In “How Oil Bosses Make Their Own Luck,” Bloomberg Opinion columnist Liam Denning reports that oil executive compensation continues to skyrocket in a disparate relation to oil prices. Instead of pay reflecting fluctuations in price, oil executives appear to be insulated from the negative consequences of price shocks. As such, Denning poses a perplexing question: are oil executives just lucky?
Relying on the work of Ford Professor Catherine Hausman and UC Berkeley’s Lucas Davis, luck is actually a non-factor. Culminating nearly 25 years of data, Hausman and Davis conducted “a statistical analysis of compensation for 934 executives at 80 large exploration and production companies.” The study finds that oil executives benefit greatly from non-salary components such as stocks and options which consisted of “more than 70% of the compensation for the average executive in 2016.”
Cognizant of this shielding effect, oil executives continue to take more and more risks in search of higher profits and personal compensation rather than, “cutting costs and debt or boosting return on capital.” Impervious to price drops, oil executives may then act without accountability to shareholders. In the end, “luck really has nothing to do with it.”
Catherine Hausman is an assistant professor at the Ford School as well as a faculty research fellow at the National Bureau of Economic Research.