Chesapeake Energy (CHK)

Compensation Discussion and Analysis

Our Compensation Discussion and Analysis (“CD&A”) discusses the compensation program for our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and the other three most highly compensated executive officers (together with the CEO and CFO, the “Named Executive Officers” or “NEOs”):

In this CD&A, references to the executive officers include the NEOs and the Company’s other executive officers. All of the Company’s employees (other than employees subject to a collective bargaining agreement, who represent less than 2% of the Company’s total employees, and certain drilling subsidiary employees) are eligible to participate in the main components of our compensation program—base salary, cash bonuses, restricted stock awards and 401(k) plan matching contributions.

The goal for our compensation system is to encourage both short-term and long-term performance that is aligned with shareholders’ interests. When we set compensation, our objective is to attract, retain and motivate employees with the competence, knowledge and experience to promote the growth and profitability of the Company.

The Compensation Committee generally reviews executive officer compensation on a semi-annual basis, as described on page 23 under “Compensation Committee”, and approves adjustments as it deems appropriate. Our CEO, CFO, COO, Senior Vice President—Human and Corporate Resources and Corporate Secretary provide the Compensation Committee with detailed analyses and recommendations regarding each element of executive officer compensation, including tally sheets and summaries of wealth accumulation from equity compensation (as discussed later in this CD&A), to facilitate the Compensation Committee’s reviews.

The Company has not utilized any specific tools or contracted for services to benchmark its total compensation, or any material element of compensation, to peer companies or other benchmarks. However, the Company does review and consider the executive compensation programs of its peers at least annually to ensure the Company’s compensation programs remain competitive.

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Compensation Discussion and Analysis

Our Compensation Discussion and Analysis (“CD&A”) discusses the compensation program for our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and the other four most highly compensated executive officers (the “Named Executive Officers” or “NEOs”):

We have historically favored a simple and easy to understand compensation program that we utilize throughout the Company rather than a more complex structure with different programs for different employee groups. We apply the same compensation philosophy and objectives to all of our employees and we utilize the same compensation programs for our NEOs that we utilize for our other executive officers, with the exception of certain perks made available to Mr. McClendon described later in this CD&A. In this CD&A, references to the executive officers include the NEOs and the Company’s other executive officers. All of the Company’s employees (other than employees subject to a collective bargaining agreement, who represent less than 0.02% of the Company’s total employees, and our drilling subsidiary employees) are eligible to participate in the main components of our compensation program—base salary, cash bonuses, restricted stock awards and 401(k) plan matching contributions.

The goal for our compensation system is to encourage both short-term and long-term performance that is aligned with shareholders’ interests. When we set compensation, our objective is to attract, retain and motivate employees with the competence, knowledge and experience to promote the growth and profitability of the Company.

The Compensation Committee reviews executive officer compensation on a semi-annual basis, as described on page 20 under “Compensation Committee”, and approves adjustments as it deems appropriate. Our CEO, CFO, COO, Senior Vice President—Human and Corporate Resources and Corporate Secretary provide the Compensation Committee with detailed analyses and recommendations regarding each element of executive officer compensation, including tally sheets and summaries of wealth accumulation from equity compensation (as discussed later in this CD&A), to facilitate the Compensation Committee’s reviews.

The Company has not utilized any specific tools or contracted for services to benchmark its total compensation, or any material element of compensation, to peer companies or other benchmarks. However, the Company does review and consider the executive compensation programs of its peers at least annually to ensure the Company’s compensation programs remain competitive.

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Compensation Discussion and Analysis

The goal for our executive compensation system is to encourage both short-term and long-term performance aligned with shareholders’ interests. In establishing executive compensation, our objective is to attract, retain and motivate executive officers and key employees with the competence, knowledge and experience to promote the growth and profitability of the Company.

Our executive compensation system is designed to take into consideration and reward the following:

As the chief executive officer and a founder of the Company, Mr. McClendon has been instrumental in shaping the vision for the Company and transforming it into a leader in U.S. natural gas production. Accordingly, his compensation is predominantly awarded in the form of long-term equity incentives. As a significant shareholder, Mr. McClendon has a major portion of his personal wealth tied directly to sustained stock price appreciation and performance, providing direct alignment with shareholder interests.

The company provides Mr. McClendon with certain perquisites specifically designed to provide him with the flexibility to focus on the myriad of critical and complex issues that currently face the U.S. natural gas industry while remaining involved in the oversight of the day-to-day management of the Company.

Because of Mr. McClendon’s unique role as a founder of the Company, he is the only executive with the opportunity to participate as a working interest owner in the oil and natural gas wells that the Company drills. The Founder Well Participation Program (“FWPP”), which was approved by our shareholders on June 10, 2005 (see Transactions with Related Persons on page 46) is a continuation of the well participation program previously administered through Mr. McClendon’s employment agreement and initiated by the Company in connection with its initial public offering in February 1993. The FWPP fosters and promotes the development and execution of the Company’s business by: (a) retaining and motivating our chief executive officer who founded the Company; (b) aligning the financial rewards and risks of Mr. McClendon with the Company more effectively and directly than other performance incentive programs maintained by many of the Company’s peers; and (c) imposing on Mr. McClendon the same risks incurred by the Company in its exploration and production operations. The Compensation Committee reviews Mr. McClendon’s participation in the FWPP on a semi-annual basis and annually adjusts the acreage costs charged to Mr. McClendon to ensure he reimburses the Company for such costs.

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The Company currently considers the positions of chief operating officer and chief financial officer to be equivalent in terms of the level of responsibility and the significance of contribution to the Company. However, because Mr. Rowland chose to forgo an award of restricted stock under our 2006 Long Term Incentive Program, the Compensation Committee rewarded him with additional permitted personal usage of our fractionally-owned company aircraft. Specifically, Mr. Rowland’s performance is measured in terms of his execution of the Company’s hedging program, the quality of the Company’s financial reporting, access to capital markets, balance sheet management, stock price performance and the performance of the accounting, treasury and information technology departments. Mr. Dixon’s performance is measured in terms of the Company’s production rates, finding and operating costs, drilling results, reserve replacement, and leasehold acquisition efforts.

The Company also considers our executive vice president—exploration and executive vice president—acquisitions and divestitures positions to be of equivalent responsibility and significance to the Company. Mr. Lester’s performance is measured in terms of the Company’s drilling results and reserve replacement. Mr. Jacobson’s performance is measured in terms of his team’s identification, negotiation, execution and integration of attractive acquisition targets.