This excerpt taken from the DVN DEF 14A filed Apr 27, 2007.
Annual Incentive Plan
During an annual goal-setting process, management sets, and the Board approves, objective annual targets for our performance as well as more subjective goals that focus on the manner in which the business is managed. Because the more subjective aspects of managing the business support the creation of long-term stockholder value, we believe they are just as important as achieving near-term objective performance measures. In 2006, our goals addressed production volumes; reserve replacement rates; finding and development (F&D) costs; operating expenses; general and administration (G&A) costs; property acquisitions; the pursuit of high impact projects; environmental, health and safety performance; relationships with regulators; efficiency in business processes; collaboration among our divisions and departments; our competitive position; and leadership development.
The Committee believes that executives cash bonuses should reflect their success in achieving corporate goals, as well as the ongoing enhancement of stockholder value, and, accordingly, considers performance with respect to corporate goals when making decisions related to cash bonuses and other compensation matters. However, the Committee does not assign a relative weight to each goal in evaluating performance. Likewise, it does not assign target award or maximum award levels to the participants in the plan. Instead, in determining the appropriate payout amounts, the Committee reviews our performance in light of the goals adopted by the Board; each executive officers individual performance during the year, including the executives part in meeting the specific financial and other key goals established for the Company and the executives function; market conditions; historical practices; incentive awards for others in the organization; and competitive market practices.
While our approach to annual incentives is not strictly formulaic, it is highly structured. The process for goal setting is followed rigorously and reviewed in detail with the Committee prior to the beginning of the year. At the end of the year, the Committee interviews the executives to rate performance against the approved goals. We have considered the relative merits of a non-formulaic approach to paying annual incentives, that is, one that combines objective measurement with subjective evaluation of performance, versus a purely formulaic approach. We have concluded that the present non-formulaic approach has been
successful, resulting in the creation of a highly-effective, focused management team, while providing the necessary flexibility to address changing market and industry conditions.
In making its decisions regarding cash bonuses for 2006, the Committee determined that we had substantially met our goals related to production volumes; reserves additions; F&D costs; operating expenses; G&A costs; and environmental, health and safety performance. The Committee concluded that any negative variances from established goals were minor and due to circumstances largely beyond managements control. In the Committees opinion, we performed extraordinarily well with respect to the goals related to property acquisitions and the pursuit of high impact projects. The Committee particularly noted the significant enhancement of our long-term growth potential through the successful production test of the Jack No. 2 well and the Kaskida discovery, both in the Lower Tertiary trend in the Gulf of Mexico; the significant augmentation of our position in the Barnett Shale field in north Texas through the acquisition of oil and gas properties from Chief Holdings LLC; and several other smaller acreage acquisitions in and around our core areas of operations. In the Committees opinion, these acquisitions, together with the successful pursuit of high impact projects like China block 42 05; an exploration joint venture with Bill Barrett Corporation in the Montana overthrust belt; and the potential expansion of Jackfish, our steam-assisted gravity drainage project in the Alberta oilsands, significantly increased stockholder value in terms of both immediate stock price appreciation and the addition of quality long-term assets.
With respect to the regulatory environment, the Committee determined that we managed favorable permitting turnaround times and conducted our operations in a manner so as to avoid any material operational delays related to regulatory action. In the business process area, it was the Committees opinion that we had made significant strides in improving the efficiency of business processes, increasing collaboration among divisions and departments, and increasing the use of industry benchmark analysis to improve performance measurement. The Committee did note that leadership development efforts had been delayed and that more progress was required in this area. The Committee also determined that each of our executive officers had contributed to our performance with respect to its 2006 goals in ways that were meaningful and appropriate for his or her function.
Available data indicates that Mr. Nichols annual cash bonus has averaged 81% of the 75th percentile of market bonuses over the three years prior to 2006, and our executive officers as a group have earned cash bonuses that averaged 93% of the 75th percentile of market bonuses over that same period. Bonuses paid to our executive officers as a group generally are consistent with our compensation philosophy of providing executives with the opportunity to earn bonuses at or near the 75th percentile of bonuses of comparable executives of the comparison companies. The Committee believed that the Companys positive performance and Mr. Nichols continued leadership in achieving our goals merited a bonus at the 75th percentile of market bonuses and awarded Mr. Nichols 2006 bonus accordingly.