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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 officer’s individual performance during the year,
including the executive’s part in meeting the specific
financial and other key goals established for the Company and
the executive’s 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
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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 management’s control. In the
Committee’s 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
Committee’s 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 Committee’s 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 Company’s 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.
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