In our project paper, the three companies that we have chosen are in the oil and gas industry which are Royal Dutch Shell, Exxon Mobil and BP. These three companies are included in the top 500 companies in the world by Fortune as Royal Dutch Shell is the company which gains the highest revenues, $458,361 million with profits $26,277millions among the 500 companies. Exxon Mobile is the largest corporation in America and gains the second highest revenues, $442,851 million with profits $45,220 among the top 500 companies in the world. And BP is the company which gains the fourth highest revenues, $367,053 with profits $21,157. We will look at how should the compensation systems that used by these three companies help their business to gain and sustain competitive advantage.
Competitive advantage is condition which enables a company to operate in a more efficient or otherwise higher-quality manner than the companies it competes with, and which results in benefits accruing to that company. Total compensation is all types of employee compensation which included wages and salaries, non-wage cash payments and fringe benefits. Total compensation in the Employment Cost Index is defined as the employer's cost of wages and salaries and employee benefits.
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Royal Dutch Shell or commonly known as Shell employs around 102,000 employees. Their human resource activities focused on advancing their people strategy; supporting their large-scale projects; and conducting efficiency-driven restructuring activities, such as in their downstream business and major functions. Their people strategy continued to focus mainly on recruiting, developing skills and improving employee performance. Shell attempt to get better alignment between remuneration and individual accountability for the short-term delivery of their business strategy. The Remuneration Committee (REMCO) ensures that Executive Directors'performance-based reward reflects how successfully this is done. The Executive Director Remuneration package is made up of a base salary, an annual bonus and a package of long-term incentives as well as a pension plan and other benefits. REMCO considers the connection between an Executive Director's pay and Shell's business strategy as critical. Most of the compensation package is therefore linked to the achievement of stretch targets that are consistent with the execution of Shell's strategy.
Following the remuneration review in 2009, REMCO decided to freeze Executive Directors' base salaries for 18 months until January 2011. An Executive Director's individual performance is also taken into account in determining his annual bonus. Individual performance is assessed against personal targets, and REMCO uses its judgement to reduce or increase the bonus as it deems appropriate to reflect how well the Executive Director met those targets. Executive Directors received: car allowances, representation allowances (which is a Dutch tax feature to simplify expenses related to business entertainment at home, amongst other things), transport to and from home and office, as well as employer contributions to insurance plans. Individuals who are not living in their base country received additional amounts for their children's school fees.
On the other hands, Exxon Mobile which gains the highest profit among the top 500 companies in the world is designed their director compensation elements to ensure alignment with the long-term shareholder interests and to make sure the Company can attract and retain outstanding director candidates who meet the selection criteria outlined in the Guidelines for Selection of Non-Employee Directors, which can be found in the Corporate Governance section of their Web site. The key elements of Exxon Mobile's compensation program and staffing objectives that support these business fundamentals and strategies are career orientation, salary, bonus, equity and retirement benefits.
Career orientation is their objective to attract and retain for a career the best talent available. It takes a long period of time and a significant investment to develop the experienced executive talent necessary to succeed in the oil and gas business; senior executives must have experience with all phases of the business cycle to be effective leaders. Career orientation among a dedicated and highly skilled workforce, combined with the highest performance standards, contributes to the Company's leadership in the industry and serves the interests of shareholders in the long term.
Salaries provide executives with a base level of income. The level of annual salary is based on the executive's responsibility, performance assessment, and career experience. Salary decisions directly affect the level of retirement benefits since salary is included in retirement-benefit formulas. The annual bonus program is highly variable depending on annual financial and operating results. The annual bonus program incorporates unique elements to further reinforce retention and recognize performance. Awards under this program are generally delivered as 50 percent cash paid in the year of grant and another 50 percent Earnings Bonus Units with a delayed payout based on earnings performance. For bonus awards granted in 2007, the trigger or cumulative earnings per share required for payout of the delayed portion was increased to $5.00 per unit versus $4.25 in 2006. It is because to reinforce the Company's principle of continuous improvement in business performance and address the impact of the Company's share repurchase program.
Always on Time
Marked to Standard
Equity compensation accounts for a substantial portion of total compensation to align the personal financial interests of executives with the long-term interests of shareholders. The restricted periods for ExxonMobil's stock grants are longer than those used by most other large companies. For the most senior executives, 50 percent of each grant is restricted for five years; and the balance is restricted for 10 years or until retirement, whichever is later. The long restriction periods are align with the Company's focus on growing shareholder value over the long term; and, make a large percentage of executive compensation and personal net worth subject to the return on ExxonMobil stock realized by shareholders.
A key principle on which the pension and savings programs are based is commonality of design for all employees. Pension benefits are paid upon retirement by two plans which are qualified pension plan and nonqualified pension plan. Qualified pension plan benefits are payable, at the election of the employee, in a lump sum or in one of various forms of annuity payments. Nonqualified pension plan benefits are paid in the form of an equivalent lump sum six months after retirement.
Last but not least, BP is the companies that gain the fourth highest revenue among the top 500 companies by Fortune. The BP remuneration committee sets the measures and targets for the annual bonus element of variable pay at the beginning of the year, based on the strategy and annual plan accepted by the board. The strategy is built around safety, people and performance. The measures included key safety measures (15% of bonus), staff numbers and survey results to reflect the people priorities (15%) and a set of financial and operational targets to measure performance (70%).
The excellent results achieved during 2009 reflect the strong leadership of the executive team and their continuing focus on safety, people and performance. Performance for the share element is assessed relative to the other oil majors -ExxonMobil, Shell, Total and Chevron. The basic principles that guide remuneration policy for executive directors in BP formed the starting point for the review. These include a substantial portion of executive remuneration should be linked to success in implementing the company's business strategy to maximize long-term shareholder value. Executives should develop and be required to hold a significant shareholding as this represents the best way to align their interests with those of shareholders. The structure of pay should reflect the long-term nature of BP's business and the significance of safety and environmental risks. Performance conditions for variable pay should be set independently by the committee at the outset of each year and assessed by the committee both quantitatively and qualitatively at the end of each performance period. Performance assessment should take into account material changes in the market environment (predominantly oil prices) and BP's competitive position.