Texas Pacific Land Corp

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Unlike most mineral royalty focused organizations, TPL also owns and manages a large amount of surface rights;

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These surface rights allow the creation of additional business lines, such as our water business and Surface Leases, Easements and Material (referred to as “SLEM”);

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TPL’s legacy assets carry zero basis on the balance sheet; and

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TPL’s financial profile is unusual with no debt, limited book assets, and high margins. TPL also returns a significant portion of its cash flow to stockholders through dividends and share repurchases.

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As a result of these unique characteristics, TPL does not have any direct peers. Instead of reviewing peer group market data, the Compensation Committee asked Meridian to review compensation for a group of comparable reference companies (the “Reference Group”). The Reference Group (listed below) represents companies which operate in ancillary businesses such as royalty mineral and non-operating companies, midstream companies, and E&P companies that have business lines similar to TPL and are similar in market capitalization, enterprise value, and/or Adjusted EBITDA.

Market data from this Reference Group, plus additional broad survey data from general industry and the E&P industry, was used by the Compensation Committee as a reference to help determine the 2023 compensation program design and individual pay levels as well as in determining the 2023 compensation, which is described below. During 2023, in preparation for decisions regarding 2024 compensation, the Compensation Committee refreshed the listing of companies in the Reference Group to account for mergers/acquisitions occurring during 2023. The following companies were removed from the Reference Group for 2024: DCP Midstream, LP, Crestwood Equity Partners LP, and Magellan Midstream Partners (Midstream Companies) and PDC Energy, Inc. (E&P Company). The following companies were added to the Reference Group for 2024: Northern Oil and Gas, Inc. (Non-Operating Company) and DT Midstream, Inc. (Midstream Company).

2023 Compensation Program

TPL’s 2023 executive compensation program design is intended to reward performance in achieving TPL’s goal of creating stockholder value, as detailed below.

Base Salaries

Our Named Executive Officers receive a base salary to provide a competitive level of fixed compensation based on each individual’s position, experience, and qualifications, internal pay-equity considerations and individual performance. The base salaries as of the end of 2023 for our Named Executive Officers were as follows:

The base salary for Mr. Glover was unchanged from 2022. The Compensation Committee increased the base salaries for Mr. Steddum and Mr. Dobbs for 2023 to better align with market data from the Reference Group.

2023 Annual Incentive Targets

Each of the Named Executive Officers is eligible to earn an annual cash bonus, based on the target bonus, which is expressed as a percentage of base salary and established based on references to market data as described above. The target bonuses as a percentage of base salary for our Named Executive Officers for 2023 were as follows:

Target bonuses as a percentage of base salary were unchanged from 2022.

The Compensation Committee has established a structured annual incentive program, with goals tied to key metrics for the company, pursuant to which the bonuses discussed above are awarded. For 2023, the metrics included two financial metrics (Adjusted EBITDA margin and free cash flow (“FCF”) per fully diluted share), as well as several strategic objectives, as outlined below.

2023 Annual (Short-Term) Incentive Program Summary

Goals for each of the 2023 metrics were established in early 2023, based on expectations for the year. The Threshold, Target, and Maximum level of performance for each financial metric are outlined below. At Threshold, Target, and Maximum performance levels, 50%, 100%, and 200% of the target bonus would be earned, respectively, for each metric.

TPL’s performance against the pre-established financial goals can be heavily influenced by the impact of changes in commodity prices. To mitigate this impact, the Compensation Committee implemented a commodity adjustment calculation, which uses a collar on commodity prices. Within the collar range, no adjustment is made for commodity prices. If TPL’s total commodity price realization falls below or rises above the collar range, a floor or cap on prices is applied. This approach provides our management team with some exposure to commodity price fluctuations, in line with our stockholders, but limits the exposure. In 2023, the collar for TPL’s total commodity price realization ranged from $37.65 per Boe to $54.56 per Boe. Actual realizations of $42.58 per Boe were within the range of the collar for 2023, thus no adjustment to price per Boe was necessary for determining Adjusted EBITDA margin and FCF per fully diluted share.

Based on final financial results, TPL exceeded the Target level on both of the financial metrics, earning 169% of target on the Adjusted EBITDA margin metric and 150% of target on the FCF per fully diluted share metric.

The Compensation Committee also established strategic objectives for the year which were intended to encourage our management team to take action to improve TPL’s long-term opportunities for success, but which did not directly impact financial results in 2023. These objectives are outlined below.

Given the challenging nature of the strategic objectives and the 2023 actual results, the Compensation Committee scored the strategic objectives at 125% of target.

Based on the achievement of all three metrics, bonuses were earned at 151.1% of target for each of the Named Executive Officers, as outlined below:

As part of its ongoing evaluation of the annual incentive program and after considering feedback from stockholders, the Compensation Committee determined to reduce the weight of Adjusted EBITDA margin in the calculation of the annual cash bonuses our executive officers are eligible to receive for 2024. As a result, the weighting of the metrics used for purposes of the 2024 annual incentive plan was adjusted as follows:

2023 Long-Term Incentive Program

As part of the program redesign in 2022, the Compensation Committee implemented a long-term incentive program for key employees of TPL, including Named Executive Officers. The goals of the long-term incentive program include:

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Align executives’ financial interests with stockholders.

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Tie executive compensation with long-term performance.

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Create a retention incentive through a substantial forfeitable balance with long-term vesting.

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Provide a competitive compensation program aligned with typical company practices.

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To meet the objectives of the program, the Compensation Committee established a long-term incentive program for the Named Executive Officers that uses a combination of PSUs and RSUs. Each of the primary vehicles is summarized in the table below and described in more detail later in this section.

Performance Share Units (PSUs)

PSUs made up 50% of our Named Executive Officers’ long-term incentive compensation for 2023. The Compensation Committee believes that PSUs create alignment between our executive officers and our long-term performance as measured by RTSR against a broad energy industry index (50% of PSUs) and the generation of free cash flow per fully diluted share over a three-year period (50% of PSUs). These awards vest, if at all, at the end of a three-year performance period.

The PSUs tied to RTSR (the “RTSR PSUs”) are intended to measure the performance of TPL’s stock against a broad set of energy industry companies included in the XOP index. Measuring RTSR against this group helps mitigate the impact of commodity price swings on the other measurements of our performance. While TPL does not have any direct peers, the broad XOP index comprises many of our customers and other companies that are similarly impacted by fluctuations in commodity prices.

The RTSR PSUs can be earned between 0% and 200% of the target number of shares based on our RTSR percentile ranking against the constituents of the XOP index as follows:

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Payouts are interpolated between the points in the table.

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RTSR is measured using an average closing price at the beginning and end of the performance period. In the case of the 2023 awards, the average closing price over the month of January 2026 will be compared against the average closing price over the month of January 2023, assuming reinvestment of dividends from February 1, 2023 to January 31, 2026.

The remaining 50% of PSUs (the “FCF PSUs”) measure our cumulative FCF per diluted share against our initial targets over a three-year period. If the Company is able to outperform and generate greater FCF, it will help enable an increase in returns to stockholders through dividends and share repurchases. By measuring FCF on a per share basis, it requires our management team to ensure any dilution to our stockholders results in sufficiently greater FCF on an absolute basis.