Shell to Shareholders: You're Right, We Shouldn't Reward Failure

Royal Dutch Shell's (RDSB) changes to how it pays its executives proves that shareholder rebellion -- typically reserved for a few "activists" -- has become too mainstream and powerful for companies to ignore.

I have to admit, I was highly skeptical Shell would listen to its shareholders after 60 percent voted against the company's pay deal last May. The vote highlighted the growing resentment towards out of control bonuses and pay for execs who failed to meet expectations. The vote also was advisory and I figured Shell would merely "take it under advisement" before moving ahead with its pay package plan.

Apparently they took the message -- the first shareholder protest since the GlaxoSmithKline incident in 2003 -- to heart. In a letter posted on the company's Web site, Hans Wijers, chairman of Shell's remuneration committee, outlined proposed changes to the way it compensates its executives.

And the proposed changes have some meat to them. CEO Peter Voser and CFO Simon Henry will be paid 20 percent less than their predecessors and directors won't be allowed to issue discretionary bonuses this year, are among the changes proposed by Shell.

So far, investors including those that lead the protest against Shell, have supported the changes. And it's a good thing, considering Shell has its hands full with a restructuring and attempts to boost its oil and gas production. The company's fourth-quarter earnings fell 75 percent to $1.18 billion and its performance has slipped below rival BP (BP).

I have to wonder why it took Shell so long to come up with what is a very common sense approach to running a company. If you miss targets then you shouldn't get a pay raise or bonuses. Seems simple enough.

At least Shell figured it out -- even if it did take them nine months. BP shareholders were largely ignored after nearly 38 percent of voted against the company's pay package last year. And Chesapeake Energy (CHK) CEO Aubrey McClendon came under fire for taking a $75 million bonus as the company lost billions.

One final note: Shell will base annual bonuses (see highlights below) using a number of metrics including 30 percent linked to operational cash flow, which strikes me as problematic because that is largely determined by the price of oil, not necessarily the skill of management.

Here's are some of the highlights in the proposal:

• Base salaries will be frozen from July 2009 to January 2011 except for promotions. CEO Voser and CFO Henry will receive an increase because they were promoted in 2009. However, their salaries will be 20 percent lower than Shell's former CEO and CFO.
• Management will be required to hold shares awarded under the long-term incentive plan for two years;
• Annual bonuses will be based on project delivery, operational cash flow, operational excellence and sustainable development. The project delivery component is important because it holds management responsible for delays and going over budget.
• CEO's holdings in Shell will increase from two times to three times his salary based on the belief that holding shares align executive interests with shareholders better than any long-term incentive plan.
• Directors will be restricted from issuing discretionary bonuses.