Share incentive arrangements
Performance Share Plan (PSP)
Under the PSP, senior executives are eligible to be granted conditional awards of rights over whole shares worth up to 200% of salary each year (300% in exceptional circumstances, such as to facilitate the recruitment of a new Executive Director). Currently, it is the policy to grant the Executive Directors 200% of salary each year, although the Committee may elect to vary the allocation taking into account the circumstances which prevail at the time (but always subject to the plan maximum).
Awards vest under the PSP subject to a TSR-based performance condition under which the Company’s TSR performance is measured over a fixed three-year period commencing on 1 January in the financial year in which the award is granted (i.e. with no opportunity to re-test).
For the awards made in 2008, half are subject to performance against the constituents of the FTSE 100 Index as at the start of the performance period (of which Tullow is a member) and the other half are subject to performance against the following comparator group of international Oil & Gas companies:
| Addax Petroleum | Niko Resources |
| Anadarko | Noble Energy Inc. |
| Apache Corporation | Pioneer Natural Resources |
| Cairn Energy | Premier Oil |
| Dana Petroleum | Santos |
| Forest Oil Corporation | SOCO International |
| Lundin Petroleum AB | Talisman Energy Inc. |
| Nexen Inc. | Venture Production |
In line with best practice, a ‘common currency’ approach is adopted for calculating TSR in respect of the above international group of companies.
For each portion of the award, vesting is as follows:
| Company’s ranking in comparator group |
Vesting percentage |
|---|---|
| Below median | 0% |
| Median | 30% |
| Upper quintile (top 20%) | 100% |
| Intermediate performance | Pro rata between 30% and 100% |
In addition, no award will vest unless the Committee considers that both the Group’s underlying financial performance and its performance against other key factors (e.g. health and safety) over the relevant period is satisfactory.
The Committee continues to believe that a TSR performance condition is appropriate as it encourages the Executive Directors to generate returns to shareholders in excess of both the market generally and a group of sector peers, and is a robust reflection of management’s success in achieving the strategic targets required to ensure the Group’s continued growth. The performance condition applying to the forthcoming 2009 awards will remain unchanged.
Read the performance conditions applying to outstanding awards made prior to 2008.
Share Ownership Guidelines
From 2008, to further align their interests with shareholders, the Executive Directors are required to retain at least 50% of the shares that vest under the PSP and DSBP (after selling sufficient shares to pay tax liabilities) until they have built up a shareholding worth at least 200% of base salary (with existing holdings taken into account). This has been increased from the 2007 level of 100% to reflect the increased rewards which will now be available in shares if performance targets are met.
Share Option Scheme
Before the introduction of the PSP in 2005, Executive Directors were eligible for grants of options under the 2000 Executive Share Option Scheme (the ‘2000 Scheme’). The Committee does not intend to grant further options to Executive Directors under the 2000 Scheme. During the year, options were granted to substantially all employees of the Group under the 2000 Scheme, other than those senior executives who were granted awards under the PSP.
All-employee Share Incentive Plans
Executive Directors may also participate, on the same terms as other employees, in the Tullow Oil UK and Irish Share Incentive Plans. These are all-employee plans that have been set up in both the UK and Ireland which enable employees to make contributions out of salary up to prescribed limits each month, which each quarter are used by the Plan trustees to acquire Tullow Oil shares (Partnership shares). The Group makes a matching contribution to the trustees to acquire a matching number of shares (Matching shares) on a one-for-one basis.
Sourcing of shares and dilution
Awards under all the Group share schemes may be satisfied using either newly issued shares or shares purchased in the market and held in the Tullow Oil Employee Trust. Awards under the Group’s discretionary schemes which may be satisfied by new issue shares must not exceed 5% of the Company’s issued share capital in any rolling 10-year period, and the total of all awards satisfied via new issue shares under all plans must not exceed 10% of the Company’s issued share capital in any rolling 10-year period.
The Group’s current intention is to satisfy awards under the 2000 Scheme via new issue shares, and awards under the PSP, DSBP and all-employee Share Incentive Plans via market purchase shares.
As at 31 December 2008, the headroom under the Company’s 5% and 10% limits was 3.7 million and 40.3 million shares respectively, out of an issued share capital of 732.9 million shares.
As at 31 December 2008, the Tullow Oil Employee Trust held 1.72 million shares.
