Nabor Industries Memo

EXECUTIVE COMPENSATION AT NABORS INDUSTRIES: TOO MUCH, TOO LITTLE,

OR JUST RIGHT?

PROBLEM

Eugene Isenberg, the CEO of Nabors Industries from 1987 to 2011, was included in the list of

the executives who received the most profits from stock options between 1992 and 2005,

published in an article by the Wall Street Journal in December, 2006. He was listed 8th at $685

million. The spotlight on Mr. Isenberg from that article as well as the perennial controversy over

executive pay led to the question and the problem in this memo: Was the CEO compensation at

Nabors Industries appropriate?

CONCLUSION

The CEO compensation at Nabors Industries was appropriate

SUPPORT

Based on facts from the case, the CEO compensation was appropriate for the following reasons:

i. Isenberg was credited with much of the success of the company which had been operating in

bankruptcy before he joined in 1987. From a regional player, Nabors grew into one of the

world’s largest contract oil and gas drillers, with yearly revenue of $3.6 billion. Also, its stock

has risen at a “lush” 21.7% compound annual rate since early 1987.

ii. Most of Isenberg’s compensation came from stock options he accepted in place of cash

bonuses earned under his employment contract.

iii. The terms of Isenberg’s contract was designed to provide him with the incentives to turn

around the company. His annual cash bonus was set to be payable only in excess of a hurdle rate.

The CEO also took a direct ownership stake in the company in addition to the options granted

him. These incentives motivated him to succeed in turning around the company.

iv. Isenberg masterminded the restructuring of the company’s balance sheet, which was carried

out by swapping existing debt for equity thereby relieving the company of its interest payment

obligations. The new-found strength of Nabors balance sheet put the company at a strategic

advantage and enabled it to buy out several competitors at depressed prices thereby...