Review and recalibration of the variable remuneration system in the oil and gas industry
STARTING SITUATION – COMPLEXITY LEADS TO LACK OF TRANSPARENCY
When it set up its variable remuneration system ten years ago, our client, an oil and gas offshore company, oriented it towards the key performance indicator of economic value added. At the time, in the late 1990s, making so-called accounting adjustments to the calculation logic for economic value added was still common practice. As a result, our client decided to introduce a total of seven adjustments, which had an impact on both results and on the capital side. Following enormous internal growth in terms of employees, sales, and capital employed, bonus payments over the last few years had been subject to very high volatility. The meanwhile inappropriate calibration of the system and the resulting fluctuations in the bonus payments led to a lack of financial planning security among the workforce. In addition, the accounting adjustments made the actual calculation logic incomprehensible and poorly transparent for the employees. As a result, the actual incentive principle that the scheme was based on faded into the background.
PROJECT APPROACH – CREATE UNDERSTANDING THROUGH CONSISTENT CHANGE MANAGEMENT
The project approach was clearly aligned with the central objectives of the project:
1) Transparency was created by abandoning all non-significant adjustments in favor of a direct connection with the income statement and balance sheet, and therefore bringing greater comprehensibility; 2) Volatility was reduced by doubling the calibration of the remuneration system, i.e. the size of the bonus interval; 3) Consistency was ensured by implementing a sustainability component for the lowest hierarchy level in the form of a “bonus bank”; and 4) Understanding was created through a rigorous change management approach in the form of a company-wide communication and training initiative.
FINDING – YOU CAN REACH YOUR TARGET ONLY IF YOU UNDERSTAND WHAT IT IS
In the same way as the client’s ships need to be maintained at certain intervals, the calibration and fine-tuning of a variable remuneration system needs to be reviewed regularly. This allows you to counter internal and external changes in good time. A transparent and easily understood variable remuneration system meets its purpose independently, namely by setting effective incentives and inducements for employees – because you can reach your target only if you understand what it is. In this context, the importance of a comprehensive change management process, including communication and training, is constantly underestimated. Finally, it will be particularly important to involve the works council from the start, and to resolve any concerns it may have at an early stage.
- Modernization of the variable remuneration system in terms of transparency and comprehensibility
- Reduction in bonus volatility, and thus improved financial planning security for employees