download - page 86

BP Annual Report and Form 20-F 201382
Dear shareholder
BP continued the disciplined and systematic execution of its strategy
during 2013, focusing on safety and operational risk management, and on
restoring value. As in 2012, there were many positive steps in the recovery
journey during 2013 including improved safety, a strengthened portfolio
and a new future in Russia. I encourage you to read about these in more
detail elsewhere in this annual report.
Remuneration for executive directors continues to be tied closely to this
overall recovery of the group. The vast majority of potential remuneration is
based on outcomes relative to measures related directly to the company’s
strategy and key performance indicators. In addition to a direct link to
strategy, our remuneration system has a strong bias towards sustained
long-term performance, and our decisions regarding remuneration are
guided by key principles of informed judgement, fair treatment and
alignment with shareholders. My meetings with shareholders this year
have again been helpful in understanding perspectives and have led to a
few modifications to our policy.
Our report this year reflects the new UK regulations on directors’
remuneration and so is divided into an annual report on remuneration and a
separate policy report. The annual report on remuneration sets out and
explains the outcomes of the various elements that make up 2013 total
remuneration. The policy report explains our proposed remuneration policy
for the next three years which, subject to approval by shareholders, will
come into effect from the AGM. For both sections the information relating
to executive directors (whose remuneration is determined by the
remuneration committee) is presented separately from that relating to
non-executive directors (whose remuneration is determined by the full
board).
2013 outcomes
I am pleased to report that remuneration for 2013, as summarized on
page 85, increased after several years where pay was significantly
depressed by the aftermath of the Deepwater Horizon incident. It is
particularly encouraging that a moderate portion of shares in the long-term
performance share plan has vested this year. These outcomes reflect
strong and sustained performance with safety steadily improving,
operations performing well and a portfolio of assets growing through
capital discipline and strong project management. The significant
divestments of the last few years have made the company smaller but
stronger, with improved potential to grow value.
Annual bonus
It was a good year for BP with improved safety, new discoveries and
operations, a strengthened portfolio and benefits already accruing from the
company’s new relationship in Russia. Overall group performance
exceeded annual plan levels and resulted in a score of 1.32 times target.
Performance was assessed relative to metrics set at the start of the year
and reflecting the company’s strategy and key performance indicators.
Safety and operational risk management accounted for 30% of annual
bonus. Led strongly from the top, this continued to show encouraging
progress with particularly significant reductions in tier 1 process safety
events and loss of primary containment – both important measures of
process safety. Results this year confirm that it remains a constant priority
throughout the business.
The company also made good gains in restoring value, which accounted
for 70% of annual bonus. Underlying replacement cost profit and total cash
costs were both better than plan targets, while operating cash flow
achieved target levels. Key operating performance was also positive with
important major projects commissioned and a significant improvement in
unplanned Upstream deferrals. Downstream operations demonstrated
high availability and good safety results but profitability was impacted by a
difficult business environment affecting refinery margins.
Deferred bonus
The first of the deferred bonus share awards, implemented in 2010,
became eligible for vesting at the end of 2013. Vesting was dependent on
safety and environmental sustainability performance over the period from
2011 through 2013. Our review confirmed very positive results during this
period with consistent improvements in key metrics and no major
incidents. Based on this positive result, the deferred and matched shares
for this period vested fully.
Performance shares
The 2011-2013 performance share plan, the first plan commencing after
the Deepwater Horizon incident, focused on value creation, reinforcing
safety and risk management and rebuilding trust. 50% of the award was
dependent on total shareholder return which failed to make the threshold
required for vesting. Reserves replacement, accounting for 20% of the
award, is expected to be very positive and progress relative to the strategic
imperatives, accounting for the remaining 30%, was very encouraging.
Overall, we expect nearly 40% of shares will vest, the highest in over
10 years.
Other elements
Salaries were increased by just under 3% for Bob Dudley, Iain Conn and
Dr Brian Gilvary mid-year. Pension increases reflect normal plan rules and
valuation according to UK regulations. The increased value reported for
Bob Dudley reflects his promotion to group chief executive in 2010 which,
because his defined benefit pension is based on three-year average
remuneration, takes a number of years to reach a steady state. In addition,
the reported value is calculated according to UK regulations and the
committee has been informed by the company’s consulting actuaries that
these significantly overstate the value of his US pension increase.
Remuneration policy
Attracting and retaining top talent is a key objective of our approach to
remuneration. Our proposed policy, as summarized on page 98, remains
largely unchanged from that which has applied for a number of years and
its continuity has been a stabilizing force during a period of company
turbulence. The core elements of salary, annual bonus, deferred bonus,
performance shares and pension continue to provide an effective, relatively
simple, performance-based system that fits well with the long-term nature
of BP’s business and strategy.
Three modifications have been included in our proposed policy as a result
of our dialogue with investors. First, we have added a three-year retention
period in the deferred bonus element for those matched shares that vest in
the plan. Second, we have made the vesting of performance shares more
stringent for those metrics based on performance relative to other oil
majors. Finally, we have added a specific review of performance share
vesting to ensure that high levels of vesting are consistent with
shareholder benefits.
All of the above are explained in more detail in the policy report.
Our remuneration system has worked
appropriately during difficult times, and I am
confident it will continue to do so as
performance returns to healthy sustained levels.
Chairman’s annual statement