On February 21, 2010, oil and gas services giant Smith International agreed to be acquired by oil field services company Schlumberger Limited, an $11 billion deal that tops the recent acquisition of BJ Services by oil field services giant Baker Hughes for $5.5 billion. Our Board Analyst profiles for both companies cite high concerns in compensation, raising concerns about the outlook for executive pay at the merged entity. Buy their governance profiles from our website.
Schlumberger CEO Andrew Gould’s pay package is the highest among the 75 S&P 500 companies for which we’ve processed proxies so far this year. Last year, Gould realized a total of nearly $51 million in compensation, including a $2.5 million base salary and nearly $46 million in profit from the exercise of market-priced stock options, which vested without a performance requirement. For that money, at the national average gas price of $2.57 in August 2009, Gould could have bought more than 19,832,868 gallons of regular gasoline. If he used them to drive a Toyota Prius getting 50 miles to the gallon, he could have driven to the moon and back more than 2,075 times. Comp committee members Jamie Gorelick, Adrian Lajous, and Michael Marks apparently want to keep those options flowing: in 2009 Gould was awarded 680,000 stock options, more than twice the award granted in 2008. Over the last three fiscal years, he has received more than 1.4 million options and has profited more than $113 million from the exercise of over 2.7 million options.
Smith hasn’t yet filed its 2010 proxy, so 2009 comp data isn’t yet available. But like Schlumberger, Smith has also been in the habit of paying its CEO a base salary above the $1 million tax-deductibility limit. Former CEO Douglas L. Rock received a base salary of $1,175,000 in 2007 and $1,347,115 in 2008, when his total realized compensation was $15,844,792. That’s enough for him to tailgate Mr. Gould in his own Prius for more than 640 round trips. Even after resigning from the CEO position, Mr. Rock continues to be well compensated while he remains as Chairman of the Board of Directors (a practice we often think leads to leadership conflict and ineffective governance). In December of 2008, he entered into an employment agreement as Special Executive Advisor to the new CEO for one and a half years, beginning in January 2009. This agreement, which will end after this year’s annual meeting, entitled him to an annual base salary of $1.3 million, a target bonus of 120% of base salary with respect to fiscal year 2009, and to continued benefits and perquisites.
Smith, unlike Schlumberger, has made performance-based equity grants. However, the performance period for the plan is short-term (one year) and it uses the same metric as the annual cash bonus, providing double rewards for a single achievement. As for change of control severances provided by Smith, according to its 2008 proxy, in the event of a change of control executives would be entitled to three times an executive’s salary and bonus, a pro-rata bonus for the current year, the accelerated vesting of stock awards, the accumulated value of pension benefits, and the continuation of welfare and benefit plan coverage and outplacement services. Had the currently-pending acquisition occurred in at fiscal year-end 2008, Douglas Rock would have been entitled to a golden parachute of more than $14 million. We don’t have figures for current CEO John Yearwood, but given the company’s track record, we wouldn’t be surprised if he could afford a few spins around the solar system too.
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Hoang Nguyen - Ratings Manager
