Schlumberger
Annual Meeting: April 6, 2022
Schlumberger CEO Olivier Le Peuch’s total disclosed compensation increased from $5,650,804 to $16,795,502 in the course of one year, essentially tripling. Schlumberger tries to make the point, repeatedly, that the increase in pay is not as sharp as it appears. It presents an adjusted chart “to show the 2019 CEO promotion LTI grant subtracted from the 2019 column and added to the 2020 column, because that award was in lieu of his 2020 LTI target award.” However, the fact remains that the pay is excessive and the company’s compensation package includes problematic features.
Portions of the annual incentive has metrics set below the prior year’s achievement, a general lowering of the goal posts that shareholders find unacceptable. Le Peuch’s total cash bonus was $3,916,100, making it more than 2/3 the total pay from last year. In particular, the 2021 target performance goal for cash flow was set below 2020’s actual cash flow generation result. Excessive bonuses may be the COVID hangover of compensation in 2022. The claim of uncertainty when planning metrics – as made by the company in this case -- has an element of reasonableness to it. There are very few occasions when setting targets below prior year achievements would be acceptable and in some situations the pandemic may have risen to that level. However, when it becomes apparent that the recovery was around the economy and the market, not the individual actions of the CEO, the board must respond accordingly. The portion of the bonus paid based on this metric paid out at maximum. The company could easily have chosen to pay it at target.
This is not the first time Schlumberger has played with metrics in a questionable manner. In 2016, I wrote that company had set significantly lower earnings per share (EPS) goals than it had in the past, and subsequently lowered them half way through the year.
The company has also redesigned its Long Term Incentive (LTI) Program to provide a mix of “four types of grants, equally weighted at target performance.” Shareholders are likely to generally support the 25% made up of performance share units (PSU) based on free cash flow conversion rate metric and the 25% based on Return on Capital Employed (ROCE). The company has also lengthened the time horizon from two to three years.
However, the remaining changes will be more problematic. For the first time in several years, the company also awarded time-based restricted stock as another 25% of the total long-term package. Time based is inherently not performance based. It was once mocked as “pay for pulse” to contrast it with “pay for performance.” More companies are eliminating such shares rather than adding them. The company essentially acknowledges the risk-free element of this compensation by pointing out that they have lowered the maximum payment due to this change.
In addition, the final 25% of long term incentive payment is made up of TSR PSUs that offer payout even if the company underperforms. Executives will receive a 25% payout if the company performs at the 25th percentile. The target is set slightly above median, but any bonus payout at 25th percentile achievement is questionable.
In all, there are many reasons for shareholders to oppose executive compensation at Schlumberger this year.