Kudos to Murphy Oil and Marathon Oil for adjusting their executive compensation frameworks, in part, to better align with their environmental targets. Their willingness alone to change the paradigm is a rarity in the oil and gas industry and deserving of credit.

On Feb. 8, Murphy Oil announced it would be adjusting performance metrics under its Annual Incentive Plan (AIP) to emphasize not only its cash flow but climate goals as well by adding a greenhouse gas (GHG) emissions reduction metric, “for which aggressive goals must be achieved to earn a payout,” according to the company. This metric accompanies the company’s safety and spill rate metrics in the environmental, social, and governance (ESG) component of its AIP, Murphy Oil said.

Other notable sustainable strides the company made in 2020 include:

  • Establishing a goal of reducing its GHG emissions intensity 15 to 20 percent by 2030 from its 2019 levels, for an aggregate of 35 percent to 40 percent reduction from its reported 2019 levels;
  • Expanding its GHG, air quality, climate risk management, and biodiversity management public disclosures;
  • Expanding the purview of its health, safety, environmental, and corporate responsibility board committee to include ESG issues and creating a director of sustainability role.

Marathon Oil similarly announced major changes to its executive compensation plan regarding ESG initiatives, in addition to new quantitative GHG emissions reduction targets. Among the changes, Marathon Oil said it has simplified its short-term incentive (STI) scorecard “to focus on Marathon’s core financial and ESG framework to prioritize, among other things, “safety and environmental performance.” It also eliminated production metrics from its annual cash bonus scorecard.

Further, Marathon Oil said it’s “raising the bar on environmental performance” by adding 2021 GHG emissions intensity target to its STI scorecard, representing an approximate 30 percent reduction to GHG emissions intensity versus 2019. It announced a medium-term goal to reduce GHG emissions intensity by at least half by 2025 versus 2019.

Said Marathon Oil CEO and Chairman Lee Tillman, “We believe oil and gas will be an essential contributor to the transition to a lower carbon future, and it is imperative that the company and our industry address the dual challenge of meeting the world’s growing energy demand, while also responding to the risk of climate change.”

According to analysis conducted by Carbon Tracker, “Fanning the Flames,” which reviewed the policies of 30 of the largest listed oil and gas companies, 90 percent of these companies had direct growth metrics—such as production or reserve placement metrics—in their 2019 incentive structures. “This is both at odds with successfully navigating the energy transition and against shareholders’ interests,” Carbon Tracker said.

To be clear, Murphy Oil and Marathon Oil are the latest—not the only—in their industry to improve their executive pay structures to align with ESG metrics. Carbon Tracker’s analysis identified four companies that have no direct growth metrics: Diamondback Energy, Equinor, OMV, and Origin Energy.

Diamondback Energy, for example, in 2019 tied environmental responsibility benchmarks directly to its incentive compensation company-wide, adding five ESG metrics to its annual STI compensation scorecard. It also formed a new safety, sustainability, and corporate responsibility committee of the board to support management in setting ESG strategy. Equinor and OMV similarly announced they’ve begun to incorporate ESG targets, including carbon reduction, into executive pay.

It is hypocritical for any company to boast climate-change ambitions while maintaining executive compensation pay plans that incentivize activity that detrimentally impacts climate. It’s always refreshing to see companies willing enough to recognize this and commit to making positive change.