Chesapeake Energy (CHK)

Elements of Compensation

We have historically favored a simple, easy to understand and easy to administer compensation program that we utilize throughout the Company rather than a more complex structure with different programs for different employee groups. We provide short-term compensation in the form of base salaries and cash bonuses and our restricted stock program provides long-term incentives to our employees. Additionally, our more highly-compensated employees, including our executive officers, are eligible for compensation deferral and company matching opportunities beyond IRS limitations through a nonqualified deferred compensation program and certain perquisites.

We believe that as an individual’s business responsibilities increase, the proportion of his or her variable, long-term compensation as a percentage of total compensation should increase. Therefore, depending upon an executive officer’s level of responsibility, his or her annual base salary is typically only 10%-20% of the officer’s total salary, bonus and equity compensation. Additionally, Mr. McClendon’s compensation, as our Chairman and CEO, but also as the Company’s founder, is more heavily weighted towards long-term equity compensation, which generally represents approximately 70%-80% of his annual total compensation, to better align his compensation with his responsibility for the long-term strategies, growth and profitability of the Company. The Compensation Committee does not utilize pre-determined guidelines for allocating between cash and equity and short-term and long-term compensation.

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.

The Compensation Committee reviews the following elements of executive officer compensation on a semi-annual basis, as described on page 18 under “Compensation Committee”, and approves adjustments as it deems appropriate. Our CEO, COO, CFO and Senior Vice President—Human and Corporate Resources provide the Compensation Committee with detailed analyses and recommendations regarding each element of executive officer compensation to facilitate the Compensation Committee’s reviews.

Base Salary. The base salary levels of our executive officers are intended to reflect each officer’s level of responsibility, leadership ability and the contribution of the officer’s department or functional unit to the success and profitability of the Company. 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 peer group salary levels for our executive officers’ salaries.

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Cash Bonuses. Cash bonuses are awarded to the executive officers based on a subjective evaluation of the performance of the Company and the individual during the six-month review period. 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. Additionally, individual performance by an executive officer in a review period that is expected to provide substantial benefit to the Company in future periods is also considered in semi-annual cash bonus decisions.

Cash bonuses are discretionary and not awarded pursuant to a formal plan or an agreement with any executive officer. Additionally, cash bonuses are not awarded based on objective Company or individual performance criteria or targets.

Restricted Stock. Consistent with our compensation objectives, we believe stock-based compensation provides strong incentives for long-term financial performance that increases shareholder value while retaining executive officers. Specifically, in conjunction with the Compensation Committee’s semi-annual review of cash compensation, on the first business day of each January and July, we award restricted stock that vests over a period of four years to employees, including executive officers. After June 2003, we chose to award restricted stock, rather than stock options, for the following reasons:

Because the semi-annual award of restricted stock to our employees is primarily intended to provide incentives for future financial performance and not rewards for prior performance, the Compensation Committee does not consider current holdings of Company securities, the amount and terms of stock options or restricted stock previously granted to the executive officer or gains realized by the executive officer from prior awards of restricted stock or stock options when granting restricted stock to executive officers.

Other Compensation Arrangements. We also provide compensation in the form of personal benefits and perquisites to our executive officers. Most of the benefits we provide to our executive officers are the same benefits that we provide to all employees or large groups of senior-level employees, including health and welfare insurance benefits, 401(k) matching contributions, nonqualified deferred compensation arrangements and financial planning services (see footnotes and narrative to the Summary Compensation Table). We do not have a pension plan or any other retirement plan other than our 401(k) and nonqualified deferred compensation plans.

The perquisites that we provide exclusively to our chief executive officer, executive vice presidents and senior vice presidents include reimbursement of monthly country club dues and personal use of fractionally-owned company aircraft (see narrative to the Summary Compensation Table). Feedback from our executive officers indicates that access to fractionally-owned company aircraft for personal use greatly enhances productivity and work-life balance which we believe may impact their willingness to work to or beyond normal retirement age. Additionally, we provide accounting support services to our chief executive officer and chief financial officer, a portion of which is reimbursed to the Company by the chief executive officer. The Compensation Committee regularly reviews the terms under which these perquisites are provided and their value

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in relation to the executive’s total compensation package; however, as these benefits and perquisites represent generally less than 15% of the executive officers’ total compensation, they do not materially influence the Compensation Committee’s decisions in setting such officers’ total compensation. Further, the Company includes the above benefits and perquisites as taxable income to the executive on Form W-2 after each fiscal year, in accordance with Internal Revenue Service (IRS) guidelines.

Our qualified 401(k) profit sharing plan is the Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan, which is open to employees of the Company and all our subsidiaries except certain employees of Chesapeake Appalachia, L.L.C. Eligible employees may elect to defer compensation through voluntary contributions to their 401(k) plan accounts, subject to plan limits and those set by the IRS. The Company matches employee contribution dollar for dollar with shares of our common stock purchased in the open market for up to 15% of an employee’s annual base salary and bonus compensation.