Contentment, a 17th century Englishman wrote, sometimes means taking away a bit of fire, rather than pouring on more fuel.

U.S. and Canadian E&Ps appear to be handing their senior executives matchbooks. Despite an oversupply of oil and gas that has tanked commodity prices and slammed shareholder value, executive compensation continues to be tied to production growth and building up reserves.

Preserving capital and value and reducing debt have traditionally been cropped out of the picture, but the incentive for executives has become an acute concern in the downturn.

On average, production and reserves metrics accounted for about 25% of executives’ target bonuses in 2015 and as much as one-third in some cases, according to a July 21 report by Moody’s Investors Service. The report says executive pay is “still focused primarily on playing offense, not defense.”

“This system of compensation is negative for credit investors, given our pessimistic industry outlook and suggests that many E&P companies are finding it difficult to shed their high-growth strategies,” said Chris Plath, Moody’s vice president and the report’s lead author.

Volumetric production growth and reserves replacement—or production and reserves (P&R)—are the most common metrics in annual incentive/bonus plans, Plath said.

Finding, extracting and selling oil and natural gas and replacing reserves is critical for E&P companies’ revenues, profits and growth. Oil and gas comes from ever-depleting assets that necessitate finding new resources.

But with the waning demand for oil and gas, incentives to overshoot production and growth targets don’t align well with prudent spending.

While six companies reduced weightings for P&R-based compensation in 2015, collectively they accounted for only a 5% drop from 2014, Moody’s said.

The relatively large decrease in P&R weightings for Continental Resources (NYSE: CLR) and Pioneer Natural Resources (NYSE: PXD) accounted for the bulk of the change.

Others made little or no change to their P&R-linked metrics. Encana Corp. (NYSE: ECA) increased its weighting for production. P&R bonuses were linked to nearly half of Anadarko Petroleum Corp.’s (NYSE: APC) senior executives’ bonuses and 40% at Chesapeake Energy (NYSE: CHK).

No spend zone

Expense control metrics did gain some traction in 2015.

E&Ps are aiming to tie executive awards more closely to factors that are more directly under the company’s control during periods of extreme volatility. Boards also have discretion over the ultimate payout of annual executive bonus plans and can adjusting payout levels for events either unforeseen or out of the company’s control.

Out of 15 companies studied by Moody’s, expense control moved to the second-highest category in 2015, with seven companies increasing their weightings for these factors. Reining in costs, spending and G&A expenses represented about 20% of executives’ incentives in 2015, up from an average of 14% in 2014.

However, just four of the 15 companies in Moody’s sample included debt-reduction goals as part of their broader financial or balance-sheet performance goals. Pioneer includes a ratio of net debt-to-EBITDAX to account for 15% of its executives’ target bonus allocation.

E&P executives’ compensation is also linked to equity awards, which creates long-term incentives to up shareholder returns.

“The focus on shareholder returns also reflects the E&P companies’ high-growth mindset, and may motivate boards and managers to focus on growth over preserving value,” Moody’s said.

Among the 15 companies studied, 14 use performance award plans linked to relative total shareholder return (TSR), which accounted for a 100% weighing in the plans of 10 of companies, Plath said.

The story so far

The fall in E&P companies’ share price has eroded the value of outstanding equity awards in companies’ long-term incentive plans. With companies’ share prices so depressed, long-term incentive awards have lost much of their value, and both base salaries and annual cash bonuses now form a larger component of executives’ realized, or take-home, pay than in recent years.

“This strong and direct focus on share prices raises certain credit risks by rewarding aggressive share repurchases, maintenance of dividends and focusing too heavily on share price,” Plath said.

Changes to 2016 incentives are unclear, Moody’s said. None of the companies studied has disclosed changes to their bonus plans, and so far only two companies have disclosed changes to their long-term incentive plan

But Plath wrote that he expects no dramatic change to either short-term or long-term incentive plans.

“Companies generally tend not to make dramatic changes to their incentive plan targets and metrics,” Plath said. “Meanwhile, boards and managers are keen to increase shareholder value at a time of low share prices.”

Darren Barbee can be reached at dbarbee@hartenergy.com.