Marathon Oil (MRO)

Compensation of Directors

The Board determines annual retainers, attendance fees, and other compensation for non-employee directors. Directors who are employees of the Company receive no compensation for their service on the Board.

Compensation of Directors

Our by-laws require that each non-employee director be paid compensation and attendance fees as the Board may from time to time determine. Directors who are employees of Marathon receive no compensation for their service on the Board. In 2004, we paid our non-employee directors as follows:

In addition to the annual retainer, we also paid our Chairman of the Board, Mr. Usher, a chairman's fee of $240,000 in 2004. The chairman does not receive meeting fees for his attendance.

Mr. Usher received cash payments in 2004 of $6,076,564 due to the exercise of stock appreciation rights previously granted to him in connection with his service as Chief Executive Officer of the Company. In February 2005, a cash payment of $6,313,000 was made to Mr. Usher due to the exercise of stock appreciation rights previously granted to him in connection with the separation of the businesses of the U.S. Steel Group and Marathon Group and his agreement to serve as Chairman, Chief Executive Officer and President of United States Steel Corporation, Chairman of the Board of Directors of Marathon, and Chairman of the Board of Managers of MAP.

Under our Deferred Compensation Plan for Non-Employee Directors, non-employee directors are required to defer half of their annual retainer in the form of common stock units. A common stock unit is what is sometimes referred to as "phantom stock" because initially no stock is actually issued. Instead, we keep an unfunded book entry account for each director that shows how many common stock units he or she has. We credit each non-employee director's deferred stock account with common stock units on the date he or she would otherwise receive the annual retainer payment. The ongoing value of each common stock unit equals the market price of the common stock. When dividends are paid on Marathon's common stock, we credit each account with equivalent amounts in additional common stock units. Then, when a director leaves the Board, he or she is issued actual shares of common stock corresponding to the number of common stock units in his or her account. We believe this is an effective way to increase the directors' equity holdings in Marathon and thereby further align their interests with those of our stockholders.

Directors may elect to defer the remaining portion of their annual retainer in the form of cash. This unfunded deferred cash benefit may be invested in certain investment options offered under the plan, which mirror the investment options offered to employees under the Marathon Oil Company Thrift Plan with the exception of the Marathon common stock fund. When a director leaves the Board, he or she receives the deferred cash either in a lump sum or in installments over ten years.

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If Marathon were to undergo a change in control resulting in the removal of a non-employee director from the Board, that director would receive a cash payment equal to the value of his or her deferred stock and deferred cash accounts.

Non-employee directors, other than the Chairman, also receive an annual non-retainer common stock unit award. Each year, the eligible directors receive a certain number of common stock units based on Marathon's stock price on the date of grant. The non-retainer common stock units are credited to a bookkeeping account and receive dividend payments in the same manner as the deferred stock unit awards described above. They vest upon the director's departure from the Board and are paid in actual shares of common stock.

In 2004, the Corporate Governance and Nominating Committee commissioned an independent compensation consulting firm to conduct a review of director compensation. Based on the results of this review, the Board approved a $20,000 increase to the annual non-retainer common stock unit award effective in 2005. As of January 2005, the annual non-retainer common stock unit award was valued at $60,000.

Pursuant to the director stock award program, under the stockholder-approved 2003 Incentive Compensation Plan, each non-employee director may receive a matching grant of up to 1,000 shares of common stock upon his or her initial election to the Board. In order to qualify, a director must purchase an equivalent number of shares in the open market during the 60 days following his or her initial election to the Board.

The Board of Directors has established stock ownership guidelines for non-employee directors of five times the annual retainer fee to be achieved by January 1, 2009.

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