BP's missed opportunity on executive pay

NEW YORK (CNNMoney.com) -- BP has pledged to learn from the oil spill in the Gulf of Mexico and to come away from the disaster with a renewed focus on safety.

To prove that it is serious, BP on Tuesday ousted its chief executive, set aside over $32 billion and announced plans sell a big chunk of assets to cover costs related to the worst oil spill in U.S. history.

"The only way you can build a reputation is not just by words, but by action," BP's incoming CEO Robert Dudley said on CNN's "American Morning" on Wednesday. "There is no question that we will make some changes going forward, significant changes," he added later.

However, BP has yet to announce any changes regarding its executive compensation policy, which has been criticized for valuing the company's financial performance over its safety record.

As BP struggles to repair its severely tarnished reputation, analysts say reforming the way it pays senior executives could send a powerful message.

"Compensation for CEOs and other senior managers is the single best way to ensure that a company puts its money where its mouth is in terms of corporate values," said Nick Kalm, president of corporate consulting group Reputation Partners. "BP will have missed a major opportunity if compensation is not tied to safety in a meaningful way."

BP spokesman Toby Odone said the terms of Dudley's compensation plan have yet to be announced, adding that information about executive pay is normally disclosed in annual reports.

Dudley, an American director who has been with BP since 1998, will replace outgoing CEO Tony Hayward in October. BP said a change in leadership was necessary to move past the spill and help restore the company's reputation, particularly in the United States.

Hayward will be paid a full year's salary amounting to $1.6 million. BP said it is unlikely Hayward will receive a bonus, though a final decision is not expected until early next year.

The 53-year old executive is eligible to receive payments from his $16 million pension once he turns 65, according to BP's most recent annual report. He could start drawing a pension earlier, but the amount would be reduced.

In 2009, Hayward received a bonus worth more than $3 million, while Dudley was awarded $1 million, for BP's "excellent performance." The bonus formula was weighted 70% towards the company's financial and operational results, while safety goals accounted for only 15% of the payment.

The structure for any bonus payments Dudley could receive will be determined by BP's compensation committee at some point in the future, according to Odone. "That hasn't been announced yet, but will be in due course."

Most compensation committees have a certain amount of discretion when it comes to determining bonus payments, according to Steve Cross, managing partner at Cogent Compensation Partners. In BP's case, "the committee would do well to exercise its discretion," he said.

BP launched a review of its pay practices in 2005 after an explosion at its Texas City refinery killed 15 workers and injured scores more. That disaster played a role in the resignation of Hayward's predecessor, Lord Browne, who received a severance package worth a reported 32 million British pounds.

Last year, BP enacted a set of reforms that aim to link executive compensation to the long-term performance of the company.

Under the reforms, one-third of executive level bonuses are deferred into "performance shares" for three years. Those shares may be matched one-for-one based on an assessment of the company's environmental and safety performance.

At the end of last year, Hayward had nearly 1.2 million shares in the deferred compensation scheme, which is only for company directors. Dudley, who was made a director in April 2009, did not own any deferred shares at the end of last year.

Given the company's recent record, those performance shares are unlikely to vest, according to Paul Hodgson, senior researcher at The Corporate Library, a governance group.

"It's unlikely that the financial targets will be met, and the safety goals certainly won't," he said.