After an extensive process, the board of directors of Statoil ASA has found it proper and necessary to make changes to the company’s remuneration system in several areas.
The changes are being implemented in order to offer more competitive terms for leaders, key personnel and other employees. The new system underpins the development of a values- and performance-oriented culture with increased requirements for every single employee and with ambitions for Statoil to further develop its global competitiveness.
“Increased globalisation and international competition requires changes in many areas,” says Jannik Lindbæk, chair of Statoil. “At the same time, a group like Statoil must ensure that its remuneration arrangements are understood and confer legitimacy with its owners, its employees and society in general. It is the view of the board that this is the case in the changes which are now being made.”
The crucial consideration for Statoil has been to establish arrangements which are transparent and in accordance with broadly-accepted principles for good corporate governance.
“Like many other companies, Statoil is experiencing constant change in the world around it,” says Mr Lindbæk.
“One aspect of this change is greater competition over senior executives and key personnel at various levels. We meet this in Norway and in all the international markets where we compete. The quality of our human resources is crucial to our future. In order to further improve our competitiveness, our corporate culture and remuneration system must therefore be changed to become more competitive and performance-based and open up for greater differentiation.
“The boards of all major and internationally-oriented companies have a great responsibility to accept the new realities. With the debate and the focus on remuneration systems we have had in Norway recently, the simplest and easiest solution would be to do nothing. That, however, would have been a downright sin of omission for a board which has recognised that changes are right and necessary. The long-term consequence of not taking the decisions required to maintain competitiveness, including where senior executives and key personnel are concerned, would be a weakened group. That would not benefit Statoil, its owners or Norwegian society.”
It is a matter of principle for Statoil to be competitive in the labour market without being a pacesetter on pay. The group wants to reward and recognise equally results achieved and how they are achieved. It must also ensure that a link exists between performance and pay, and a balance between immediate and long-term contributions and results. Opportunities for increased remuneration must be accompanied by higher performance requirements along all these axes. An important goal for Statoil’s remuneration system is to develop the community of interest between the group’s employees and its owners. This is also taken care of by setting clear limits to the rewards which the various schemes can provide.
The board believes that options are inappropriate as an instrument for Statoil because share prices do not only reflect the group’s performance but also fluctuate to a great extent with the oil and gas prices.
Statoil’s board believes that today’s remuneration system has functioned well in some areas but has considerable weaknesses in others. In particular, long-term value creation in the group needs to be incorporated to a greater extent in a new system. The board therefore wants to strengthen this element by increasing the result-related elements in the remuneration package for everyone, increase differentials and improve the potential for performance-based remuneration of key posts. The board also wants to strengthen the community of interest between owners and employees through the use of improved share-buying schemes which cover all employees. The main elements in the new remuneration system are as follows:
- It is proposed that the framework for the group’s corporate bonus, which is paid to all employees, will be increased from up to 5% of basic salary today, to up to 7.5% from 2007. Its size is result-related.
- The board will propose at the annual general meeting that the share saving plan for all employees be substantially improved. While employees can currently buy shares and receive one bonus share after two years for every two purchased, it is proposed to increase this to one bonus share per share bought.
- For senior executives and personnel in key positions, the potential in the annual bonus is being increased from today’s maximum of 20% (30% for the chief executive) to between 15% and 40% (50% for the chief executive). The requirements which must be met for a pay-out to be made will be very strict, based on a combination of financial, operational and personal targets.
- Statoil will also establish a long-term incentive (LTI) scheme for executives in key specialist and administrative positions. This will be linked both to individual performance and to the group’s value creation over a three-year period, seen in relation to a reference group of internationally competing companies. The main principle is that if Statoil, during the three-year period, does as well as, or better than the average for its competitors, the arrangement will allow for a bonus of a maximum of twice the annual bonus earned in the first year. The bonus opportunity will be lost wholly, or in part, if the company’s performance is weaker than the average for its competitors. Half of the long-term bonus earned must be invested in Statoil shares.
The proposed increased corporate bonus and improved share saving plan will be discussed with the employees’ unions before implementation. The arrangements for increased differentiation of annual bonus and establishing of long-term incentives have been decided upon without the support of the board’s employee-elected directors.
The cost of the new elements is estimated at roughly NOK 295 million per annum with full pay-outs in every area. About NOK 235 million of this relates to the changes which apply to all Statoil employees.
“The board is concerned with the group’s continued growth and long-term development,” says Mr Lindbæk. “Statoil must compete on equal terms with all other oil and gas companies. This makes it more crucial than ever that Statoil can continue to attract the best human resources. In sum, what the group wants to offer its employees is challenging jobs which develop them, and a competitive remuneration system. Only then can Statoil retain its role as the Norwegian flagship in the international business community.”