The Company’s KPI system is aimed at segmenting the Company’s Development Strategy and its Long-Term Development Program into specific KPIs and cascading them to all management levels of the Company, evaluating progress against the target, and creating incentives for efficient management decision-making.
The Company’s KPI System ensures:
- focus on implementing the Company’s Strategy and meeting the targets set in the Company’s Long-Term Development Program;
- focus on consistently improving the Company’s financial and operating (industry-specific) results;
- compliance with directives and instructions of federal executive authorities, including annual cost-cutting targets;
- well-balanced integrated indicators motivating employees to achieve the Company’s primary goals;
- transparency, measurability, minimum levels, and consistency of KPIs;
- top-down approach to cascading and breaking down KPIs.
The Company’s KPIs include: financial and economic, such as operating profit before depreciation and amortization (EBITDA), return on average capital employed (ROACE), total shareholder return (TSR), financial leverage (Net Debt / EBITDA), cost reduction, and industry-specific KPIs (hydrocarbon production rate, reserve replacement, light product yield, an integrated KPI for innovations, etc.).
The Company’s KPI System includes:
- сorporate KPIs which are identified based on key financial, economic, and industry-specific indicators of the Company’s consolidated business plan and business plans of its businesses;
- individual KPIs, which are identified based on strategic goals set individually for each manager of the Company.
KPI lists and targets for Rosneft’s senior managers are established by its Board of Directors following a preliminary discussion by relevant Committees of the Board of Directors on an annual basis.
2018 KPIs for Rosneft’s senior managers were based on the business plan approved in December 2017 and were established by the Board of Directors on 20 March 2018, Minutes No. 14.
The 2018 list of corporate KPIs and individual KPIs of Rosneft’s Chief Executive Officer includes:
- return on average capital employed (ROACE);
- hydrocarbon production rate;
- injury rate;
- workforce productivity;
- ratio of Rosneft’s total shareholder return (TSR) equal to or exceeding the Russian industry average;
- cost reduction in the reporting period year-on-year, on a comparable basis;
- financial leverage (Net Debt / EBITDA);
- integrated KPI for innovations;
- compliance rate for instructions issued by the Board of Directors and the Management Board.
To calculate annual bonus payments for managers and employees, the Company analyzes progress against KPIs following the annual performance analysis based on management accounts and audited public financial statements.
The Company’s Internal Audit Service conducts an annual audit of corporate and individual KPIs set for the purposes of calculating annual bonus payments due to the management of the Company and Group Subsidiaries. KPI progress audit results for top managers are discussed by the HR and Remuneration Committee of the Board of Directors.
Top manager progress is discussed by the HR and Remuneration Committee of the Board of Directors. Annual bonus payments to management and their size for the reporting period depend on top managers’ progress against the target KPIs and are approved by Rosneft’s Board of Directors.
Target KPIs are normalized to reflect the drivers beyond management’s control, such as FX rates and global market prices, in accordance with the Company’s Regulations on the Procedure for KPI Normalization as Related to Review and Assessment of the Company’s Management Performance in the Reporting Period for the Purposes of Annual Bonus Payments (approved by the Rosneft’s Board of Directors on 6 April 2015, Minutes No. 27) and the Company’s Guidelines for KPI Normalization as Related to Business Plan Performance Analysis (approved by Order No. 218 of Rosneft dated 18 May 2015).
|Metric||2018 year actual||KPI Progress in 2018||2017 year actual|
|ROACE (%)||17.4||Above target||11.5Updated considering refined final faire value of the assets acquired in 2017.|
|Financial leverage (Net Debt / EBITDA) In RUB terms. In USD terms the financial leverage in 2018 amounted to 1.2.||1.4||Above target||2.1|
|Injury rate within the Company (LTIF and FAR), %||95.8||Above target||N/A|
|Ratio of Rosneft’s total shareholder return (TSR) equal to or exceeding the Russian industry average, %The calculation of a 2018 indicator includes data for four previousyears.||27.1||Not below the Russian industry average||9.3|
|Integrated KPI for innovations, %Based on the Company’s management reports.||100||On target||100|