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Bonus program at Shell revised: Company alters reward system after scandal over reserves

Houston Chronicle: Bonus program at Shell revised: Company alters reward system after scandal over reserves

By LYNN J. COOK

Copyright 2004 Houston Chronicle

Aug. 31, 2004, 11:33PM

Posted 1 September 04

The Royal Dutch/Shell Group of Companies is changing how it rewards employees.

Starting in January, staff bonuses will be simplified to take into account individual accomplishments and companywide performance. Success at the division level will no longer be a factor.

The company is estimating that 75 percent of its 90,000-member work force will see a change in the way bonuses are structured. Of those, 13,000 work in Houston, which is headquarters to Shell Oil Co.

The change in incentive pay comes in the wake of scandal.

Shell rocked the energy industry last January when it slashed its proven reserve estimates by more than 20 percent. The news forced the ouster of then-chairman Philip Watts, who headed up exploration and production for much of the time the questionable reserves were added to the books at Europe’s second-largest oil company.

Last week the company hammered out the final details of the settlement related to the reserves restatement with the U.S. Securities and Exchange Commission and the United Kingdom’s Financial Services Authority for $150 million.

Jeroen van der Veer stepped up as the new chairman of the board in the spring, and he’s been trying to win back investor confidence ever since.

Until he took over in March, some bonuses in Shell’s oil and gas division were tied to reserve targets. The new structure will put the emphasis on working for Royal Dutch/Shell as a whole rather than single units.

According to a company statement, Shell “intends to have a single business performance factor through the group. This it to ensure we have an enterprise-first remuneration structure that builds cohesion, loyalty and commitment to the long-term good of the group as a whole.”

Shell spokeswoman Helen Bow says the changes are still subject to discussion and could be modified this fall.

Under the current bonus structure, managers over certain divisions or geographical areas have been able to make extra large bonuses even if the overall company isn’t performing nearly as well.

Alienating star performers is a big concern any time incentive payments become more team-oriented, says Chris Crawford, a managing director with compensation consultantcy Longnecker & Associates. But bonus changes of this magnitude could indicate that the company has experienced growing pains from treating each business like its own mini-fiefdom.

“This may be Shell’s way to create cross-pollination to support each other instead of treating every division as its own silo,” he says.

Bala Dharan, a professor with Rice University’s Graduate School of Management, says energy companies have to come up with ways to spur managers to discover more oil.

He thinks Shell’s new model will still have to offer added incentives for finding oil and gas reserves in some way, even if that means building the reserve factor into the companywide portion of the bonus equation.

“They all need to face the problem of procedures used internally to measure reserve quantities to prevent people from manipulating numbers,” Dharan says.

“But if you’re in the exploration business, you have to give managers incentives to explore. It goes without saying. In such a large company like Shell, it would be hard to imagine they won’t have any.”

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