Thursday, April 7, 2011

Incredible

“...notwithstanding the tragic loss of life in the Gulf of Mexico, we [Transocean] achieved an exemplary statistical safety record as measured by our total recordable incident rate (‘‘TRIR’’) and total potential severity rate (‘‘TPSR’’).  As measured by these standards, we recorded the best year in safety performance in our Company’s history, which is a reflection on our commitment to achieving an incident free environment, all the time, everywhere.”*

Good grief.  Did Transocean really say this?  Eleven people including nine Transocean employees died in the Deepwater Horizon oil rig explosion.  The quote is from Transocean’s 2010 Annual Report and Proxy recently filed with the SEC.  It provides another illuminating example where the structure and award of management incentives speak much greater volumes than corporate safety rubrics.  (For our report on compensation structures within nuclear power companies and the extent to which such compensation included incentives other than safety, look here and here.)  Or as the saying goes, “Follow the money”.

To fully comprehend how Transocean’s incentive program purports to encourage safety performance we are providing the following additional quotes from its Annual Report.

“Safety Performance.  Our business involves numerous operating hazards and we remain committed to protecting our employees, our property and the environment. Our ultimate goal is expressed in our Safety Vision of ‘‘an incident-free workplace—all the time, everywhere…..

"The [Compensation] Committee measures our safety performance through a combination of our total recordable incident rate (‘‘TRIR’’) and total potential severity rate (‘‘TPSR’’).

•    "TRIR is an industry standard measure of safety performance that is used to measure the frequency of a company’s recordable incidents and comprised 50% of the overall safety metric. TRIR is measured in number of recordable incidents per 200,000 employee hours worked.

•    "TPSR is a proprietary safety measure that we use to monitor the total potential severity of incidents and comprised 50% of the overall safety metric. Each incident is reviewed and assigned a number based on the impact that such incident could have had on our employees and contractors, and the total is then combined to determine the TPSR.

"The occurrence of a fatality may override the safety performance measure.

"….Based on the foregoing safety performance measures, the actual TRIR was 0.74 and the TPSR was 35.4 for 2010. These outcomes together resulted in a calculated payout percentage of 115% for the safety performance measure for 2010. However, due to the fatalities that occurred in 2010, the Committee exercised its discretionary authority to modify the TRIR payout component to zero, which resulted in a modified payout percentage of 67.4% for the safety performance measure." (p. 45)
The treatment of bonuses for Transocean execs was picked up in various media outlets and met with, shall we say, skepticism.  Transocean responded to the blowback with the following:

“We acknowledge that some of the wording in our 2010 proxy statement may have been insensitive in light of the incident that claimed the lives of eleven exceptional men last year and we deeply regret any pain that it may have caused...” **

Note that the apology is directed at the “wording” of the proxy, not to the actual award of bonus compensation for safety performance.  We are tempted here to make some reference to “density” but it is self-evident.

Perhaps realizing that something more would be appropriate, Transocean announced yesterday that members of the senior management team would be donating their bonuses to the Deepwater Horizon Memorial Fund.*** 

Oops, actually they will be donating just the “safety portion” of their bonuses to the fund.  All other bonus amounts and incentive awards are not affected and the Transocean incentive structure for safety performance remains unchanged for 2011.



***  Announcement by Transocean Ltd. Senior Management Team, Zug, Switzerland (Apr 5, 2011 MARKETWIRE via COMTEX).

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