Did oil execs luck into record pay?

By Michael Brush

Many Americans are struggling to make ends meet because of $75 and $100 trips to the gas station.

Executives at oil companies are getting rich because of those same trips. And what do those CEOs have to say for themselves?

"It's not our fault" -- or something along those lines.

Big Oil CEOs are pulling down record pay even as their companies tacitly concede they didn't do anything extra to earn it. When anyone asks why gasoline costs $4.50 a gallon, they cite factors beyond their control, such as speculators or global demand.

That doesn't stop these CEOs from cashing in. Their pay hinges largely on two things: profit and stock price. It's no surprise that an oil company's profit would rise with the price of oil, as would its stock price. The CEO doesn't have to be a genius. A pulse will suffice.

"They are getting a gift for being in the right place and being lucky," said Mark Van Clieaf of MVC Associates International, a consulting company that advises boards on pay for performance.

And don't buy the pleas of innocence. These CEOs negotiated pay packages that compensate them with millions of dollars during normal years -- and during times like now, stock awards propel their pay into the stratosphere.

Chief executives at big oil companies such as ExxonMobil (XOM, news, msgs), Chevron (CVX, news, msgs) and ConocoPhillips (COP, news, msgs) earned from $15 million to $21.7 million last year, well above the $9.9 million median for CEOs at S&P 500 ($INX) companies, according to The Corporate Library. Plus, these energy company CEOs are now sitting on hundreds of millions of dollars worth of incentive stock and options grants.

They drink your milkshake

ExxonMobil chief Rex Tillerson made $21.7 million last year, according to Equilar, an executive compensation research firm.

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Tillerson's pay included a bonus of $3.36 million. In addition, he was sitting on about $77.9 million worth of unvested incentive stock, thanks to an increase in ExxonMobil's stock price last year to $95 a share from $63.

Why did Tillerson make so much more than the average CEO last year? By the company's own admission, you can't attribute it to his management skills. Instead, Tillerson realized an enormous amount of wealth because much of his pay was linked to short-term metrics such as increases in ExxonMobil's stock price and net income, factors driven primarily by the price of oil.

After all, when it comes to the price of oil or gasoline at the pump, Tillerson or ExxonMobil have little control, said J. Stephen Simon, a company senior vice president and board member, when he testified in May before the Senate Judiciary Committee.

"It's not our profitability in this business that's driving the higher price that consumers pay. It's the raw materials that we have to purchase on the open market to produce those products for our customers," said Simon, blaming scarcity and geopolitical uncertainty.

ExxonMobil said executive pay isn't all linked to short-term metrics, though. Last year, for example, 60% of Tillerson's compensation consisted of restricted stock that wouldn't vest for 10 years or until retirement, whichever period was longer.

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The company also links some portion of executive pay to strategy development and to improvements to safety, health and environmental impact. But it didn't say how much.

At Chevron, chief David O'Reilly made $15.7 million last year, according to Equilar, including $3.6 million in bonus pay. O'Reilly had $26.3 million worth of unvested stock grants at the end of the year.

Like Tillerson, much of O'Reilly's salary is linked to short-term metrics that include earnings and the movement of the stock price.

Chevron Vice Chairman Peter Robertson, in essence, conceded O'Reilly's bonus pay had little or nothing to do with his management skills. That's because, he said, Chevron isn't to blame for the soaring cost of crude in the world markets. Yet it's those same high crude prices that helped Chevron perform so well last year, leading to executive bonuses.

Chevron said O'Reilly got no increase in base pay last year and that it links executive pay to company performance relative to peers. However, the company makes it difficult to judge how challenging this hurdle is because it does not reveal how much the company has to outperform peers for Chevron executives to get bonuses.

Robertson drew laughs during the Judiciary Committee hearing when he said he couldn't remember whether he made more than $4 million. "You know, if I made over $4 million a year, I probably wouldn't remember either," Sen. Patrick Leahy, D-Vt., responded.

ConocoPhillips CEO James Mulva made $15 million last year, including a $3.4 million bonus. He also had at least $234 million worth of unvested performance stock, thanks to an increase in the company's stock price to $90 a share from $68 during 2007.

Like Chevron and Exxon Mobil, ConocoPhillips readily concedes Mulva benefited from rising oil prices. His pay is tied to shareholder return, return on capital and income per barrel of oil, factors that are affected by the price of oil.

Profiteering concerns

Part of the problem is that U.S. oil companies aren't investing enough in the millions of acres of "untapped" lease holdings they have in the U.S., said Benjamin Cardin, D-Md., one of the senators who questioned energy company execs in the Judiciary Committee hearing in May. He also thinks they fail to put enough money into developing renewable-energy resources. Spending more in both of these areas could increase the security of the country's energy supplies or bring down the cost of energy in the long run, he said.

Cardin believes legislation may be needed to impose a "windfall" tax if oil companies fail to invest more in the U.S. and in renewable energy.

"They like the status quo," he said. "They are very happy with this. If energy prices go up even more, they are going to make even more money. I do think there is a legitimate concern about top management profiteering from the economic vulnerabilities of our country."

Exploration investments often take many years to pay off, said consultant Van Clieaf, whereas the executives' pay packages are typically tied to relatively short, three-year averages. "There is a disconnect," he said.

To fix the problem, he said, more compensation should be linked to long-term factors such as the average growth in proven reserves over three to five years, measures of how much is spent on exploration and whether it pans out, or consistent increases in the percentage of profits from renewable-energy sources.

Another part of the problem is that the rewards oil execs are enjoying now were set up years ago, when few people thought oil prices would go up so much.

"I don't think anybody ran a sensitively analysis and asked what would happen if oil went to $100 or $150 a barrel," Cardin said. "If they had, they would have said, 'Oh, shoot, that executive is going to get that much?'"

The energy companies all told the Judiciary Committee that they are doing their part.

Chevron's Robertson said his company's capital budget for new energy projects this year is $23 billion, triple what the company spent in 2004. "We're an investing machine," he said. He also said Chevron is a leading producer of geothermal energy.

ConocoPhillips' Lowe said his company has reinvested 106% of its income on average over the past six years to increase oil and gas supplies, expand refining capacity, and develop renewable fuels.

ExxonMobil's Simon said the company had invested $355 billion in new energy projects over the past five years, "which is more than we earned during this same period." But it's still not a huge number compared with its $1.7 trillion in revenues during that period.

Chevron does appear to be reinvesting in development at a decent rate. But in the cases of ConocoPhillips and ExxonMobil, I'm not buying it. The latter two are giving most of their newfound wealth back to shareholders rather than deploying it to find new reserves.

That's good for shareholders, including the well-heeled CEOs. But it doesn't do much to bring down energy prices by increasing production levels.

At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.

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Discovery may lead to quake early-warning system

By Will Dunham

WASHINGTON, July 9 (Reuters) - Scientists working at California's San Andreas Fault have detected subtle geological changes occurring hours before an earthquake that could enable them to develop an early-warning system aimed at saving lives.

Their instruments detected geological changes most likely caused by tiny fractures forming in the rock ahead of an impending earthquake due to stress in the Earth's crust, according to seismologist Paul Silver of the Carnegie Institution in Washington, one of the researchers.

"It's the opening up of cracks before an earthquake," Silver said in a telephone interview.

The research, published on Wednesday in the journal Nature, was conducted using wells dug 0.6 miles (1 km) deep into the quake-prone fault at Parkfield, California.

Their equipment generated and recorded seismic waves before, during and after two small quakes, allowing them to observe these small, predictive geological changes.

In the first case, the geological signals occurred 10 hours before a magnitude 3 quake in December 2005. The same sort of signals also occurred two hours before a magnitude 1 quake that happened five days later, the researchers said.

"We are very encouraged by these observations, and we are planning for more experiments to confirm whether these changes are part of the general physical processes before an earthquake," seismologist Fenglin Niu of Rice University in Houston said in a telephone interview.

EVACUATIONS?

Scientists have made strides in understanding earthquakes, but finding changes in the Earth's crust that could allow for an advance prediction has remained difficult.

Current earthquake warning systems provide at best a few seconds notice before an earthquake strikes.

The findings were published just two months after a powerful earthquake in China. The May 12 quake in Sichuan province killed about 80,000 people, with many killed when buildings such as schools collapsed.

"To get the point where we have a practical early warning system for earthquakes, that's still a ways off -- 10 years, maybe 20," Silver said.

If more research finds this effect to be pervasive before earthquakes, these findings may make that goal attainable, the researchers said.

"No matter how much time you have, there's something you can do. Even with a few seconds, you can automatically turn off gas valves. You may even be able to get a hard hat on your head or run outside of a building," Silver said.

"But with something on the order of 10 hours, you could perhaps evacuate populations, you could certainly get people out of city centers and areas that are deemed dangerous."

(Editing by Maggie Fox and Sandra Maler)

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McCain's List Of 300 Economists Filled With Skeptics

Three times in the past two days, Sen. John McCain has proclaimed that 300 economists have enthusiastically endorsed his "Jobs for America" economic plan. The number, line, and message are highly misleading.

On Wednesday, Politico reported that a handful of those 300 had expressed reservations with McCain's "policy prescriptions." One wasn't even supporting the Arizona Republican for president.

Nevertheless, McCain again touted the support of the economists during a townhall event last night. So the Huffington Post decided to dig in a bit further, sending emails to roughly 150 members of the list. The response, from roughly a fifth of that group, was telling. Many of the economists whom McCain cited were generally supportive of his economic goals. But their support was tempered by strong objections towards specific proposals as well as deeper skepticism to the non-economic components of McCain's candidacy. Many felt compelled to clarify that their show of support for the Arizona Republican's economic proposals shouldn't be misinterpreted as an endorsement of his presidential campaign.

"Yes, I support the Jobs for America policy proposal, especially a simplified tax code, lower restrictions on trade, and energy development," said Michael Connolly, Professor of Economics, University of Miami. "[But] I am worried that continuing the wars in Iraq and Afghanistan will tear apart our social fabric and defeat any economic proposal to reduce the deficit and stimulate growth. Guns are crowding out butter."

This past week, the McCain campaign presented the list of the economists as backing a general statement outlining the Senator's economic objectives. But when asked to weigh in on specific proposals -- as opposed to the 403-word executive summary -- many in the group shuddered. Among individual policies, McCain's idea of a gas tax holiday was the one most scoffed at with nary an economist offering a defense.

"It would do nothing but increase the quantity demanded - and it wouldn't increase supply," wrote Dave Garthoff of the University of Akron. "So price would just go back up again until demand and supply approached equilibrium, and everyone would blame the oil companies."

Others, meanwhile, said they were not supportive of McCain's pledge to balance the budget by 2013. "No, I think some flexibility to run deficits and surpluses, although I agree that the deficit is too large," said Glenn MacDonald, Distinguished Professor of Economics and Strategy at Washington University in St. Louis.

One economist said his endorsement was for the "general economic principles only" before expressing disagreement with some of plan's specifics.

Do you support making the 2001 tax cuts permanent?," asked the Huffington Post. "No," replied Peter J Van Blokland, University of Florida.

Do you recommend a temporary gas tax holiday to address rising energy costs? "No."

Do you support a pledge to balance the budget by 2013? "No."

Do you consider your participation in the letter an endorsement of McCain for president? "No."

For several of the 300, McCain's economic proposals were overshadowed by their concerns about his foreign policy. In addition to Connolly, Professor Tom Lehman, of Indiana Wesleyan University, declined to endorse McCain's presidential candidacy.

"I have serious disagreements with McCain on the foreign policy issues, particularly the Iraq War," he said. "However, I support McCain's general approach to issues of economics, specifically his support of free trade, retention of tax cuts, balanced budget, and general free-market philosophy."

Others thought McCain was not conservative enough. One economist said he would not be supporting the presumptive Republican nominee because he (the economist) was a Libertarian. Stephen J. Dempsey, a professor at the University of Vermont's School of Business Administration, decried McCain's proposals as baby steps.

"Yes, I support making the tax cuts permanent," he wrote. "I think a gas tax holiday is a band-aid on an amputated limb. I am in full support of balancing the budget by reducing government expenditures on wasteful programs. My signing the letter is not an endorsement of McCain. We could have done much better (i.e., a true conservative)."

To be sure, more than a handful of those who responded to the Huffington Post said that their endorsement of the Jobs for America plan was, by extension, a pledge of support for McCain's candidacy. (This shouldn't come as a major surprise -- a review found that 166 of McCain's economist backers also signed a letter in 2000 trumpeting George W. Bush's economic agenda.)

"Speaking for myself only," wrote Martin Eichenbaum, Ethel and John Lindgren Professor of Economics at Northwestern University. "I support the general principals advocated by Senator McCain as well as many, but not necessarily all, of the detailed policy proposals he has made. I would very much like to balance the budget by 2013. I certainly consider my participation in the letter to be an endorsement of Senator McCain for president."

But clearly the list that the McCain campaign presented does not consist of enthusiastic endorsers. If anything it seems -- from this un-scientific sampling of responders -- that the economists who plan on voting for the Arizona Republican are doing so because he represents, for them, the lesser of two evils.

That is, except for Charles Rowley, a professor at George Mason University, who isn't an American citizen.

"I view my endorsement as an endorsement of the general economic principles so far outlined by John McCain," he wrote. "Since Barack Obama proposes significant increases in the size of government, significant hikes in tax rates, ongoing toleration for pork-barrel legislation, long-term budget deficits and, most seriously, a significant shift towards trade protection, evidently, in terms of the general principles outlined in the letter that I have endorsed, I must prefer John McCain as a presidential candidate in an imperfect world. However, because I am a British citizen, I cannot vote in this election."

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