Annual meeting: April 6, 2016 Schlumberger is one of those S&P 500 companies that you may never have heard of. It describes itself as “the world’s largest oilfield services company” and specializes in oil and gas exploration technology. As with other oil companies, Schlumberger has had a difficult year: the stock price has fallen dramatically, revenues are down year-over-year by 27% and the company has laid off 34,000 workers since the end of 2014. However, compensation for CEO Paal Kibsgaard – over $18 million -- didn’t significantly decrease. In fact his cash compensation actually increased by nearly 12%. This demonstrates the broad discretion of the Compensation Committee, and the hollowness of an elaborately constructed pay for performance plan.

Changing the goalpost

The company set significantly lower earnings per share (EPS) goals for this year than it had in the past, subsequently lowered them half way through the year, and then decided that even those goals should be based on a new accounting principle of “belief” rather than actual numbers.

The EPS target for the first 6 months of 2015 was $2.70 and the threshold for receiving any bonus was EPS of $1.70 or more. In July 2015, the board lowered targets for the second half of the year making what was once the threshold closer to the target, with a full bonus earned at an EPS of $1.80. Of note, 2014’s EPS target was $5.40 and threshold was $5.00

Even with the significant reductions, it was a challenge to meet targets. However, the compensation committee decided to use non-GAAP figures. Here’s a quote from the proxy statement: “Furthermore, the Committee believed that the $0.30 of charges in the first half of 2015 and the $1.43 of charges in the second half of 2015 resulted in EPS on a GAAP basis that did not reflect Schlumberger’s operating trends and arose largely from actions that management took in order to proactively address the industry downturn and other events outside of management control. Based on these results, the Compensation Committee approved a payout of 74% of target for the first half of 2015 and 88% of target for the second of 2015, resulting in a combined percentage of 81% of target for the EPS component of the annual cash incentive.”

In other words, the company first decided to base less of the bonus on EPS, then lowered EPS goals significantly (and including mid-year) and then ultimately based EPS numbers on belief. Despite the fact that actual EPS for the second half of the year was actually a negative number, the Committee approved payouts for that component of the goal at 81%. Comparisons and Benchmarking:

The proxy statement actually touts the fact that the company’s “stock price declined only 40% between June 30, 2014 and December 31, 2015.” The word “only” here references comparisons to the price of crude oil and the Philadelphia Oil Service Sector. However, when it comes to setting compensation the company does not limit itself to oil industry peers but also uses a second peer group of “large companies with significant international operations,” a list which includes such companies as Caterpillar, Merck, and Microsoft. Wouldn’t we all like to pick comparisons? Benchmarking also inflated pay at Schlumberger. It is a widespread practice to target or benchmark compensation at the 50th percentile of peers. Schlumberger goes further: “The Compensation Committee seeks to target total direct compensation (i.e., base salary plus annual cash incentives plus LTI awards) for our NEOs and other executive officers at or very close to the 75th percentile of the Company’s two main executive compensation comparator groups.” This is extremely unusual: only five companies in the S&P 500 set the threshold at that percentile. The rationale for targetting at the 75th percentile, that “the market for executive talent in the oil and gas industry is exceptionally competitive” has appeared in proxy company proxy statements for the last three years. The retention justification may be justifiable in a competitive industry on an upward swing, but loses meaning in the context of Schlumberger’s industry downturn.

The clever use of comparator groups also helps explain why cash bonus increased in 2015. The financial element of the bonus includes a Relative Performance Incentive (RPI) where the company considers its revenue growth (% change), and pretax operating margin growth (basis points) compared with Halliburton and Baker Hughes. Relative performance is a fine strategy to use as long as it is used in both up and down cycles. This was not in place when the price of a barrel of oil was increasing: it was added in July 2013. Even so, despite the cherry picking of the companies there was one more exclusion to be made. Specifically, “The Compensation Committee decided to exclude the results of our WesternGeco business for purposes of assessing our relative performance because Halliburton and Baker Hughes have no seismic operations.”

Also of note: Upcoming merger

In the midst of the chaos, Schlumberger is acquiring another Cameron International (a manufacturer of materials used in oil and gas exploration, including valves, wellheads), in a deal scheduled to close shortly. When the cash and stock transaction was announced in August 2015 it was valued at $14.8 billion, but that was a long time ago. One of Kibsgaard’s personal goal metrics that contributed to his bonus this year was completion of certain merger tasks. He was thus incentivized to proceed this merger whether or not it was ultimately in the best interests of shareholders. The facts on the ground have changed considerably, and one recent article pointed out a number of specific pitfalls at Cameron.

It could also leave Schlumberger shareholders on the ticket for significant severance packages, apparently even if terminations are based – as so many company layoffs have been – on downturns in the industry. Specifically, the Cameron’s mergers proxy notes that, “Schlumberger shall provide . . . to any Covered Employee whose employment is terminated for reasons other than cause prior to the second anniversary of the Effective Time severance benefits equal to the benefits provided under the applicable Cameron severance plan as in effect immediately prior to the date hereof.”

Finally, mergers can cloud accounting even further. Maybe the cloudy accounting will help prop up pay next year.