Incentivized to Sell: The Impact of Compensation Design on Energy Industry Consolidation

Over the past several years, the U.S. oil and gas exploration and production (E&P) sector has undergone significant consolidation. A series of large- and mid-cap merger and acquisition (M&A) deals reshaped the industry as companies pursued scale, operational synergies, and inventory depth.

Alongside the strategic drivers of these transactions, attention has turned to the change-in-control (CIC) compensation arrangements for CEOs of the acquired firms. These “golden parachute” packages, which often include rich severance payments and accelerated equity, raise the question of whether executives had personal financial incentives to a level that influenced their decision to sell their companies.

This article analyzes recent major E&P transactions, the CIC payouts awarded to target company CEOs, and how these incentives compare to other industries where consolidation has been less prolific.

Consolidation Wave in U.S. E&P (2019–2024)

Following a decade of growth-focused strategy, the late 2010s saw a pivot in E&P corporate priorities. Investors began pressuring producers to emphasize capital discipline, cash flow, and shareholder returns over sheer production growth. This shift, combined with volatile commodity prices and cost pressures, set the stage for a wave of consolidation.

In response, many large- and mid-cap E&P companies merged or were acquired to improve operating efficiencies and bolster assets. Table 1 highlights several notable E&P M&A transactions since 2019, including the size of CEO CIC payouts where applicable.

Table 1 – Selected Major U.S. E&P M&A Deals and CEO Outcomes

As shown above, E&P mergers have delivered substantial payouts to many selling CEOs, suggesting a strong personal financial incentive to consummate such deals. However, not every deal resulted in a parachute payment — in some mergers, the target CEO secured a top position in the new entity, effectively swapping an immediate payout for continued leadership and future compensation in a larger company.

CEO Change-in-Control Compensation Basics

Change-in-control provisions in executive contracts are specifically structured to align the interests of management with those of shareholders during a potential sale of the company. Typically, these provisions stipulate that if a CEO is terminated or resigns for a “good reason” following a change in ownership, the executive receives severance payments (usually calculated as a multiple of base salary and bonus), accelerated vesting of equity incentives, and additional benefits, such as continued health coverage or enhanced pension contributions.

The purpose of these provisions is to eliminate the executive’s reluctance to support a transaction that might lead to their departure, thus ensuring that the executive objectively evaluates opportunities that could enhance shareholder value. In practice, however, these arrangements often result in substantial payouts, serving as “golden parachutes” that mitigate the financial impact of involuntary exits.

Key features of typical CEO CIC packages include:

• Cash severance: Typically amounts to two to three times the CEO’s base salary plus target bonus (up to the maximum, in some cases). This multiple is locked in by contract. According to an Alvarez and Marsal analysis of public companies, 63% of E&P CEOs have a multiple of three, which is generally the maximum standard due to 280(g) excise tax issues.
• Equity award acceleration: Unvested stock options, restricted shares, and performance awards typically vest immediately upon a CIC (often requiring a double-trigger: the change-in-control and termination). This can constitute the largest portion of the payout, especially if the company’s share price has risen. Across industries, accelerated long-term incentives form the majority of CIC value for CEOs.
• Bonuses: The executive may receive a pro-rated or target annual bonus for the year of the deal.
• Benefits continuation and retirement: Continuation of health insurance and perquisites for a period, typically 12–36 months. Some packages also credit extra years of service for pension calculations or provide outplacement services.
• Tax gross-ups: In the past, many CIC agreements reimbursed the executive for any IRS excise tax (20%) imposed on excess parachute payments. However, such gross-up provisions have become rare due to shareholder backlash. Most companies now leverage a “best net” approach (reducing the payout to avoid triggering the tax if necessary). Notably, Anadarko’s board added an excise tax gross-up to its CEO’s contract just ahead of its 2019 deal — a move criticized as overly generous in today’s governance climate.

Ultimately, a CIC agreement guarantees that a CEO who loses their position in a merger will receive significant compensation, encouraging them to support value-creating takeovers without fear of personal financial loss.

CIC Incentives in E&P Compared to Other Industries

To assess whether E&P CEOs have been more heavily incentivized by CIC provisions than peers in other sectors, we compare several indicators: severance multiples, prevalence of certain perks, and the overall size of payouts. Table 2 summarizes how E&P CIC practices stack up against other industries’ norms in recent years.

Table 2 – Comparison of CEO CIC Arrangements: E&P vs. Broad Market

E&P CEO CIC provisions are, on average, somewhat more generous than those of many other industries. In terms of payout size, energy CEOs have ranked near the top. In 2017, for example, energy sector chiefs had an average CIC package value of ~$33 million, second only to information technology executives. By comparison, industrials and utilities averaged CIC packages in the mid-$20 millions.

This gap is partly due to E&P leaders often accumulating significant equity wealth that vests upon a deal, and because many E&Ps are midsize companies where a sale is a more expected liquidity event — leading boards to pre-negotiate hefty CIC terms to retain talent during takeover speculation.

It’s worth noting, however, that tech deals can produce even larger windfalls. For example, when Microsoft agreed to acquire Activision Blizzard in 2022, Activision’s CEO was set to receive approximately $15 million in severance, in addition to nearly $400 million from his stock holdings. In that sense, E&P CEOs were not uniquely advantaged in absolute dollars, but relative to their companies’ size and typical pay, their golden parachutes were generous.

The Impact of CIC Incentives on E&P M&A Decisions

A critical question is whether these lucrative CIC arrangements incentivized E&P executives to pursue mergers. While CEO motivations are difficult to prove, circumstantial evidence from several deals suggests that personal payouts were at least an acknowledged factor:

• Anadarko Petroleum (Occidental): Just one day before announcing its sale, Anadarko’s board tweaked CEO Al Walker’s CIC agreement, removing an age-based reduction that would have lowered Walker’s payout and promised to cover excise taxes. This action increased Walker’s potential exit package, and with Occidental’s higher bid, his parachute payment reached $98 million. This implies that management was keenly aware of and acting upon the CEO’s financial stake in a takeover, supporting the view that CIC rewards helped smooth the path to a sale.
• Noble Energy (Chevron): In this deal, proxy advisors and some investors openly objected to the rich golden parachutes, which had been bolstered with transition bonuses. Glass Lewis advised shareholders to vote against the CIC payouts — even as it endorsed the merger itself. This controversy indicates that stakeholders suspected management might have secured extra personal benefits as part of negotiating the merger, raising questions of conflict. Ultimately, shareholders did approve the merger, and the CEO received his $25 million package.

Golden Parachutes: Necessity or Threat to M&A Neutrality?

Governance experts have noted that golden parachutes can help facilitate M&A transactions. Their purpose is to mitigate negative perceptions of job loss to encourage the pursuit of any deal that is in the shareholders’ interests. In practice, neutrality can shift to eagerness for a deal in which payouts are extremely high. On the other hand, it’s important to recognize that strategic and market factors primarily drove many of the aforementioned mergers. Industry consolidation was often a logical response to economic conditions.

Even when large parachutes were present, boards will argue that those were necessary to attract and retain talent in a volatile sector prone to takeovers. If a CEO knows they are protected, they can negotiate a sale from a position of neutrality, which arguably benefits shareholders by enabling value-maximizing deals. There is empirical support for the idea that companies with golden parachutes are more likely to receive takeover offers and consummate deals. In that sense, robust CIC incentives in E&P may have contributed to the wave of mergers by assuring CEOs of their financial stability when weighing a merger, effectively removing obstacles to consolidation in a fragmented industry.

As an executive compensation design matter, offering the CEO a significant role in the combined company can be an alternative tactic to mitigate self-interest, effectively substituting the golden parachute with a “golden handshake,” welcoming them to the new organization.

Looking Ahead: Ethically Leveraging CIC Incentives

The consolidation of U.S. E&P companies in the last few years has coincided with, and possibly been facilitated by, CEO change-in-control arrangements. E&P executives often had pre-negotiated golden parachutes guaranteeing significant payouts if their companies were acquired, and these safety nets likely made management teams more receptive to M&A overtures.

However, while CEO CIC incentives in E&P were exceptionally rich, most evidence suggests they functioned as intended, removing a potential barrier and enabling leaders to act in the best interest of shareholders and pursue mergers that made strategic sense. The balance of interests was not always perfect, but E&P boards used CIC tools to help drive the necessary consolidation of the sector.

Going forward, compensation committees should leverage CIC payouts to encourage value-enhancing deals without crossing into unwarranted management windfalls.

At CBIZ, our consultants develop custom executive compensation strategies to fit your business’s unique culture, address key performance drivers, and help ensure compliance with ever-changing regulations. Connect with us today to learn more.