BP 2014 Annual Report Download - page 76

Dear shareholder,
2014 started strongly but, as others have commented in this report, ended
more turbulently as the price of oil fell, mainly in the last quarter. This
formed the backdrop for the decisions of the committee at the end of
2014. The work of the committee is governed by a number of overriding
principles. Key among these is seeking a fair outcome in reward that is
linked to BP’s immediate and long-term performance and strategy delivery.
As part of this, the committee seeks to ensure that variable remuneration
is based on underlying performance and is not driven by factors over which
the directors have no control. All of this work is carried out within the policy
framework that was approved overwhelmingly by shareholders earlier in
the year.
In this context:
 2014 saw the end of an improving three-year period for BP. This is
demonstrated elsewhere in the report. The high-performance gearing in
remuneration of the executive directors reflects good business results
through an overall increase in remuneration compared to last year.
 The world is a more uncertain place in 2015. BP has responded broadly
to this, including freezing salaries, and the committee has refocused the
measures for the annual bonus to reflect new challenges.
 There are clear concerns in society and among shareholders that
remuneration for executive directors is simply too much. The policy,
now approved by shareholders, is clear and recognizes these concerns
particularly by placing limits on the amounts that can be awarded.
Equally, this remuneration has to be appropriate to be aligned with the
global market for talent in which BP works. Here the committee has to
strike a balance.
2014 in retrospect
Our remuneration policy was approved at the 2014 AGM for a three-year
period. At the same meeting, a number of shareholders voted against or
withheld their votes on our annual remuneration report. There were several
reasons for this. There were concerns around our commitment to
disclosure of targets, whether prospectively or retrospectively, and the
need for additional disclosure when the committee was exercising
judgements around qualitative measures. Some shareholders believed that
the overall remuneration of the executive directors was excessive.
Directors’ remuneration report
We are responding to these concerns and are committed to making as full
a retrospective disclosure of those targets that we are able to, subject to
confidentiality. I believe that this is demonstrated in this year’s report,
particularly in the tables relating to annual bonus and performance shares.
In terms of overall quantum of remuneration, I have previously made clear
that the committee understands the concerns felt in society and by some
shareholders. The committee, however, believes that these concerns are
properly recognized and balanced in the way in which the policy is framed
and implemented.
At the time of our last report, the outcome for the performance shares was
based on an estimated second place for relative reserves replacement.
Once results for the oil majors were publicly available it was assessed that
BP was in first place, resulting in a vesting of 45.5%. The awards were
adjusted and announced accordingly.
Finally, in July, Iain Conn agreed with the board that he would stand down
as a director on 31 December 2014. Iain has made a significant
contribution to the company over his long career and, on this basis, the
terms of his departure were agreed with the committee within the policy.
The terms were promptly communicated on BP’s website and are set out
again later in this report.
2014 outcomes
BP has performed well in increasingly difficult circumstances. This has
been demonstrated by the delivery of the 10-point plan, which the board
approved as BP’s strategic direction in 2011. In considering performance in
2014 and its effect on remuneration, two areas stand out. Firstly, a key
milestone in delivery of the plan was achieving $32.8 billion of operating
cash flow . The excellent performance in this measure had a strong
influence on both the annual bonus and the performance share element.
The second area with an equally strong influence was safety. Over the
three years of the performance share element, performance improved by
more than 15% on two of the measures and over 60% on one measure.
Annual bonus
Measures for the annual bonus that focused on safety and value were
largely unchanged from previous years to encourage continuity of
performance and delivery. There had been a strong safety performance in
2013. We seek continuous improvement in this area and the targets for
2014 were ambitious. Against that background, performance was mixed
and showed a modest improvement.
Operating cash stood out as being well ahead of target but underlying
replacement cost profit★ was below. Seven projects started up in 2014,
making 16 major projects★ start-ups since the beginning of 2012. All of
this resulted in a group performance score of 1.10, compared with a score
of 1.32 last year. The committee felt that this score reasonably reflected
the overall performance for the year. Following elections by the executive
directors, one third of this bonus will be paid in cash and two thirds in
shares that are deferred for three years and matched. There is
retrospective disclosure of many of the targets for the annual bonus later in
this report.
Deferred bonus
2011 deferred bonus share awards became eligible for vesting at the end
of 2014. Vesting is dependent on safety and environmental sustainability
performance over that period. The committee reviewed this in consultation
with the SEEAC. Based on strong and consistent improvement and no
significant incidents, the deferred and matching shares vested in full.
Chairman’s annual statement
BP Annual Report and Form 20-F 2014
72