Is InterOil’s remuneration excessive?

The answer, of coarse, depends whom you ask, but here are the facts..

There is an obvious first stop. It’s looking at a compensation table, for instance here (p10) for last year:

Phil Mulacek, CEO, earned:

  • $500,000 in base salary
  • $1,326,125 in options
  • $168,000 in all other compensation
  • $1,994,125 in total.

CFO Colin Visaggio earned a bit more, $332,837 in base salary $2,117,994 in options and some other smaller stuff, totalling $2,535,371. Other officials varied between $1.1 and $1.7M in total, the major part being in options.

First impression, it doesn’t strike us as overly excessive if you compare it to similar companies and considering the larger part of compensation is in options, which can only be characterized as highly risky.

And about these options there is some fuss, about the new 2009 options plan. The fuss is concentrated in the following quote (from the same 6K p5):

  • The maximum number of Common Shares reserved for issuance pursuant to awards under the New Plan is set at 2,000,000. As at the date hereof, there are options outstanding, which, if exercised, will result in the issuance of 1,730,500 Common Shares. Accordingly, the number of Common Shares reserved for issuance under the New Plan (and all other options granted by InterOil at this time) is equal to 3,730,500 Common Shares, representing approximately 10.18% of the issued and outstanding Common Shares as at this date.

At first sight, this looks a bit scary, but if one reads the rest of the item, it becomes considerably less scary. Let’s start with those 1,730,500 outstanding options first. This is not the result of a single year, but goes back all the way to 2004. For instance, on p.11 of that same report you see a table with all outstanding options of the directors. For instance, CEO Phil Mulacek has the following options still outstanding:

  • 2004: 15,000
  • 2005: 15,000
  • 2006: 15,000
  • 2007: 15,000
  • 2008: 60,000

You will also see that management still had close to a million (947,500 to be precise) options outstanding. Apparently, the rest of the total outstanding options (1,730,500) where either:

  • already exercised
  • or not granted to executive officers.

To give you an indication of the former, for the whole of 2008, only 58,000 options were exercised (see Year-end report 2008 p.38), a further 60,000 in the first quarter of 2009 (Q1 report p.27) so these numbers are pretty small. And indeed, executive officers are not the only ones getting options:

  • In order to ensure that a sufficient number of Common Shares are available to permit InterOil to continue to grant stock options and other incentive awards, on May 13 , 2009, the Board approved the 2009 Stock Incentive Plan (the ” New Plan “), which will result in the reservation of an additional 2,000,000 Common Shares to satisfy the grant of future incentive awards to employees, consultants and outside directors. [6K p.5]

And indeed, look at some 2007 figures, from the year-end report.

  • In addition to the common shares owned or controlled or directed directly or indirectly by our directors and executive officers, 590,000 shares are issuable upon exercise of outstanding options, resulting in directors and executive officers holding 29.87% of the common shares on a fully diluted basis [p.46]
  • As of December 31, 2007, there were options outstanding to purchase 1,137,250 shares. [p.44]

That is, in 2007, directors and executive officers only had a little over half of the outstanding options.

Base salaries are low, hence the company relies quite heavily on options, the idea is not only to align interest with shareholders, these options are also meant to preserve cash and provide long-term incentives (we welcome the latter especially):

  • As in past years, during 2008 we relied heavily on grants of stock options to compensate directors, executive officers and key employees. The Compensation Committee generally subjects option grants to a vesting schedule. The exercise price is established as the fair market value of our Common Shares on the date the options are granted, in accordance with the provisions of the Stock Plan.
  • To determine the amount of option awards, the Compensation Committee considers the fact that stock options constitute a considerable portion of the compensation package that we use to attract and retain qualified executives, as well as the employee’s ability to influence our future performance.
  • The Compensation Committee also takes into account the number of outstanding and unvested options held as well as the size of previous awards made to both the intended executive or employee and their peers. The number of stock options granted is designed to give rise to a total annual remuneration, including this long term incentive component, which placed the relevant officers and employees within the range between the mid-point and upper quartile of the comparator group.
  • We awarded options to purchase a total of 952,500 Common Shares during 2008. By their nature, stock options only have value to those receiving them if the value of our Company grows. The market price for our Common Shares has been, and is likely to continue to be, volatile. [6K p.9]
  • In early 2008, we conducted a detailed benchmark analysis of executive remuneration with the assistance of data provided by a number of compensation consulting groups, including the Hay Group, against compensation paid by companies, primarily within the same industry and of similar size. Recognising our stage of development. we have endeavoured to keep base salaries and annual bonuses as near to the benchmarked market mid-point as possible in order to conserve our cash while ensuring that we are able to attract and retain competent professionals for critical senior roles with stock option grants. In order to align management’s interest with our Shareholders, we have placed significant emphasis on options-based compensation that promotes equity ownership by our management. [6K p.8]

There are also limits set for any single officer:

  • The maximum aggregate number of shares attributable to incentive awards that may be granted or may vest in any calendar year pursuant to any incentive award for a named executive officer is 300,000 and the maximum cash payout in any calendar year which may be made to such officer is US$5 million. [6K p.6]

Although the share price is at $35 now, IOC’s shares have fluctuated quite heavily and the average price for the outstanding options is over $20 [Q1 p.31]. Strike prices might seem a tad generous now, but that’s with considerable hindsight. Bear in mind that there are still options outstanding that have been granted in 2004, and InterOil’s share price hasn’t always developed so well. Exploration is a risky business, so is taking options on a risky business. That risk has only recently been reduced substantially, with the world class find at Antelope1.

Is this all excessive? Different people will come to different conclusions as this basically is a normative issue, but if you use comparable companies as the norm, the answer is almost certainly NO.


  • 2008 total compensation per executive officer varied from $1.1-$2.5M
  • In 2008, the total number of options granted was 952,500, and certainly not all to executive officers (in 2007, only a little over half went to them)
  • The company chose a policy of low base salaries and a significant amount of long-term options for a compensation scheme, considering the risk of options, it’s difficult to state that this is excessive
  • The suggestion some have made that the 2M + the still outstanding 1.7M options are all for the executive directors and are all in a one year compensation package is manifestly wrong. The existing outstanding options go back to 2004 at least, and the numbers are also in line with other information about executive compensation and amounts of options issued. There is also no reason to think they will blow the 2M new option plan just in one year and/or exclusively for executive officers. It’s just a maximum number for the new option plan which results from the de-listing of the Toronto exchange.

Although we’re extremely conservative in matters of corporate governance (and have not hidden these views from these pages, to put it mildly), we see little merit in claims that corporate officers are excessively compensated. On the other hand, nobody has to feel sorry for them either..

One thought on “Is InterOil’s remuneration excessive?”

  1. This might be your single greatest post on IOC. I am not sure how many hours you invested to diagnose this situation, but I suspect it is considerable. Once again I am in your debt.

    *bows head in a sign of respect and thanx*

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