Damage doesn’t dim CEO pay

It was the worst oil spill Marathon Petroleum had seen in years. A crack in a 60-year-old underground pipeline released 1,400 barrels of diesel fuel into an Indiana creek, staining the banks of the waterway and threatening a population of endangered freshwater mussels.

The incident barely registered, however, in the performance reviews of Marathon’s top executives, who earn part of their annual bonus by meeting environmental goals. Because these reviews account for the company’s number of significant oil spills in a year — not the total volume of oil — the Indiana spill counted as just one of 23 incidents in 2018.

The way Marathon evaluated its executives, 2018 was the company’s best environmental performance in at least eight years. The board of directors awarded chief executive Gary Heminger $272,251 for “excellence in environmental, personal safety and process safety improvement.”

Many of the largest fossil fuel companies reward top executives for meeting environmental goals, a compensation tactic they adopted over the past two decades as a response to regulators and investors concerned with pollution and worker safety.

But the way some of these incentive programs are designed allows companies to award executives their full bonuses even in years when the firms cause major environmental damage or total emissions go up, according to a review of pay disclosures from six of the largest U.S. oil and gas companies and interviews with experts in compensation and environmental data.

Four of the companies — Chevron, Valero, Phillips 66 and Occidental Petroleum — have never missed their environmental targets in all the years they have publicly disclosed such goals, filings show. And yet, researchers who study environmental data for MSCI, an investment analytics firm, said three of the companies — Valero, Phillips 66 and Occidental — still lag behind the industry average for reducing toxic emissions, carbon emissions or both.

Marathon, which only missed its environmental targets once in the past decade, was rated average for toxic emissions and carbon emissions among oil and gas refining companies reviewed by MSCI.

“When you meet the metrics every year, that suggests that the metrics haven’t been sufficiently challenging,” said Rosanna Landis Weaver, executive pay program manager for As You Sow, a nonprofit group backed by foundation grants and individual donors that advocates for corporate social responsibility.

In some cases, experts say, companies are using metrics that don’t provide a full picture. Marathon’s focus on the number of environmental incidents across all of its operations means “very poor performance at one or two sites” — such as a large oil spill — “can be diluted by outperformance at other facilities,” Trillium Asset Management, an investor in Marathon that pressures companies to improve their social, governance and environmental practices, said in a letter to the company’s shareholders last year.

In emailed responses to questions, Marathon spokesman Jamal Kheiry said the company uses incentives to “measure the effectiveness of our environmental management system, and drive continuous improvement in environmental stewardship.”

Another oil giant, Occidental Petroleum, has given bonuses to executives for investing in carbon-capture projects even as the company’s total carbon emissions have gone up, filings and company emissions data show.

Occidental spokesman Eric Moses said the company has pledged to eliminate carbon emissions by 2050 and would soon begin evaluating executives on progress toward that goal. The carbon capture projects will “help both Occidental and businesses in other industry sectors to achieve shared net-zero goals.”

Lillian Riojas, a spokeswoman for Valero, said the company has “been able to meet our environmental targets because we have made very significant progress over the last decade” in areas including safety and toxic air emissions.

Chevron spokesman Sean Comey said the company’s board has updated its annual bonus program three times in the past three years to add incentives for reducing methane flaring, greenhouse gas emissions and investments in carbon offsetting.

Bernardo Fallas, a spokesman for Phillips 66, declined to comment.

Critics say climate goals are usually such a small portion of bonus plans that they have little influence over executive behavior. When Shell made emission reduction goals 10 percent of its executive bonus last year, some environmentally minded investors opposed the plan, arguing that over 50 percent of the annual bonus was still based on growing the company’s production of gas.

The pay package “encourages executives to chase higher levels of fossil fuel output,” said Simon Rawson, a director at ShareAction, a United Kingdom-based nonprofit that works to promote better corporate behavior and receives the majority of its funding through charitable grants.

This year, Shell said it would make emission reductions a greater portion of annual bonus incentives and remove natural gas production goals completely. Anna Arata, a Shell spokeswoman, said the pay packages of 16,500 employees partially depend on meeting companywide short-term emission goals.

The failure of some pay programs to promote better corporate behavior highlights a lack of oversight by corporate boards of directors, who approve executive pay at publicly traded companies and are tasked with managing long-term risks such as climate change, Rawson said. Even as many boards acknowledge this mandate — creating climate committees and designating sustainability chairs — they’ve failed to hold executives accountable for real action on environmental issues, he said.

The energy industry’s experience is a cautionary tale for the broader business world. Dozens of large companies, including Coca-Cola, Walmart, Ford Motor Co. and Procter & Gamble, have tied executive pay plans to environmental targets as they face pressure from investors to mitigate climate change, said Mindy Lubber, chief executive of climate advocacy group Ceres.

“CEOs do what they are paid to do,” said Lubber, whose Climate Action 100+ initiative pushes large companies to set carbon emission goals and have at least one senior executive’s pay tied to the company’s progress toward those emission goals.

But as evidence from oil and gas companies shows, executives can score highly on environmental goals even when their companies have mixed track records on the environment.

During Heminger’s tenure as Marathon CEO, from 2011 to 2020, climate advocates criticized the company for being slow to adopt a carbon reduction plan and for its role in orchestrating a Washington lobbying campaign aimed at loosening restrictions on vehicle pollution. Marathon says it was advocating for a review of the “feasibility” of current vehicle pollution standards and never took a position on whether changes to those standards were needed.

Pollution at Marathon refineries led to Clean Air Act violations and congressional scrutiny over toxic air emissions at a Detroit refinery, where local residents have complained for years about the facility’s release of toxic chemicals which they believe contribute to a high rate of respiratory illness in their community.

In Marathon’s annual pay disclosures, Heminger is credited with meeting or surpassing environmental targets during nine of his 10 years as CEO. He earned a total of $1.9 million for meeting these goals, including added payouts for exceeding expectations in five of those years, a Post analysis of energy company bonuses shows.

Heminger, who retired last year, declined to comment.

Marathon’s bonus system was questioned last year by Trillium Asset Management, which saw a disconnect between the way executives were rewarded and the way company facilities had harmed communities in places like Detroit. The investor asked Marathon to publish a report exploring how it could better incorporate community concerns into its bonus system.

In a proxy filing, Marathon’s board opposed the measure, saying unlike its current, quantifiable metrics, community concerns “would be difficult to measure and audit.” The board said it had the power “to reduce or completely eliminate awards” if it finds “our performance in any area, including our impact on the communities where we live and operate, has been unsatisfactory.”

Trillium has since sold its shares in Marathon, said Jonas Kron, Trillium’s chief advocacy officer.

Under its bonus system, Marathon classifies all spills, air emissions, permit violations and regulatory actions into four tiers, based on their severity, and only counts the most severe incidents in the annual bonus plan. Oil spills, for example, are only counted if they release 10 or more barrels into water or 100 or more barrels onto land.

By this measure, the company has been fairly consistent: Every year from 2013 to 2019, the company experienced one or two pipeline oil spills of over 100 barrels, according to data from the Pipeline and Hazardous Materials Safety Administration.

But these numbers fail to account for the larger impact of spills like the one at Indiana’s Big Creek — at the time, Marathon’s largest pipeline spill by volume in seven years. Marathon sent around 80 responders to clean up the site, according to Kevin Turner, an on-scene coordinator with the Environmental Protection Agency, and agreed to fund an effort to propagate the mussel population.

Kheiry, the Marathon spokesman, said the company continually updates its technology and procedures to prevent oil spills and that this spill represented an “unanticipated risk” because it was caused by bank collapse, which usually doesn’t happen on flat terrain. The company recovered most of the spilled oil and cleaned up the banks of the creek. He said one bird died as a result of the spill and “there is no evidence that mussels were impacted.” He added that Marathon does try to account for the severity of incidents by using its tier system; the Indiana oil spill counted in the highest tier.

Because Marathon has grown its operations, it’s hard to assess whether the company has reduced its overall environmental harm. In four different years, Marathon counted a higher number of environmental incidents than the year before, but Heminger got his full environmental bonus anyway, because the board set higher limits for the number of incidents those years.

Marathon’s Kheiry said the company has grown significantly over the past decade, including with its acquisition of oil refining rival Andeavor, in 2018. Because it has more pipelines, refineries, gas processing plants and other facilities, the company is exposed to more environmental risk, and therefore its board sometimes raises the limits, Kheiry said.

“We believe our record of reducing incidents at newly acquired assets and maintaining superior performance at our existing assets shows that the [compensation] program has been a success,” Kheiry said.

Marathon says its environmental metrics are checked by its internal auditing group but are not reviewed by any independent third party.

Some of the people who live near Marathon’s Detroit refinery say air pollution remains an ongoing problem in their community. Vicki Dobbins, who lives blocks away from the refinery, says her neighborhood still smells like “old garbage” due to gas emissions.

“You can sometimes ride through here and the air is so strong you have to hold your breath,” Dobbins said.

After a release of toxic air emissions at the refinery in 2019, dozens of residents called local health officials to complain of a noxious gas affecting their breathing, according to the Michigan Department of Environment, Great Lakes, and Energy, which cited the company for causing a nuisance. Rep. Rashida Tlaib (D-Mich.) convened a field hearing in Detroit and the House Committee on Oversight and Reform asked the EPA to investigate the problem of chemical leaks at the refinery.

Earlier this year, Marathon settled with Michigan over 10 different environmental violations covering several incidents from the past four years, agreeing to take new precautions including a community air quality website visible to the public. Tim Carroll, an EPA spokesman, said the agency conducted an inspection of the refinery in July of this year and “will share more information about it when it becomes publicly available.”

Marathon, citing data from Michigan’s state pollution database, said air emissions at the Detroit facility have declined 80 percent over the past 20 years, and said the vast majority of air pollutants in that area of the city are now generated by other neighboring industrial facilities, such as steel and automobile plants and a sewage treatment center.

The company says it’s working with residents of southwest Detroit. As part of its settlement, Marathon agreed to install a new air filtration system at a public pre-k-8 school less than a mile from the refinery. Marathon says it also set aside $5 million this year to buy the homes of some residents who want out.

The threat of climate change has forced many companies to rethink their pay practices. Investors are pushing energy giants to go beyond pollution goals and incorporate carbon emission targets into CEO pay, claiming that may be the best way to motivate executives to take the drastic actions necessary to meet long-term carbon reduction goals.

The challenge, says U.K. researcher Dario Kenner, is that oil executives are already hardwired to grow profits and revenue from fossil fuels, which often means generating more carbon emissions. Kenner, who researches wealth and climate change, co-authored a study this year that found executives of BP, Chevron, ExxonMobil and Shell all have strong personal incentives to delay significant carbon reducing measures.

While Marathon, Occidental, Chevron and Valero all began linking executive bonuses to carbon emission goals within the past two years, these companies all still incentivize executives to grow financial or production metrics, such as earnings, cash flow or total oil production, filings show.

“If you have big chunky metrics that are linked to production and growth, that is going to drive executive behavior,” says ShareAction’s Rawson, who helped lead the opposition to Shell’s pay programs last year.

For the past three years, Houston-based energy giant Occidental has rewarded CEO Vicki Hollub a total of over $600,000 for meeting the company’s environmental, safety and sustainability goals, the Post analysis of bonuses shows. These goals encouraged Hollub to make investments in carbon capture technologies, which the company described as “an important feature of Occidental’s strategy to reduce its greenhouse gas emissions while growing its business.”

But scientists say capturing carbon is energy-intensive and not yet contributing to a meaningful reduction in carbon emissions. Rather than decreasing its emissions, Occidental’s total carbon emissions from its direct operations grew by 30 percent from 2017 to 2019, according to company data.

The company’s efforts in carbon capture “have not yet translated into quantitative evidence in terms of overall improvement in the company’s performance for carbon emissions,” said Antonios Panagiotopoulos, a vice president at MSCI.

Moses, the Occidental spokesman, says its emissions numbers reflect an increase due to its 2019 acquisition of Anadarko Petroleum.

Steven Mufson contributed to this report.

More from The Washington Post:

• How the Cares Act gave millions to energy companies with no strings attached.
• Can the market save the planet? FedEx is the latest brand-name firm to say it’s trying.
• New EPA administrator: ‘Science is back.’
• Carbon capture, a climate change solution, slowly gains ground.