One of the central claims in the ongoing feud between SandRidge Energy Inc. and shareholder TPG-Axon is that the Oklahoma City energy company's executives have reaped hefty profits over the past five years while its stock price dropped 80 percent.
The shareholder has objected to the compensation CEO Tom Ward and other executives have received while shareholders have lost value.
“The destruction of stockholder value has been caused by poor and erratic strategic decisions, reckless spending, and a culture of cronyism and waste that has drained value from the company,” the shareholder said in a regulatory filing last month.
SandRidge has dismissed the claims, calling TPG-Axon an “opportunistic investor with short-term interests.”
With a total compensation of $25.2 million, CEO Tom Ward was among the highest-paid energy executives in 2011, even though the company's revenue of $1.4 billion ranks it in the bottom half of publicly traded exploration and production companies.
Ward's compensation increased 16 percent in 2011, up from $21.7 million in 2010. His pay increased 58 percent the year before, up from $13.7 million in 2009.
The company outlined its executive compensation strategy in its proxy statement filed in March with the Securities and Exchange Commission and distributed to shareholders before its annual meeting.
“We believe a strong, experienced senior management team is necessary to execute our business plan,” the proxy states. “Accordingly, our compensation philosophy reflects our need to attract, retain and motivate top talent and supports our position as an employer of choice in the oil and gas industry.”
One of TPG-Axon's main arguments has been that the executive compensation has continued to climb while the stock price has tumbled 80 percent since its 2007 initial public offering.
SandRidge addressed some of those concerns in its 2011 proxy.
“Our compensation program has remained competitive despite a fluctuating stock price over the last couple of years, primarily because the reasons for such fluctuations, we believe, were mainly due to commodity price fluctuation, uncertainly in global equity markets and delayed acceptance by the market of the company's transition from natural gas to oil,” the company stated.
Regulatory agencies require public companies to set their executive compensation based on comparisons with similar firms.
SandRidge includes two lists: mid-size exploration and production companies and large energy firms.
The mid-size companies are Pioneer Natural Resources, Southwestern Energy, Newfield Exploration Co., Denbury Resources Inc., Plains Exploration and Production Co., Range Resources, Ultra Petroleum Corp., ATP Oil and Gas Corp. and Forest Oil Corp. Those companies had 2011 revenues of $687 million to $2.7 billion, with a median of $1.95 billion, which is slightly higher than SandRidge's 2011 revenue of nearly $1.4 billion.
The mid-size companies had a median executive compensation of $6.1 million. Ward's compensation of $25.2 million was more than four times that amount.
SandRidge's proxy lists Ward's compensation as “above the 90th percentile.”
SandRidge also compared itself to six large companies: Apache, Anadarko, Chesapeake Energy Corp., EOG Resources, Devon Energy Corp. and Noble Energy.
Those companies had a revenue range of $4.1 billion to $16.7 billion, with a median of $11 billion, nearly eight times larger than SandRidge.
The median CEO pay for the large companies was $15.2 million.
Greg Dewey, SandRidge's vice president of communications, said the company includes larger companies in its peer group because it competes against those companies for employees.
“Clearly our peer group has to include both inside and outside of downtown Oklahoma City,” he said. “We can't set anybody's compensation, including the executives, without thinking about who we're competing with. Recruiting the top talent requires being able to compete with the top talent around you.”
By more than $8 million in 2011, Ward was the highest-paid CEO at any of Oklahoma City's publicly traded energy firms.
To help establish proper benchmarks and set fair compensation, company boards often hire consultants like Houston-based Pearl Meyer and Partners.
Pearl Meyer Managing Director Ed McGaughey has not worked with SandRidge and said he cannot address the company specifically. But in general, he said it is important for companies to set proper benchmarks.
“The company's revenue should fall within the 25th and 75th percentile,” of those it compares itself with, he said.
There are some exceptions, such as a situation when a smaller company is a direct competitor with larger companies for employees.
“For some clients, their compensation peers are so much different that we need to regress the data,” McGaughey said. “But you can't benchmark against companies that are 20 times bigger.”
McGaughey also typically compares his exploration and production clients to a more comprehensive list of energy companies, which he breaks down by revenue level. Companies should fall within the 25th to 75th percentile of its revenue category, he said.
By those numbers, companies like SandRidge with revenues of $1 billion to $2 billion should have CEO total compensation of $2.5 million to $5.9 million annually.
“For small companies that have not been performing optimally, it's not good optics to pay out big bonuses or rewards of stock,” McGaughey said. “What's ‘big' depends on benchmarking.”
Two other SandRidge executives received more than Pearl Meyers' recommendations for CEOs.
James Bennett, SandRidge's executive vice president and chief financial officer, received $7.7 million in 2011, and president and chief operating officer Matthew Grubb was paid $6.8 million, according to regulatory filings.