Saturday, April 2, 2011
Transocean Executive Compensation Bonuses for "Best Safety Year in 2010" in spite of the Deep Water Horizon Explosion
Posted by Find Insurance Online at 9:56 PMTransocean, the world’s largest off-shore oil rig company, owned the Deep Water Horizon rig that exploded in the Gulf of Mexico in April of 2010. Astonishingly, the company awarded its managers healthy bonuses. Even more astonishing, safety was a major component. Even without intending to, the compensation sets up managers in a conflict of interest—their compensation motivating them to keep up the good work rather than to correct for what went wrong in the management of the Horizon rig. In other words, the bonuses give all the wrong incentives, and there has been no principled leadership to point in the other direction.
The Wall Street Journal reports that the company’s management reckons 2010 as its “best year in safety performance” in spite of the accident. In a filing on executive pay, the management of Transocean reported, "Notwithstanding the tragic loss of life in the Gulf of Mexico, we achieved an exemplary statistical safety record." Based on the total rate of incidents and their severity, "we recorded the best year in safety performance in our company's history." That must be quite a history if almost trashing the Gulf of Mexico is considered a good year.
According to the journal, “Transocean uses two safety criteria to calculate executive bonuses: the rate of incidents per 200,000 hours that employees work, and the potential severity of those incidents. In 2010, the rate of incidents dropped by 4% from 2009.” Even so, the potential severity of the exploded rig in the Gulf must have been off the charts. This tiny caveat laid aside, the journal reports that “Transocean's executives received two-thirds of their target safety bonus. Safety accounts for 25% of the equation that determines the yearly cash bonuses, along with financial factors including new rig contracts.” Flush with most of their bonuses, the executives could afford to be sympathetic with the families of the eleven people, nine of whom had worked for Transocean, who died in the explosion.
According to the journal, a spokesman for Transocean said, "The statements of fact in the proxy speak for themselves, but they do not and can not adequately convey the extent to which everyone at Transocean is keeping the families of the men who lost their lives at Macondo in their thoughts and prayers as we approach the first anniversary of the incident." Lest the public be taken in by this PR, it is important to observe that normative sentiments like sympathy do not compute in a business calculus, whereas bonuses do. To the managers themselves, we can be sure that the bonuses did not go unnoticed.
On an individual level, which do you suppose is closer to the manager at Transocean: his bonus or the families of the victims? Which could be expected to motivate him more? The bonuses act, in effect, at odds with the motivation society would naturally expect in the wake of such a major disaster. Rather than giving managers a reminder that perhaps they should not have been so subject to the BP managers who had sought to cut corners, the bonuses say, “keep up the good work!” In other words, it enables the displacement of responsibility that was on display when executives from Transocean, BP, and Halliburton testified before Congress after the explosion. Each of the managers blamed those at the other companies. According to the journal, “Transocean has largely blamed BP, saying that as the operator, BP had final responsibility for all decisions on the rig. BP, in turn, has said its contractors, including Transocean, made critical errors.” Such a childish mentality is unworthy of adults running big companies, especially if the latter are capable of destroying a major portion of the planet. With much power comes great responsibility (rather than childishness).
Lest merely owning the rig absolves Transocean managers from their role and responsibilities, we might want to look at the message that the bonuses send to the managers. That message confirms the “blame the other guy” mentality and says, in effect, “you need not spend much time and energy on correcting for anything that went wrong on our part at the Horizon because it was a good year.” In other words, “you must have been doing something right.”
The idiosyncratic manager who has a hunch that the corporate culture or the company’s safety procedures are fundamentally flawed would have to ignore the message in his bonus, which, by the way, undoubtedly becomes the default “cultural understanding” in the corporate culture of the company. To act on his hunch, the manager would have to be quite principled. Not a stranger to principled people, his action would involve running up against a resistant culture whose groupthink and childish “blame the other guy” proclivity had just been reinforced financially. In other words, we should not expect much self-criticism and correction from inside Transocean.
Accordingly, we should resist the temptation that comes with higher gas prices to have our government’s regulators look the other way in keeping after deep water rigs. People who advocate deregulation even in the wake of the rig explosion in the Gulf of Mexico, which came less than two years after the “too big to fail” financial crisis of 2008 (big bonuses ensued there too), might do well to consider the signals that Transocean’s board gave its managers following the company’s best year on safety performance. That is one show the rest of us should skip, or at least leave after the first act. In fact, rather than relying on companies or industries to police themselves, we might want to reckon them as actors keeping to a certain carefully crafted script.
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