American Electric Power Company (AEP)

Overview

The HR Committee oversees AEP’s executive compensation program and determines the compensation for executives. In carrying out this responsibility, the HR Committee reviews and determines all compensation, significant benefit plan changes and perquisites for AEP’s executive officers. The HR Committee makes recommendations to the independent board members about the compensation of the Chief Executive Officer, and those independent board members determine the CEO’s compensation.

AEP’s executive compensation programs are designed to:

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Overall, AEP’s executive compensation program is intended to create a total compensation opportunity that, on average, is equal to the median of AEP’s peer group of other utility companies and industrial companies, as described below under “Compensation Peer Group.” The HR Committee’s independent compensation consultant, Towers Perrin, participates in HR Committee meetings, assists the HR Committee to develop the compensation program and meets with the HR Committee in executive session without management present during most meetings. See the Human Resources Committee Report on page 41 for additional information about the independence of Towers Perrin’s advice to the HR Committee.

In light of extremely difficult economic conditions the HR Committee, with management’s agreement, made several recent changes to our executive compensation program. These steps were to:

Specifically, the HR Committee tied target funding for the 2009 annual incentive compensation program for nearly all AEP’s employees, including the executive officers, to AEP’s ongoing EPS performance relative to the upper quartile of our 2009 earnings guidance as of December 2008, which was EPS of $3.30 per share, rather than to the midpoint of our EPS guidance range of $3.20 per share.

The HR Committee selected the upper quartile of the earning guidance range as the target, rather than the midpoint to require year over year improvement for target award funding. Despite deteriorating economic conditions that have led the Company to issue earnings guidance with a midpoint that was slightly lower than the prior year’s results, the Committee also believed that a modest increase in the EPS target over the prior year struck an appropriate balance between employee and shareholder interests during these extremely difficult economic conditions.

Our 2008 earnings target was approximately 8.5% or $0.25 per share higher than our 2007 earnings target, and our 2009 earnings target is approximately 3.1% or $0.10 per share higher than our 2008 earnings target. Despite the reduced growth of the EPS target, the HR Committee believes AEP’s 2009 EPS objective will be more difficult to achieve than the 2008 target due to very difficult economic conditions.

Overview

The HR Committee administers AEP’s executive compensation program. In carrying out this responsibility, the HR Committee reviews and determines all compensation, significant benefit plan changes and perquisites for AEP’s executive officers. The HR Committee makes recommendations to the independent board members regarding the compensation of the Chief Executive Officer, and those independent board members approve the CEO’s compensation.

AEP’s executive compensation programs are designed to:

Overall, AEP’s executive compensation program is intended to create a total compensation opportunity that, on average, is equal to the median of AEP’s peer group, which is made up of other utility companies and industrial companies as described below under “Compensation Peer Group.” The HR Committee’s independent compensation consultant, Towers Perrin, participates in HR Committee meetings, assists the HR Committee in developing the compensation program and meets with the HR Committee in executive session during most meetings without management present. See the Human Resources Committee Report on page 33 for additional information regarding the independence of Towers Perrin’s advice to the HR Committee.

Overview

The HR Committee administers AEP’s executive officer compensation program. The HR Committee reviews and determines all compensation and significant benefit and perquisite changes for AEP’s executive officers. The HR Committee makes recommendations to the independent board members regarding the compensation of the Chief Executive Officer, and those independent board members approve the CEO’s compensation. That compensation includes:

The overall compensation philosophy of the HR Committee and of AEP’s management is that total compensation should be tied to individual performance, should be closely linked to AEP’s performance in achieving financial and non-financial objectives, and that any long-term incentive compensation should be closely aligned with shareholders’ interests. AEP’s executive compensation programs are therefore designed to:

Overall, AEP’s executive compensation program is intended to create a total compensation opportunity that, on average, is equal to the median of AEP’s peer group, which is made up of other utility companies and industrial companies as described below under “Compensation Peer Group.” The HR Committee’s independent compensation consultant, Towers Perrin, participates in HR Committee meetings, assists the HR Committee in developing the compensation program and meets with the HR Committee in executive session during most meetings without management present. See Corporate Governance - Human Resources Committee on page 11 for additional information regarding the independence of Towers Perrin’s advice to the HR Committee.