Remuneration

The following are excerpts from Oil Search’s 2006 Annual Report. For a comprehensive Remuneration report, please refer to the annual report.

Overview

Each employee has a current contract with Oil Search Limited (Oil Search) or with another Oil Search group company being Papuan Oil Search Limited, Oil Search (PNG) Limited or Oil Search (Middle Eastern) Limited.

Remuneration & Nominations Committee

The Remuneration and Nominations Committee (the “Committee”) provides advice and recommendations to the Board regarding the remuneration of executives and Directors. The Committee also provides advice and recommendations to the Board regarding the skills needed and available to the Board to discharge its duties and add value to the Group.

The Committee comprises Messrs Warren (Chairman), Constantinou, Stitt and Igara. The Committee’s full charter is available in the Corporate Governance section. 

Remuneration Philosophy

In order to fulfil the role of the Committee set out above, the members refer to the following principles when developing recommendations to the Board regarding remuneration:

• ensure that coherent remuneration policies and practices are observed which enable the attraction and retention of executives and Directors who will create value for shareholders;
• fairly and responsibly reward executives having regard to the performance of the Group, the performance of the executive and the general pay environment; and
• comply with all relevant legal and regulatory provisions.

Remuneration Structure

Oil Search’s remuneration structure for the Managing Director and senior executives is divided into three principal components:

• total fixed remuneration package;
• short-term incentive; and
• long-term incentive.

Total fixed remuneration (“TFR”) package

The TFR component of executive remuneration comprises base salary, superannuation contributions and other allowances. It is determined by the scope of each executive’s role, level of knowledge, skill and experience along with their individual performance.

Short-term and long-term incentives

As noted above, Oil Search executives are eligible to receive a short-term incentive and a long-term incentive.

Short-term incentive ("STI")

The STI is a cash bonus of up to a maximum 40% of an executive's TFR.

It is generally paid in March each year for performance in the previous calendar year. The amount awarded to each executive is determined by reference to the Company’s performance against Board-approved Key Performance Indicators (KPIs), as well as the performance of the individual executive.

Long-term incentive ("LTI")

In 2004, the Annual Meeting approved the introduction of new equity incentive arrangements for its senior executives and other employees. The arrangements are to meet two key objectives:

• to offer a market competitive LTI to the Company’s senior executives to assist with the recruitment, retention and motivation of key staff; and
• to encourage the broader employee population to acquire equity in the Company and thereby assist with building an “ownership” culture within the Company.

The Company retained Ernst & Young Australia to assist with the design and implementation of the proposed arrangements.

The arrangements comprise:

• a performance rights plan (“PR Plan”) for key executives and senior managers; and
• a share option plan for the broader employee population.

Two separate plans were implemented because this best meets the key objectives outlined above, in particular:

• it is relatively uncommon from a corporate governance perspective for companies to use a single plan to offer equity incentives to both senior staff and employees in general; and
• the terms of the awards to be offered to executives, which are partly based on individual performance criteria, are not appropriate for all employees.

Performance Rights Plan

Awards under the PR Plan are rights to acquire ordinary shares in the Company for nil consideration, conditional on predetermined performance hurdles being met within defined time restrictions.

The PR Plan rules allow participation by any executive, executive director or any other employee deemed to be eligible by the Board. The PR Plan is available to approximately the top 100 executives and senior managers.

Executives based outside Australia and Papua New Guinea may participate in the PR Plan, if selected by the Board, and the Board may adopt additional rules for the PR Plan to take into account overseas legal or tax considerations./p>

Awards under the plan are expressed as a number of PRs to acquire a certain number of ordinary shares in the Company (generally one share for each PR).

PR Plan participants are not required to pay any amount in respect of the PRs or on acquisition of the shares pursuant to the PRs.

The Board determines the size of the annual long-term incentive award to be granted to each participant through an assessment of market remuneration practice and in line with Oil Search’s executive remuneration strategy.

Awards under the PR Plan are made annually, normally following the Company’s Annual Meeting. However, the PR Plan rules allow the Board flexibility to make awards at different times of the year, as required (for example to a key senior executive who is determined by the Board to be eligible to participate in the PR Plan).

PRs vest three years after the date of grant to the extent performance criteria have been met.

The first awards under the PR Plan were granted following the 2004 Annual Meeting and will vest in June 2007. The performance period for this award was 1 January 2004 to 31 December 2006, and it has been independently verified that the performance criteria for this award have been fully met.

The PR Plan rules allow the Board flexibility to define different vesting periods for each award of PRs, as appropriate.

The performance criteria for the awards are based on the Company’s Total Shareholder Return ("TSR") over the three-year performance period, measured against the TSR performance of the first 150 bodies corporate comprised in the ASX 200 Index.

To determine the level of vesting of the initial awards, the Company’s TSR over the performance period will be ranked against the TSR of each of the first 150 bodies corporate comprised in the ASX 200 Index over the same three-year period.

If the Company’s TSR performance is:

1. below median, that is the 50th percentile, the number of PRs that vest will be zero;
2. at median, the number of PRs that vest will be 50% of the total number of PRs comprised in that award;
3. equal to or greater than the 75th percentile, the number of PRs that vest will be 100% of the total number of PRs comprised in that award;
4. greater than median and less than the 75th percentile, the number of PRs that vest will increase on a straight line basis from 50% to 100% of the total number of PRs comprised in that award.

The PR Plan rules allow the Board flexibility to determine appropriate performance criteria for each annual award.

The Board retains discretion to allow vesting of all PRs and to waive any restrictions on a change of control or demerger of the Company.

PRs that do not vest following assessment of the performance condition lapse immediately.

If a participant dies or ceases employment because of retirement, redundancy, resignation, termination of his or her employment or other circumstances as determined by the Board, the participant will be entitled to exercise vested PRs within 90 days after employment ceases, or such longer period as the Board may determine (except in the case of a participant’s death where personal representatives of the participant may exercise the PRs up to 12 months from the date of death).

If a participant dies or ceases employment, all unvested PRs lapse unless the Board determines otherwise.

Any PRs that remain unexercised lapse on the fifth anniversary of the date of grant.

The PR Plan is administered by the Board or a committee to whom the Board has delegated responsibility for administering the PR Plan.

The PR Plan rules provide flexibility to allow the use of newly issued or existing shares (for example, through purchase on market) to satisfy awards under the PR Plan.

PRs do not attract dividends or voting rights.

The aggregate number of shares subject to outstanding rights or options (that is, rights or options that have not yet been exercised and that have not lapsed) that have been awarded under all of Oil Search’s equity incentive plans must not exceed 5% of issued share capital.

Remuneration of Directors of Oil Search (A$)

1. Figure includes a special bonus of A$250,000 awarded to Mr Botten in 2006 to reflect the strong performance of the Company in 2005.

Remuneration of Specified Executives of Oil Search (A$)

1. Figure includes a special bonus of A$250,000 awarded to Mr Botten in 2006 to reflect the strong performance of the Company in 2005.