The energy transition will require oil and gas companies to fundamentally change the way they do business. On one end are the big, strategic questions: Will international oil companies become international energy companies, throwing themselves headlong into alternative energy, or will they keep doing what they do best until the curtain eventually falls? On the other end are the less visible issues, buried deep in annual reports and proxy filings, that have an equally big part to play in steering company behaviour.
This note focuses on one of the less visible issues, namely remuneration policies. Remuneration is one of several key angles that oil and gas companies need to rethink as they adapt to the realities of the low-carbon transition. The conditions attached to executive pay should reasonably be expected to drive those same executives’ behaviour, meaning that remuneration policies have an important part to play in steering oil and gas companies in new directions.
In companies looking to transition, executives will need inducements to move away from the hydrocarbon business that they are so familiar with. But even in those taking a “last man standing” approach, executives may be encouraged to, for sheer economic reasons, engage in risky ventures that exacerbate stranding risks – risks that will only rise as the energy transition continues. Value creation, not growth for growth’s sake, should be the motivation for any oil and gas company of the future, and remuneration policies can help ensure that happens.