Our
stockholders and other interested persons may communicate withCorporate Governance Principles provide that, in the event the Chairman of
our Audit Committee or with our non-employee directors as a group, by written communications addressed in care of Corporate Secretary, VAALCO Energy, Inc., 9800 Richmond Avenue, Suite 700, Houston, Texas 77042.All communications received in accordance with these procedures will be reviewed initially by our senior management. Senior management will relay all such communications to the appropriateBoard is not an independent director, or when the independent directors unlessdetermine that it is determined that the communication:
| ● | does not relate to our business or affairs or the functioning or constitution of the Board of Directors or any of its committees; |
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| ● | relates to routine or insignificant matters that do not warrant the attention of the Board of Directors; |
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| ● | is an advertisement or other commercial solicitation or communication; |
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| ● | is frivolous or offensive; or |
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| ● | is otherwise not appropriate for delivery to directors. |
The director or directors who receive any such communication will have discretion to determine whether the subject matter of the communication should be brought to the attention of the full Board of Directors or one or more of its committees and whether any response to the person sending the communication is appropriate. Any such response will be made only in accordance with applicable law and regulations relating to the disclosure of information.
The Corporate Secretary will retain copies of all communications received pursuant to these procedures for a period of at least one year. The Board of Directors will review the effectiveness of these procedures from time to time and, if appropriate, recommend changes.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Compensation Discussion and Analysis
In this Compensation Discussion and Analysis, we discuss our compensation objectives, our decisions and the rationale behind those decisions relating to 2015 compensation for our executive officers named in the Summary Compensation Table and who we sometimes refer to as the “Named Executive Officers”. All of the Named Executive Officers currently serve as officersbest interests of the Company, except (i) Mr. Scheirman, who retired fromthe independent directors will also appoint a lead independent director. The primary role of the lead independent director would be to ensure independent leadership of the Board, and as President and Chief Operating Officer on June 3, 2015 and remainedwell as to act as a consultant until December 31, 2015; (ii) Ms. Cutrer, who retired as Executive Vice President on January 2, 2016,liaison between the non-management directors and (iii) Mr. Hullinger, the Company’s former Chief Financial Officer. On November 9, 2015, Mr. Hullinger ceased being the Company’s Chief Financial Officer and began serving under the terms of an employment agreement as the Company’s Finance and Accounting Senior Advisor and continued in that role until March 15, 2016.
Objectives of Our Compensation Program
Our executive compensation program is intended to align the interests of our management team with those of our stockholders by motivating our executive officers to achieve strong financial and operating results for us, which we believe closely correlate to long-term stockholder value. In addition, our program is designed to achieve the following objectives:
| ● | attract and retain talented executive officers by providing reasonable total compensation levels competitive with that of executives holding comparable positions in similarly situated organizations; |
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| ● | provide total compensation that is justified by individual performance; |
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| ● | provide performance-based compensation that balances rewards for short-term and long-term results and is tied to both individual and the Company’s performance; and |
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| ● | encourage the long-term commitment of our executive officers to us and our stockholders’ long-term interests. |
What Our Compensation Program is Designed to Reward – Pay for Performance
Our strategy is to economically increase reserves and production through the exploration, development and production of oil and gas properties with an emphasis on international opportunities. Our compensation program is designed to reward performance that contributes to the achievement of our business strategy on both a short-term and long-term basis. In addition, we reward qualities that we believe help achieve our strategy such as teamwork; individual performance in light of general economic and industry specific conditions; performance that supports our core values; resourcefulness; the ability to manage our existing corporate assets; the ability to explore new avenues to increase oil and gas production and reserves; level of job responsibility; and tenure within the industry.
Although our equity awards generally do not have explicit performance-vesting conditions, they are subject to fluctuations in our stock price and individual performance and contributions have been considered in making the grants. Our Named Executive Officers, who receive a significant amount of their compensation in the form of equity awards, have been subject to the same downward pressure on their realized compensation as our stockholders. The granting of equity to our Named Executive Officers exposes them to the same risks that face our stockholders. Furthermore, a significant portion of the equity awards granted to our Named Executive Officers are in the form of stock options and stock appreciation rights, which we believe are inherently performance-based. By way of illustration, as of April 19, 2016 none of the approximately 3 million stock options and stock appreciation rights that we have granted to our currently-employed Named Executive Officers to date are “in-the-money” even though they were valued at approximately $3.5 million in the aggregate at time of grant.
As with our entire executive team, the value of our CEO’s actual compensation since his hire in 2013 has been significantly tied to the performance of our stock price, with his total realized pay for the last three years representing approximately 38% of his total reported pay.
Elements of Our Compensation Program and Why We Pay Each Element
To accomplish our objectives, our compensation program is comprised of four elements: base salary, cash bonus, long-term equity-based compensation and benefits.
We pay base salary in order to recognize each executive officer’s unique value and historical contributions to our success in light of salary norms in the industry and the general marketplace; to match competitors for executive talent; to provide executives with predictable, regularly-paid income; and to reflect an executive’s position and level of responsibility.
We include an annual cash bonus as part of our compensation program because we believe this element of compensation helps to motivate management to achieve key corporate objectives by rewarding the achievement of these objectives. The annual cash bonus also allows us to be competitive from a total remuneration standpoint. However, given the negative pressure on the Company’s stock during 2015, continued depressed commodity prices, and a desire to preserve cash and maintain liquidity, the Compensation Committee determined that no bonuses be awarded to Mr. Guidry, Mr. McCormack and Mr. Christ and an award of $10,000 be made to Mr. Bounds under the 2015 bonus program.
Long-term equity-based incentive compensation is an important element of our compensation policy because we believe it aligns executives’ interests with the interests of our stockholders; rewards long-term performance; is required in order for us to be competitive from a total remuneration standpoint; encourages executive retention; and gives executives the opportunity to share in our long-term performance. For the annual awards in March 2014 and March 2015, we utilized both option awards and restricted stock awards as components of long-term equity-based incentive compensation for all of the executive officers. In March 2016, we began utilizing both option awards and stock appreciation right (“SAR”) awards as the components of long-term equity-based incentive compensation for our executive officers. Option awards and SAR awards are granted at exercise prices not less than the market value of our common stock on the date of the grant and are not transferable (other than to the holder’s heirs or entities for the benefit of his or her heirs). Therefore, option and SAR awards granted will have no realizable value unless our stock price appreciates in value.
We also offer benefits, such as a 401(k) plan and payment of insurance premiums, in order to provide a competitive remuneration package.
2015 Advisory Vote on Executive Compensation
At our annual meeting in 2015, we offered our stockholders an opportunity for an advisory, non-binding vote on our executive compensation through our “say on pay” proposal. Approximately 97% of the stockholders who voted on the proposal last year approved the compensation to our Named Executive Officers. Based on the overwhelming support demonstrated in last year’s “say on pay” vote, we retained the central elements making up our incentive compensation, which includes an emphasis on long-term equity-based incentives and a targeted cash bonus component that is less than the amounts the Company had awarded historically prior to 2014. The Compensation Committee will continue to consider the outcome for our “say-on-pay” votes and stockholder views when making future compensation decisions for our executive officers.
How We Determine Each Element of Compensation
In determining the elements of compensation, we consider various measures of Company and industry performance including total shareholder return, capital expenditures, additions to reserves of oil and gas, operating costs, safety performance, production and other measures discussed herein. We may from time to time retain an independent compensation consulting firm to assist the Compensation Committee in evaluating the executive compensation program. The Compensation Committee retained Mercer Consulting (“Mercer”), an independent compensation consultant, in 2015 with respect to evaluating executive compensation. The decision to engage Mercer was made by the Compensation Committee and Mercer reported directly to the Compensation Committee; however, at the Compensation Committee’s direction, the consultant worked directly with management to review or prepare materials for the Compensation Committee’s consideration. While engaged as the Compensation Committee’s consultant, Mercer did not perform any services for the Company outside the scope of its arrangement with the Compensation Committee. During 2015, the Compensation Committee reviewed the consultant’s independence and determined that there were no conflicts of interest as a result of the Compensation Committee’s engagement of Mercer. The Compensation Committee did not engage any consultant other than Mercer during 2015 to provide executive compensation consulting services.
In January 2016, the Compensation Committee retained Longnecker & Associates (“Longnecker”), an independent compensation consultant, with respect to evaluating executive compensation for the 2016 compensation cycle. The decision to engage Longnecker was made by the Compensation Committee and Longnecker reported directly to the Compensation Committee; however, at the Compensation Committee’s direction, the consultant worked directly with management to review or prepare materials for the Compensation Committee’s consideration. While engaged as the Compensation Committee’s consultant, Longnecker did not perform any services for the Company outside the scope of its arrangement with the Compensation Committee. In connection with their initial engagement, the Compensation Committee reviewed the consultant’s independence and determined that there were no conflicts of interest as a result of the Compensation
Committee’s engagement of Longnecker. The Compensation Committee has not engaged any consultant other than Longnecker during 2016 to provide executive compensation consulting services.
The scope of both Mercer and Longnecker’s engagement has been to provide a proposed list of peer companies that operate in a similar business to VAALCO, and to analyze peer and market compensation data to provide the Compensation Committee with an assessment of the Company’s top executive positioning compared to the market. Specifically, Mercer and Longnecker’s roles have been to:
| ● | Conduct a market analysis of the following compensation element versus proxy peers: |
| ● | Base salary; |
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| ● | Annual cash bonus; |
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| ● | Total cash compensation (base plus annual cash bonus); |
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| ● | Long-term incentives (LTI); and |
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| ● | Total direct compensation (total cash plus LTI). |
| ● | Evaluate prevalence of the following compensation elements at peers: |
| ● | Annual incentive design elements (e.g. metrics, leverage); |
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| ● | Long-term incentive vehicles used and design elements; |
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| ● | Outline key executive compensation trends and regulatory, legislative, and governance considerations (e.g. say on pay); |
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| ● | Summarize potential refinement opportunities; |
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| ● | Preview the materials with the Compensation Committee Chair, and management as appropriate; and |
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| ● | Present materials to the Compensation Committee. |
How Elements of Our Compensation Program are Related to Each Other
We view the various components of compensation as related but distinct and emphasize “pay for performance” with a significant portion of total compensation reflecting a risk aspect tied to long- and short-term financial and strategic goals. In 2014, based on the report of our compensation consultant and the compensation practices of our peers, we decided to proportionately reduce potential cash bonus compensation for our executives while increasing potential equity-based incentive compensation. We believe this shift still provides a competitive, attractive cash bonus opportunity for our executives while also more closely aligning their interests with those of our stockholders. In 2016, in an effort to minimize share dilution while still providing equity-based incentive compensation that we believe is competitive with the market for executives, we adopted the VAALCO Energy, Inc. 2016 Stock Appreciation Rights Plan (the “SAR Plan”). Other than as noted above, our Compensation Committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and annually paid-out compensation, between cash and non-cash compensation, or among different forms of non-cash compensation.
Market Comparisons
To assist the Compensation Committee, an executive compensation assessment was compiled by Mercer in January 2015 and provided to VAALCO. The Mercer report was used by the Compensation Committee to help determine base salary for 2015, grants of incentive compensation and for determining target bonus compensation that could be earned in 2015, but paid in 2016.
The peer group recommended by Mercer that was used with respect to compensation decisions made in 2015 was assembled by a screening process to assemble a group of public exploration and production companies with revenues comparable to the Company’s revenues. The analysis resulted in the following set of 11 peers:
Apco Oil & Gas International | Gran Tierra Energy Inc. | Petroquest Energy, Inc. |
BPZ Resources Inc. | Gulfport Energy Corp. | TransGlobe Energy Corporation |
Contango Oil and Gas Co. | Hyperdynamics Corp. | TransAtlantic Petroleum Ltd. |
Erin Energy Corporation | Oando Energy Resources Inc. | |
In February 2016, Longnecker re-evaluated the peer group. Following its re-evaluation, Longnecker recommended that the Compensation Committee (i) remove Hyperdynamics Corp. due to its low enterprise value, (ii) remove Apco Oil & Gas International due to its acquisition by Pluspetrol during 2015 and (iii) remove BPZ Resources, Inc. due to its bankruptcy. Longnecker, seeking out peer companies meeting the revenue requirements but also in alignment with the Company’s focus on international offshore exploration and development, also recommended to the Compensation Committee that it replace the removed peers with the following three companies: Bowleven plc, Harvest Natural Resources Inc. and Ophir Energy plc. The Compensation Committee adopted the recommendations of Longnecker with respect to the changes to the peer group and utilized the revised peer group in making its compensation determinations in March 2016.
With the new peer group adopted by the Compensation Committee, nine of the 11 peers had significant non-United States operations and five of the peer companies have significant West African properties, which is the Company’s current focus.
Although the Compensation Committee retained Mercer in 2015 and Longnecker in 2016 to conduct a peer group analysis, and also reviewed other survey information, ultimately many of the compensation decisions are qualitative and not quantitative, and take into consideration the unique international nature of our operations, competitive conditions in our industry, competitive conditions for executive talent and other factors discussed below. We do not set specific benchmarks but rather use peer group information to check our compensation decisions for reasonableness.
Base Salary
At its regularly scheduled meeting in March of each year, the Compensation Committee meets to review the base salaries of our executive officers.
In setting base salaries, the Compensation Committee seeks to maintain stability and predictability from year to year, and usually makes percentage increases based on its view of the cost of living and competitive conditions for executive talent in the oil and gas business. The Compensation Committee also considers subjective factors in setting base salary, including individual achievements, our performance, level of responsibility, experience, leadership abilities, increases or changes in duties and responsibilities and contributions to our performance.
In March 2015, utilizing knowledge of competitive conditions in the industry, the Compensation Committee determined to keep the 2015 base salaries for our Named Executive Officers at that time at the previous levels set for 2014, which were as follows: $500,000 for Mr. Guidry, $496,173 for Mr. Scheirman, $333,828 for Mr. Hullinger and $300,132 for Ms. Cutrer.
In connection with their respective appointments in January 2015, July 2015 and November 2015 and pursuant to the terms of their employment agreement, which were reviewed and approved by the Compensation Committee, the annual base salaries of Mr. Christ, Mr. Bounds and Mr. McCormack were established at $265,000, $340,000 and $325,000, respectively.
In March 2016, given the current downturn in the energy industry more generally, the Compensation Committee again determined to keep the 2016 base salaries for our four Named Executive Officers at current levels.
Bonus
Our executive officers, senior management and other non-management personnel have the potential to receive a meaningful cash bonus if annual financial and operational objectives or goals, pre-established by the Compensation Committee, are met.
At a meeting, usually prior to the end of the year, our Board of Directors approves the operating budget and financial forecast for the ensuing fiscal year. Based on the budget and forecast, at their meeting in the first quarter of the following year, the Compensation Committee sets various targets for financial and non-financial measures such as oil and gas production levels, operating expenses, safety performance, resource additions and total shareholder return. During the first
quarter of each year, following a preliminary determination of our financial and operating results, our Compensation Committee meets to establish bonus compensation for the previous year and to formally establish the bonus program goals for the current year.
In determining the incentive bonuses earned, the Compensation Committee gives substantial weight to our achievement of the Company goals and objectives set out in our budget for the preceding year, in addition to individual goals and objectives for each executive. Typically, approximately 60% of the target bonus for each executive officer is based on corporate goals while approximately 40% of the target bonus is based on individual performance and accomplishments. The target bonus percentages, as a percentage of an individual’s annual base salary, established for our Named Executive Officers for 2015 was as follows: Mr. Guidry – 100%; Mr. Bounds – 75%; Mr. McCormack – 65%; Mr. Christ – 50%; Mr. Scheirman – 75%; Mr. Hullinger – 68%; and Ms. Cutrer – 50%.
The Compensation Committee established the following corporate performance goals in March 2015 for the fiscal year 2015 bonus program:
| ● | Achieve average daily net oil and gas production of 4,560 barrels of oil equivalent (Boe) (actual was 4,628 Boe per day); |
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| ● | Achieve direct operating costs of $18.85 per barrel (actual was $17.83 per barrel); |
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| ● | Achieve a Total Recordable Incident Rate of 0.82 (actual was 0.48); |
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| ● | Achieve Resource Additions of 6 MMBOE (actual was 0 MMBOE); |
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| ● | Capital Expenditures of $70 million for an approved set of projects (actual was $87.3 million); and |
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| ● | Total Shareholder Return in the second quartile of the Peer Group (actual was third quartile). |
Each executive officer’s individual contribution to the above goals was also evaluated. Under the formulaic application of the Company’s results as measured against the corporate performance goals, a payout of 88% of target was achieved under the corporate performance component of the 2015 bonus program. However, given the negative pressure on the Company’s stock during 2015, continued depressed commodity prices, and a desire to preserve cash and maintain liquidity, the Compensation Committee determined that no bonuses be awarded to Mr. Guidry, Mr. McCormack and Mr. Christ and a $10,000 award be made to Mr. Bounds under the 2015 bonus program.
Pursuant to the terms of the agreements governing their respective separations from the Company entered into in October 2016 and November 2016, Mr. Hullinger and Ms. Cutrer were awarded bonuses in March 2016 in the amounts of $113,492 and $112,550, respectively.
Long-Term Equity-Based Incentives
We believe formal long-term equity incentive programs are valuable compensation tools and are consistent with the compensation programs of the companies in our peer group. We maintain (i) the VAALCO Energy, Inc. 2014 Long-Term Incentive Plan (the “2014 LTIP”), which permits the grant of our stock, options, restricted stock, restricted stock units, phantom stock, stock appreciation rights and other awards, any of which may be designated as performance awards or be made subject to other conditions and (ii) the VAALCO Energy, Inc. 2016 Stock Appreciation Rights Plan (the “SAR Plan”), which permits the grant of stock appreciation rights (“SARs”). We believe that long-term equity-based incentive compensation is an important component of our overall compensation program because it:
| ● | balances short and long-term objectives; |
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| ● | aligns our executives’ interests with the long-term interests of our stockholders; |
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| ● | rewards long-term performance relative to industry peers; |
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| ● | makes our compensation program competitive from a total remuneration standpoint; |
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| ● | encourages executive retention; and |
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| ● | gives executives the opportunity to share in our long-term value creation. |
The Compensation Committee administers our long-term incentive plans and performs functions that include selecting award recipients, determining the timing of grants and assigning the number of shares subject to each award, fixing the time and manner in which awards are exercisable, setting exercise prices and vesting and expiration dates. For compensation decisions regarding the grant of equity compensation to executive officers, our Compensation Committee considers recommendations from our Chief Executive Officer. Typically, awards vest over multiple years, butBecause our Chair of the CompensationBoard is an independent director, our Board has determined that a lead independent director is not necessary at this time.