IN NON-OPERATED ASSETS, many companies are shifting from a generalist and assurance-oriented oversight posture to a strategy built around sharp-edged annual influence plans with specific key focus areas (KFAs).
Given this more active position in non-operated assets, especially among major oil and gas, mining, and power companies, we wanted to understand how leading companies are linking these influencing plans – and the KFAs within them – to the annual objectives, performance reviews, and incentives of individual members of the asset team.
Specifically, we wanted to know things like: Do non-operated asset team members’ annual objectives directly link to the Influence Plans and individual KFAs? If yes, how much weight is placed on the plan, relative to other activities (e.g., reporting and assurance)? Similarly, where there is a direct link, are team members held accountable for outcomes (e.g., reduction in operator’s field opex costs) or activities (e.g., providing the Operator with benchmarking data and experts to make the case that field opex costs are too high)? The purpose of this memo is to summarize some of our findings.
To find out, Water Street conducted structured discussions with six major oil and gas companies that now widely use influencing plans to calibrate where they stand on a dozen dimensions. Principally, our discussions were with HR and other executives at the corporate center, as we believed that they were best positioned to describe an overall corporate approach. We also conducted limited conversations at the asset level to understand how these principles are applied in practice.
Our key findings were as follows (Exhibit 1).
Exhibit 1: Calibrating the Links between Influence Plans and Incentives
- All six major oil companies surveyed use influence plans in non-operated ventures, although with varying levels of adoption across regions and asset classes.
- Five of the six major oil companies directly link core asset team member annual objectives and incentives to annual influence plan KFAs, while the other major is actively considering it.
- This direct link tends to be present only in core team members (e.g., the asset manager and direct reports) and not in other functional specialists supporting the asset on an indirect, limited-time, or as-needed basis.
- In most assets, core team members are accountable both for the delivery of the overall Influence Plan and for those individual KFAs where the employee is directly involved as the lead or otherwise.
- Of the five majors that tend to establish a direct link between the Influence Plan and individual objectives and incentives, two companies have a philosophy to include activities only, two tend to include activities and outcomes, and one includes outcomes only.
- Of the three that include outcome targets in individual and team goals, all tend to provide supervisors with flexibility to incorporate situational factors, and do not fully hardwire target outcomes agreed to at the beginning of the year to performance reviews and incentives at the end of the year.
- Each of the three companies had different approaches to further managing the inherent uncertainly of outcomes; but all included some version of guidance to teams in order to define the basket of individual KFAs as narrowly and realistically as possible such that the chance of ‘zero’ success is effectively ‘zero’ percent.
- In two instances, the company assigns to individual KFAs a “probability of success” as a way to encourage non-operated teams to ensure that the basket of KFAs was not filled with target outcomes of 5-20%, but also included several that were 50% or higher success chances.
- Four of the six companies had experience with asset teams using non-financial incentives to motivate and reward non-op asset team members in their influencing goals, such as regional recognition as the top non-op asset team influence success in the quarter, to small gifts (e.g., tickets to local sporting events); in one business unit of one company, the VP established an “influence points system” where points were awarded for influencing success, with the winning individual and asset team getting special recognition and a small bonus.
SUMMARY OBSERVATIONSStepping back, for those thinking about how to link influence plans to individual incentives, a few principles should guide the design:
- Leverage the HR system already in place. If at all possible, use the existing HR system and structure (e.g., MBOs, performance appraisal grades, etc.).
- Evaluate and hold people accountable for what they did (or did not) do. For instance, the difference between 88.5% and 90.3% plant availability may have nothing to do with the work of the non-operator asset team. As one executive explained: “Unless you can point a direct backward path from the outcome to your outstanding work, then it should not be part of your review or incentives.”
- Recognize that successful influencing is often a team effort. While it is vital to have individuals tied to performance and to link KFAs into individual MBOs, it is also necessary to recognize that it takes a village to deliver the outcomes. Therefore:
- Include overall success of the Influencing Plan in the MBOs of all Asset Team members, and
- Cross-link individual MBOs across individuals working on the same KFA.
- Do not over engineer the structure. Attempting to correct for or control all of the inherent challenges to linking incentives to an Influencing Plan can result in an incredibly complex tool that is opaque and difficult to administer. Therefore, any structure designed to link incentives to an Influencing Plan should: (1) maintain a bias for utility, and (2) acknowledge that, ultimately, many aspects of the evaluation will be subjective by necessity.
~~~Oil companies are not the first businesses to confront the challenge of tethering individual compensation to uncertain and influence-based outcomes. Lobbying firms, sales organizations and, to some extent, private equity firms all operate in influence-based and individual performance-driven environments, and have created strong links between influence goals and incentives. The good news is that major oil and gas companies are at last getting more comfortable too.
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