Chesapeake Energy (CHK)

Components of Our Compensation System:

Base Salary. The executive officers’ base salaries are reviewed and set semi-annually for each individual. The actual amount of each executive’s base salary reflects and is adjusted on a subjective basis for such factors as leadership, commitment, attitude, motivational effect, level of responsibility, prior performance of the Company and the individual’s contribution to that performance. Although we review the salary levels of executive officers of peer companies to determine whether our executive officers’ salaries are reasonable in comparison, we do not specifically target a percentile or range within the peer group compensation levels when establishing our executive officers’ salaries.

Cash Bonuses. We believe that cash bonuses should be paid to the executive officers based on a subjective evaluation of the performance of the Company and the individual. The Company’s financial and operating performance measurements are based on reserves, production, net income, cash flow, successful drilling results, finding and operating costs, general and administrative costs, asset acquisitions and divestitures, risk management activities and common stock price performance. Individual performance factors include leadership, commitment, attitude, motivational effect, level of responsibility, prior experience and extraordinary contributions to the Company. Cash bonuses awarded in 2005 were consistent with the Company’s strong financial and operational results and management’s successful execution of the Company’s acquisition and drilling programs and risk management strategies while continuing to build on the Company’s high-quality asset base and maintaining a low cost operating structure.

Stock-Based Compensation. Consistent with our compensation philosophy, we believe stock-based compensation provides strong incentives for long-term financial performance that increases shareholder value

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while rewarding and retaining executive officers. Specifically, we award restricted stock that vests over a period of four years to employees, including executive officers, on a semi-annual basis. We have elected to award restricted stock, rather than stock options, for the following reasons:

When granting restricted stock to executive officers, the Committee does not consider current holdings of Company securities or the amount and terms of stock options or restricted stock previously granted to the executive officer.

Policy on Deductibility of Compensation. Section 162(m) of the Internal Revenue Code limits the tax deduction to $1 million for compensation paid by a publicly held company to its chief executive officer and each of the Company’s four other most highly compensated executive officers, unless certain requirements are met. In structuring executive compensation, the Committee considers the anticipated tax treatment of various arrangements and payments; however, we may choose to award compensation which is not deductible under Section 162(m) if we believe it is consistent with this compensation philosophy and would be in the best interest of the Company and its shareholders. Compensation recognized by the executive officers upon the vesting of restricted stock, as currently structured, is not deductible pursuant to Section 162(m).

Employment Agreements. We maintain employment agreements with our executive officers, the material terms of which are described under “Employment Agreements”. We review the terms of the agreements at least annually, generally focusing on the permitted activities allowed for our executive officers, the competitiveness and adequacy of the severance arrangements and the competitiveness and value of the perquisites and other personal benefits provided to such officers.

On February 10, 2006, effective with his resignation, the Fourth Amended and Restated Employment Agreement dated July 1, 2005 between Tom L. Ward and Chesapeake Energy Corporation terminated. The agreement provided for Mr. Ward’s full-time employment as Chesapeake’s President and Chief Operating Officer of the Company. In accordance with the terms of the agreement, upon Mr. Ward’s resignation, neither the Company nor Mr. Ward has any further obligations thereunder including, without limitation, any obligation of the Company to provide any further payments or benefits to Mr. Ward after the effective date of such resignation, except support staff and aircraft usage extended during the consulting period, as provided in the resignation agreement. Please refer to page 32 of this proxy statement for a full discussion of the terms of Mr. Ward’s resignation agreement under “Employment Agreements, Termination of Employment and Change of Control Arrangements.”

Compensation of the Chief Executive Officer. The compensation of our chief executive officer, who is the principal executive officer of the Company, is determined in the same manner as the compensation for other executive officers of the Company. The CEO’s current employment agreement, entered into effective July 1, 2005, provides for a minimum annual base salary of $950,000 which represents an 8.0% increase over his year-end 2004 salary of $880,000. In addition, his 2005 cash bonuses represented an increase of 18% over 2004 levels. The cash bonuses and restricted stock granted to our CEO were based on the subjective evaluation of the Company’s growth and profitability and the contributions of our CEO to that growth. We determined that the

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increase in overall compensation for the CEO during 2005 was appropriate given the Company’s strong performance in 2005, including the achievement of the following:

In addition to leading the Company to outstanding financial and operational achievements in 2005, our CEO has established a strong record in the areas of employee commitment and retention, community support, governmental relations, environmental stewardship and technology use and innovation.

Internal Pay Equity. In performing our semi-annual review of executive compensation, we review a spreadsheet showing “internal pay equity” within the Company. This spreadsheet shows the relationship between the base salary, cash bonus and equity compensation of our upper management levels (i.e., the CEO, named executive officers, executive vice presidents, senior vice presidents, vice presidents and our senior managers) for the prior three years. We believe that the relationship between CEO compensation and the compensation of our executives is reasonable and in line with their respective job duties and responsibilities. We additionally take into consideration the fact that our CEO is the co-founder of our Company which we believe further differentiates him from the other executives and from the CEOs of our peers.

Conclusion. Based on our review of the Company’s compensation system and policies in 2005, we have determined that the total compensation packages of the CEO and other named executive officers, in the aggregate, are reasonable and not excessive. The changes to the CEO’s and named executive officers’ compensation have been disclosed in our current reports on Form 8-K filed with the SEC on June 13, 2005 and December 22, 2005 and the related employment agreements are reflected as exhibits to our Form 10-K for the year ended December 31, 2005. In addition, we believe that the executive compensation arrangements are reflective of the exceptional growth and performance that the Company generated in 2005 and the contributions of the executive officers to those results.

Members of the Compensation Committee: