Upon successful implementation of the incentive system among the top managers and the heads of independent structural divisions, in 2011 the bonus payment principles based on KPI performance were applied to the heads of Administration of Rosneft and of the Group companies.
IN 2009 THE COMPANY DEVELOPED AND IMPLEMENTED AN INCENTIVE SYSTEM FOR ROSNEFT TOP MANAGERS BASED ON MEETING KPI TARGETS.
The principles and the procedure for the annual bonus payment are similar for all the categories of employees in the Company Administration and the Group companies. They are stated in the Provisions on Annual Bonus Payment (approved by the Board of Directors on December 28, 2011, Minutes No. 9) and the Company Provision on KPI System (approved by the Board of Directors on December 09, 2014, Minutes No. 12).
The key objective of the Company KPI system implementation shall be transforming the Company Strategy and Long-Term Development Program into the format of specific indicators for day-to-day management, assessing their current performance and developing principles of efficient management solutions.
The Company KPI system provides for:
- focus on the Company Strategy and Long-Term Development Program execution;
- focus on continuous improvement of financial and operating (industry-wide) results of the Company;
- costs reduction in the reporting period as compared to the previous one;
- well-balanced and complex indicators motivating to achieve the priority objectives of the Company;
- transparency, measurability, minimal sufficiency and consistency of performance indicators;
- top-down cascading and decomposition of KPIs.
The Company KPI system includes both financial and economic indicators, such as operating profit before depreciation (EBITDA), return on average capital employed (ROACE), total shareholder return (TSR), financial leverage (Net Debt/EBITDA), cost reduction indicators, and industry-wide indicators (hydrocarbons production performance, reserves replacement, light oil product output etc.).
The Company KPI system includes:
- General performance indicators. The list of indicators is generally developed according to the key financial, economic and industry-wide indicators of the Company and its divisions;
- Individual KPI of the Company management. The list is developed according to the strategic objectives individually for each Company manager.
Target KPI of the Company top management are approved by the Rosneft Board of Directors upon preliminary discussion at the relevant committees meetings. KPI for the Company top managers for 2015 were approved by the Board of Directors on April 03, 2015, Minutes No. 27.
The list of the general KPI of the Company and individual KPI of the Rosneft President for 2015 include the indicators as follows:
- Hydrocarbons production and output;
- Financial leverage (Net Debt / EBITDA);
- Rosneft TSR to average industry level of Russian companies TSR ratio;
- Cost reduction in the reporting period compared to the previous period in comparable conditions;
- Innovative development program execution.
Assessment of meeting KPIs
KPI meeting analysis for the annual bonus payment to the Company managers and employees is made upon summarizing the Company activities according to the audited consolidated financial and accounting statements.
The Company Internal Audit Service performs annual audit of each general and individual performance indicator, set for annual bonus payment to the Company and the Group companies’ management in the reporting period. The audit results of KPI performance by the top managers are submitted to the relevant Committees.
Assessment of the top managers’ activities is reviewed by the HR and Remuneration Committee of the Board of Directors. The Rosneft Board of Directors approves the annual bonus payment to the top managers and its amount for the reporting period, depending on meeting the set KPIs.
Actual KPI levels are being normalized for:
- environmental factors;
- resolutions of the authorized bodies of the Company influencing KPI performance;
- changes in accounting and KPI calculation techniques, including changes in IFRS and other reporting standards;
- other factors stated by the Rosneft authorized management body (according to the Rosneft Charter), including assets sales/purchase and business operations restructuring of the Head Office and business units.
Normalization during assessing KPI process provides for:
- assessment of contribution of the Company management with account of specific achievements of the top managers, having KPI, thus stimulating growth of efficiency irrespective of any external conditions;
- improvement of the quality of business planning due to constant improvement of the results of operations managed by the heads of the Company;
- improvement of transparency and auditability of KPI assessment.
KPI normalization shall be performed in accordance with the Company Guidelines No. PZ-10 M-0004 for KPI Normalization when Analyzing the Company Business Plan Performance, approved by the Order No. 218 of May 18, 2015 and the Regulation on the Procedure for KPI Normalization when Analyzing and Assessing Operations of the Company Management for the Reporting Period for Annual Bonus Payment, approved by the Rosneft Board of Directors and enacted by the Order No. 214 of May18, 2015.
Upon results of 2014–2015 the majority of KPIs were met with account for normalization. The key KPI values, published in IFRS statements are given below. Reasons for the actual KPI values variance from the target ones are given in Appendix 1.
|2015||2014||Variance||Target KPI achievenent in 2015|
|1. Hydrocarbons production, mmtoe||254.2||251.6||+1.0 %||Target exceeded|
|2. EBITDA, RUB bln||1 245||1 057||+ 17,8 %||Target exceeded|
|3. ROACE, %||13.4||10.0||+ 3,4 pp||Target exceeded|
|4. Net Debt / EBITDA||1.4||2.3||– 39.1 %||Target exceeded|
|5. TSR to average industry level ratio||1.29||Not assessed||>1||Target exceeded|
|SEC proven, hydrocarbon reserves, mm boe*||34 465||33 977||1,4 %||33 014|
|PRMS proven hydrocarbon reserves, mm boe*||42 917||43 085||– 0,4 %||41 771|
|SEC proven marketable gas reserves** (bcm)||1 609||1 414||+ 14 %||1 329|
|PRMS proven marketable gas reserves** (bcm)||2 161||2 018||+ 7 %||1 867|
|PRMS proven reserves life (years)||23||24||24|
|Oil and gas condensate production, mmt)||202,8||204,9||–1 %||189,2|
|Gas production (bcm)||62,5||56,7||+ 10 %||38,2|
|Oil export, mmt||109,1||102,4||+ 7 %||97,3|
|Oil refining, mmt||96,9||99,8||– 3 %||90,1|
|Oil refining and petrochemicals, mmt||95,4||97,1||– 2 %||87,1|
|Oil product exports***, mmt||65,8||62,7||+ 5 %||55,1|
|Oil product retail sales, mmt||10,9||11,2||– 3 %||10,2|
* including fuel gas.
** marketable gas: fuel gas + sales gas.
*** Consolidated Company data as from January 01, 2013, including petrochemical products and bunker fuel.
|Sales revenues and income generated by affiliate companies (RUB bln)||5 150||5 503||– 6,4 %||4 694|
|EBITDA (RUB bln)||1 245||1 057||17,8 %||947|
|EBITDA Margin||24,2 %||19,2 %||+ 5 pp||20,2 %|
|Taxes (RUB bln)||2.3||3.0||– 23.3 %||2.7*|
|Net income (RUB bln)||356||350||1,7 %||388**|
|Net income margin||6.9 %||6.4 %||+ 0,5 pp||11.8 %|
|Return on average capital employed (ROACE)||13.4 %||10.0 %||+ 3,4 pp||11.9 %|
|Return on average equity (ROAE)||12.2 %||11.5 %||+ 0,7 pp||20.0 %|
|CAPEX (RUB bln)||595||533||11.6 %||560|
|Unit Upstream CAPEX ($ / boe)***||4.3||5.3||– 18.9 %||7.0|
|Unit Production OPEX ($ / boe)***||2.6||3.9||– 33.3 %||4.3|
|Free cash flow (RUB bln)||657||596||10.2 %||204|
|Free cash flow per share (RUB)||61.99||56.24||10.2 %||19.80|
|Dividend per share (RUB)||11.75****||8.21||43.1 %||12.85|
|Total dividend accrued (RUB bln)||124.5****||87.0||43.1 %||136.2|
* Consolidated Company data as from January 01, 2013.
** Net of the effect from acquired TNK-BP assets revaluation of RUB 167 bln.
*** Calculated using Central Bank of Russia monthly exchange rate.
**** Amount of dividend recommended by the Board of Directors for approval at the Company General Shareholders Meeting on June 2016.