Drill Baby Drill, Still

Three months and 4.9 million barrels of oil later, the Deepwater Horizon oil spill had finally been resolved after devastating the Gulf of Mexico and causing what White House energy adviser Carol Browner called “the worst environmental disaster the U.S. has faced.” Yet early last week, Transocean Ltd., owner of the Deepwater Horizon oil rig, submitted a clumsily worded filing to the SEC calling 2010 its “best year in safety performance” as justification for awarding executive bonuses and raising base salaries as much as 22.2 percent.

The Deepwater Horizon oil rig, which was drilling a deepwater well on BP’s Macondo Prospect in the Gulf of Mexico for BP PLC last April, suffered a deadly explosion that killed 11 workers. According to The Wall Street Journal, the Deepwater Horizon oil spill, or Macondo blowout, led to the “largest offshore oil spill in history.” However, the recent Transocean payout of bonuses sharply contrasts with that of 2009, when the company withheld all executive bonuses “to underscore the company’s commitment to safety” following four deaths earlier in the year.

Transocean maintains that since it was leasing the rig to BP, the fault lies with them, due to their obligations to safety and maintenance as the rig operator. Indeed, the White House oil spill commission released a report explicitly citing BP for nine faults and Transocean with none. However, the same report states, “Whether purposeful or not, many of the decisions that BP, Halliburton and Transocean made that increased the risk of the Macondo blowout clearly saved those companies significant time (and money).” Regardless of which entity bears the greatest responsibility for the ecological tragedy and economic destruction afflicted on the region, all played roles on “the path to tragedy.” Transocean has made a public relations blunder by offering executive bonuses for 2010 while simultaneously claiming: “We achieved an exemplary statistical safety record as measured by our total recordable incident rate and total potential severity rate É  As measured by these standards, we recorded the best year in safety performance in our Company’s history.’” It emanates a sense of self-absolution, rather than the remorseful attitude that the company should be exhibiting.

Instead of solely attempting to reassign blame, it would have been in Transocean’s strategic interests to remain conscious of its public image and more mindful of how its proxy statement might have been received. Considering the extensive media scrutiny of the accident and the wide-ranging impact on local communities in addition to their local economies, bonus pay seems non-sequitur. While it may be true that executives earned their dues according to company algorithms used to determine 25 percent of their bonuses, offering the money as well as accepting it in light of such a well-publicized and severe tragedy, are simply distasteful actions.

To have a balanced perspective of the issue, we should have a better understanding of the offshore drilling industry. To be fair to Transocean, mishaps seem somewhat common and are even described as “systemic” in a report by Obama’s National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling. MSNBC reported in an article last April following the incident that “since 2001, there have been 69 offshore deaths, 1,349 injuries and 858 fires and explosions in the Gulf.”

It would be irrational and unfair to demand that executives forgo bonuses every year in an industry where at least one unfortunate mishap occurs every year. In a competitive labor market, bonuses are often used as a performance-based incentive to align the interests of employees with the collective goals of the firm’s management. Bonuses are also used to retain talent, as well as decrease employee turnover, or “churn.” Churn incurs search costs for new labor that will require training and suffer decreased productivity while the new workers adapt to an unfamiliar company culture. Performance-based special compensation makes sense in a market-based economy and is not the issue. But given the circumstances and the proximity of recent events to the awards, it seems imprudent. As such, there are a number of explanations for the furor over Transocean’s executive bonuses.

Commentators were more concerned about what they perceived as an unapologetic attitude expressed in the SEC filing than the superfluous bonuses being awarded in spite of a glaring catastrophe. In fact, the grounds cited as warranting the special compensation for Transocean executives is exactly what is at fault and caused the most distress.

In an attempt at public relations damage mitigation, Transocean released an apology for “insensitive” wording in the SEC filing and released an image-friendly story to appease detractors. Mr. Dionne Searcey reports in an April 6 article in The Wall Street Journal that “five senior executives will collectively donate more than $250,000, a little more than a quarter of their overall bonuses, to a fund for the victims.” The move is a good recovery after such a blatantly ill-advised maneuver and subsequent awkward moment in corporate image management.

Andrew Wong is a fourth-year business economics major. He can be reached at andrewcw@uci.edu.