Noble Energy DEF 14A 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
Noble Energy, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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NOBLE ENERGY, INC.
100 Glenborough Drive
Houston, Texas 77067
To the Stockholders of
Noble Energy, Inc.:
The annual meeting of stockholders of NOBLE ENERGY, INC., a Delaware corporation (Company), will be held on Tuesday, April 22, 2008, at 9:30 a.m., Central Time, at The Woodlands Waterway Marriott Hotel & Convention Center, 1601 Lake Robbins Drive, The Woodlands, Texas 77380, for the following purposes:
The Board of Directors has fixed the close of business on March 11, 2008 as the record date for the determination of stockholders entitled to notice of, and to vote at, the meeting and any adjournment or postponement thereof. Only stockholders of record at the close of business on the record date are entitled to notice of, and to vote at, the meeting. A complete list of the stockholders will be available for examination at the offices of the Company in Houston, Texas during ordinary business hours for a period of 10 days prior to the meeting.
A record of the Companys activities during 2007 and its financial statements for the fiscal year ended December 31, 2007 are contained in the Companys 2007 Annual Report on Form 10-K. The Annual Report does not form any part of the material for solicitation of proxies.
All stockholders are cordially invited to attend the meeting. Stockholders are urged, whether or not they plan to attend the meeting, to complete, date and sign the accompanying proxy card and to return it promptly in the postage-paid return envelope provided, or, alternatively, to vote their proxy by telephone or the internet according to the instructions on the proxy card. If a stockholder who has returned a proxy attends the meeting in person, the stockholder may revoke the proxy and vote in person on all matters submitted at the meeting.
By Order of the Board of Directors of
Noble Energy, Inc.
Arnold J. Johnson
Vice President, General Counsel and Secretary
March 21, 2008
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR
THE 2008 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 22, 2008.
The Companys Proxy Statement for the 2008 Annual Meeting of Stockholders, Annual Report to Stockholders for the fiscal year ended December 31, 2007 and Annual Report on Form 10-K for the fiscal year ended December 31, 2007 are available at ww3.ics.adp.com/streetlink/nbl.
TABLE OF CONTENTS
NOBLE ENERGY, INC.
100 Glenborough Drive
Houston, Texas 77067
For Annual Meeting of Stockholders
To Be Held On April 22, 2008
The accompanying proxy, mailed together with this proxy statement, is solicited by and on behalf of the Board of Directors (Board of Directors or Board) of Noble Energy, Inc., a Delaware corporation (Company), for use at the annual meeting of stockholders of the Company to be held at 9:30 a.m. Central Time on Tuesday, April 22, 2008, at The Woodlands Waterway Marriott Hotel & Convention Center, 1601 Lake Robbins Drive, The Woodlands, Texas 77380, and at any adjournment or postponement thereof. The approximate date on which this proxy statement and the accompanying proxy will first be mailed to our stockholders is March 21, 2008.
Shares represented by valid proxies will be voted at the meeting in accordance with the directions given. If no directions are given, the shares will be voted in accordance with the recommendations of our Board unless otherwise indicated. Any stockholder of the Company returning a proxy has the right to revoke the proxy at any time before it is voted by communicating the revocation in writing to Arnold J. Johnson, Secretary, Noble Energy, Inc., 100 Glenborough Drive, Suite 100, Houston, Texas 77067, or by executing and delivering a proxy bearing a later date. No revocation by written notice or by delivery of another proxy will be effective until the notice of revocation or other proxy, as the case may be, has been received by the Company at or prior to the meeting.
In order for an item of business proposed by a stockholder to be considered properly brought before the annual meeting of stockholders as an agenda item or to be eligible for inclusion in our proxy statement, our By-laws require that the stockholder give written notice to our Secretary. The notice must specify certain information concerning the stockholder and the item of business proposed to be brought before the meeting. The notice must be received by our Secretary no later than 120 calendar days before the first anniversary of the release date of the previous years annual meeting proxy statement; provided, however, that in the event that (1) no annual meeting was held in the previous year or (2) the date of the annual meeting has changed by more than 30 days from the date of the previous years meeting, notice by the stockholder must be received no later than the close of business on the tenth day following the earlier of the day on which notice of the meeting date was mailed or public disclosure of the meeting date was made for such notice to be timely. Accordingly, proper notice of a stockholder proposal for the 2009 annual meeting must be received by us no later than November 22, 2008.
Holders of record of our common stock may vote using one of the following three methods:
By Mail: Stockholders of record may vote by signing, dating and returning the proxy card in the accompanying postage-paid envelope.
By Telephone: Stockholders of record may call the toll-free number on the accompanying proxy card to vote by telephone, in accordance with the instructions set forth on the proxy card and through voice prompts received during the call.
By Internet: By accessing the voting website listed on the accompanying proxy card, stockholders of record may vote through the internet in accordance with the instructions included on the proxy card and on the voting website. Stockholders electing to vote through the internet may incur telephone and internet access charges.
Proxies submitted by telephone or the internet are treated in the same manner as if the stockholder had signed, dated and returned the proxy card by mail. Therefore, stockholders of record electing to vote by telephone or the internet should not return their proxy cards by mail.
Stockholders whose shares of our common stock are held in the name of a bank, broker or other holder of record (that is, street name) will receive separate instructions from such holder of record regarding the voting of proxies.
We will appoint one or more inspectors of election to act at the meeting and to make a written report thereof. Prior to the meeting, the inspectors will sign an oath to perform their duties in an impartial manner and according to the best of their ability. The inspectors will ascertain the number of shares outstanding and the voting power of each, determine the shares represented at the meeting and the validity of proxies and ballots, count all votes and ballots, and perform certain other duties as required by law.
The inspectors will tabulate the number of votes cast for, or withheld from, each matter submitted at the meeting for a stockholder vote. Votes that are withheld will be excluded entirely from the vote and will have no effect. Under the rules of the New York Stock Exchange (NYSE), brokers who hold shares in street name have the discretionary authority to vote on certain routine items when they have not received instructions from beneficial owners. For purposes of our 2008 annual meeting, routine items include the election of directors and the ratification of the appointment of our independent auditor. In instances where brokers are prohibited from exercising discretionary authority and no instructions are received from beneficial owners with respect to an item (so-called broker non-votes), the shares they hold will not be considered part of the voting power present and, therefore, will have no effect on the vote.
We are committed to integrity, reliability and transparency in our disclosures to the public. To this end, we adhere to corporate governance practices designed to ensure that our business is conducted in the best interest of our stockholders and in compliance with our legal and regulatory obligations, including the listing standards of the NYSE and the rules and regulations of the Securities and Exchange Commission (SEC). We monitor developments in the area of corporate governance.
The standards applied by our Board in affirmatively determining whether a director is independent in compliance with the listing standards of the NYSE generally provide that a director is not independent if:
1. the director is, or has been within the last three years, an employee of the Company, or an immediate family member (defined as including a persons spouse, parents, children, siblings, mothers- and fathers-in-law, sons-and daughters-in-law, brothers- and sisters-in-law, and anyone, other than domestic employees, who shares such persons home) is, or has been within the last three years, an executive officer, of the Company;
2. the director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $100,000 per year in direct compensation from us, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service);
3. (a) the director or an immediate family member is a current partner of a firm that is our internal or external auditor; (b) the director is a current employee of such a firm; (c) the director has an immediate family member who is a current employee of such a firm and who participates in the firms audit, assurance or tax compliance (but not tax planning) practice; or (d) the director or an immediate family member was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on our audit within that time;
4. the director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of our present executive officers at the same time serves or served on that companys compensation committee; or
5. the director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, us for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million or 2% of such other companys consolidated gross revenues.
In addition to these objective standards, our Board has adopted a general standard, also in compliance with the NYSE listing standards, to the effect that no director qualifies as independent unless the Board affirmatively determines that the director has no material relationship with the Company that could interfere with the directors ability to exercise independent judgment. Our Board exercises appropriate discretion in identifying and evaluating the materiality of any relationships directors may have with us or with parties that conduct business with us.
On February 26, 2008, our Board reviewed our directors relationships with the Company (and those of their immediate family members), including information related to transactions, relationships or arrangements between the Company and our directors or parties related to our directors. The following is a description of categories or types of transactions, relationships or arrangements considered by our Board (in addition to any matters described under the Certain Transactions section of this proxy statement) in making its determination that these directors are independent:
After reviewing these transactions, relationships and arrangements, and after applying the NYSE independence standards described above, our Board affirmatively determined that no material relationship existed that would interfere with the ability of Messrs. Berenson, Cawley, Cox, Hedrick, Urban or Van Kleef to exercise independent judgment and that each is independent for Board membership purposes. Our Board also determined that all members of our Audit Committee, Corporate Governance and Nominating Committee and Compensation, Benefits and Stock Option Committee are independent under the NYSE independence standards and applicable SEC rules.
Our Lead Independent Directors responsibilities and authority are more specifically described in our Corporate Governance Guidelines.
We comply with, and operate in a manner consistent with, applicable law prohibiting extensions of credit in the form of personal loans to, or for the benefit of, our directors and executive officers.
All of our directors are expected to attend each annual meeting of our stockholders. A director who is unable to attend the annual meeting, which it is understood will occur on occasion, is expected to notify the Chairman of the Board in advance of such meeting. Attendance at our annual meeting will be considered by our Governance Committee in assessing each directors performance. Last year, all but one of our directors attended our annual meeting of stockholders.
Stockholders and other interested parties may contact any member of our Board, any Board committee or any chair of any such committee by mail, electronically or by calling our independent, toll-free compliance line. To communicate by mail with our Board, any individual director or any group or committee of directors, correspondence should be addressed to our Board or any individual director or group or committee of directors by either name or title. All correspondence should be sent to Noble Energy, Inc., Attention: Corporate Secretary, at 100 Glenborough, Suite 100, Houston, Texas 77067. To communicate with any of our directors electronically, stockholders should go to our website at www.nobleenergyinc.com. Under the headings Corporate Governance/Corporate Governance Guidelines, you will find a link under Exhibit 3 (Shareholder Communications with Directors) that may be used for writing an electronic message to our Board, any individual director, or any group or committee of directors. In addition, stockholders may call our independent, toll-free compliance line listed on our website under the heading Corporate Governance/Audit Committee Complaints Policy.
All stockholder communications properly received will be reviewed by the office of our General Counsel to determine whether the contents represent a message to our directors. Any contents that are not in the nature of advertising, promotions of a product or service, or patently offensive material will be forwarded promptly to the appropriate director or directors.
Only holders of record of our common stock, par value $3.331/3 per share, at the close of business on March 11, 2008, the record date for our annual meeting, are entitled to notice of, and to vote at, the meeting. A majority of the shares of common stock entitled to vote, present in person or represented by proxy, is necessary to constitute a quorum. Abstentions and broker non-votes on filed proxies and ballots are counted as present for establishing a quorum. On the record date for our annual meeting, there were issued and outstanding 172,105,199 shares of common stock. Each share of common stock is entitled to one vote.
The following tabulation sets forth, as of March 11, 2008, information with respect to the only persons who were known to us to be beneficial owners of more than five percent of the outstanding shares of our common stock, based on statements filed with the SEC pursuant to Section 13(g) or 13(d) of the Securities Exchange Act of 1934.
As of the date of this proxy statement, our Board consists of eight directors, six of whom are independent. Information regarding the business experience of each nominee is provided below. All directors are elected annually to serve until the next annual meeting and until their successors are elected.
Directors are elected by plurality vote of the shares present at our annual meeting, meaning that the director nominee with the most affirmative votes for a particular slot is elected for that slot. The proxyholders will vote in favor of the eight candidates listed below unless contrary instructions are given.
If you sign your proxy card but do not give instructions with respect to the voting of directors, your shares will be voted for the eight persons recommended by our Board, except where authorization to do so is withheld.
Our Board expects that all of the nominees will be available to serve as directors as indicated. In the event that any nominee should become unavailable, however, the proxyholders will vote for a nominee or nominees who would be designated by our Board unless the Board chooses to reduce the number of directors serving on our Board.
Jeffrey L. Berenson Mr. Berenson, age 57, is President and Chief Executive Officer of Berenson & Company, a private investment banking firm in New York City that he co-founded in 1990. From 1978 until co-founding Berenson & Company, Mr. Berenson was with Merrill Lynchs Mergers and Acquisitions department, becoming head of that department in 1986 and then co-head of its Merchant Banking unit in 1988. He was appointed to the Board of Directors of Patina Oil & Gas Corporation (Patina) in December 2002 and joined our Board upon completion of our merger with Patina on May 16, 2005. Mr. Berenson is also a member of the Board of Directors of Epoch Holdings Corporation.
Michael A. Cawley Mr. Cawley, age 60, has served as President and Chief Executive Officer of The Samuel Roberts Noble Foundation, Inc. (Foundation) since February 1, 1992, after serving as Executive Vice President of the Foundation since January 1, 1991. Prior to 1991, Mr. Cawley was the President of Thompson, Cawley, Veazey & Burns, a professional corporation, attorneys at law. Mr. Cawley has served as a trustee of the Foundation since 1988 and is also a director of Noble Corporation. He has served on our Board since 1995 and has been our Lead Independent Director since 2001.
Edward F. Cox Mr. Cox, age 61, has been a partner in the law firm of Patterson Belknap Webb & Tyler llp, New York, New York for more than five years and has served as the chair of the firms corporate department and as a member of its management committee. He is chair of the New York League of Conservation Voters Education Fund, of the New York City Commission on State Parks, of the Finance Committee of the Trustees of The State University of New York and of the State University Construction Fund. He is also a member of New Yorks merit selection constitutional Commission on Judicial Nomination. Mr. Cox has served on our Board since 1984.
Charles D. Davidson Mr. Davidson, age 58, has served as our President and Chief Executive Officer since October 2000 and has served as Chairman of our Board since April 2001. Prior to October 2000, he served as President and Chief Executive Officer of Vastar Resources, Inc. (Vastar) from March 1997 to September 2000 (Chairman from April 2000) and was a Vastar director from March 1994 to September 2000. From September 1993 to March 1997, he served as a Senior Vice President of Vastar. From 1972 to October 1993, he held various positions with ARCO.
Thomas J. Edelman Mr. Edelman, age 57, founded Patina and served as its Chairman and Chief Executive Officer from its formation in 1996 until its merger with the Company in 2005. He co-founded Snyder Oil Corporation and was its President from 1981 through 1997. He also served as Chairman of Range Resources Corporation from 1988 through 2003. From 1980 to 1981, he was with The First Boston Corporation and, from 1975 through 1980, with Lehman Brothers Kuhn Loeb Incorporated. Mr. Edelman also serves as Chairman of BioFuel Energy Corp. and Bear Cub Investments LLC, President of Lenox Hill Neighborhood House and Trustee and Chair of the Investment Committee of The Hotchkiss School. He joined our Board upon completion of our merger with Patina in May 2005.
Kirby L. Hedrick Mr. Hedrick, age 55, served as Executive Vice President over upstream operations for Phillips Petroleum Company from 1997 until his retirement in 2000. He was elected to our Board on August 1, 2002. Mr. Hedrick is also a member of the Board of Directors of Pengrowth Energy Trust.
Scott D. Urban Mr. Urban, age 54, served in executive management positions at Amoco and its successor, BP, from 1977 to 2005. At the time of his retirement from BP in 2005, he was Group Vice President, Upstream for several profit centers including North America Gas, Alaska, Egypt and Middle East and, before that, Group Vice President, Upstream North Sea. Mr. Urban held various positions at Amoco including, at the time of its merger with BP, Group Vice President, Worldwide Exploration. He is also a partner in Edgewater Energy Partners, an organizational consulting firm for energy-related industries. Mr. Urban was appointed to our Board on October 23, 2007.
William T. Van Kleef Mr. Van Kleef, age 56, served in executive management positions at Tesoro from 1993 to 2005, most recently as Tesoros Executive Vice President and Chief Operating Officer. During his tenure at Tesoro, Mr. Van Kleef held various positions, including President, Tesoro Refining and Marketing, and Executive Vice President and Chief Financial Officer. Before joining Tesoro, Mr. Van Kleef, a Certified Public Accountant, served in various financial and accounting positions with Damson Oil from 1982 to 1991, most recently as Senior Vice President and Chief Financial Officer. He joined our Board on November 11, 2005. Mr. Van Kleef is also a member of the Board of Directors of Oil States International, Inc.
Generally, our By-laws provide that a stockholder must deliver written notice to our Secretary no later than 90 calendar days prior to our annual meeting naming the stockholders nominee(s) for director and specifying certain information concerning the stockholder and nominee(s) as described below under the section Evaluation of Director Nominees. Accordingly, a stockholders nominee(s) for director to be presented at our 2009 annual meeting of stockholders must be received by us no later than January 28, 2009.
Our Board unanimously recommends that stockholders vote FOR the election of each of its nominees.
Our Board held thirteen meetings in 2007, consisting of five regular meetings, its annual organizational meeting and seven special meetings.
Our Governance Committee believes that the minimum qualifications for serving as a director of the Company are that a nominee demonstrate, by significant accomplishment in his or her field, an ability to make a meaningful contribution to our Boards oversight of the business and affairs of the Company and have an impeccable record and reputation for honest and ethical conduct in both his or her professional and personal activities. Nominees for director shall be those people who, after taking into account their skills, expertise, integrity, diversity, character, judgment, age, independence, corporate experience, length of service, potential conflicts of interest and commitments (including, among other things, service on the boards or comparable governing bodies of other public companies, private business companies, charities, civic bodies or similar organizations) and other qualities, are believed to enhance our Boards ability to manage and direct, in an effective manner, the affairs and business of the Company, including, when applicable, to enhance the ability of committees of our Board to fulfill their duties and/or to satisfy any independence requirements imposed by law, regulation or listing standards of the NYSE.
In general, nominees for director should have an understanding of the workings of large business organizations such as the Company and senior level executive experience, as well as the ability to make independent, analytical judgments, the ability to be an effective communicator and the ability and willingness to devote the time and effort to be an effective and contributing member of our Board. In addition, our Governance Committee will examine a candidates specific experiences and skills, time availability in light of other commitments, potential conflicts of interest and independence from management and the Company. Our Governance Committee will also seek to have our Board represent a diversity of backgrounds, experience, gender and race.
Our Governance Committee will identify potential nominees by asking current directors and executive officers to notify the committee if they become aware of persons meeting the criteria described above who have had a change in circumstances that might make them available to serve on our Board for example, retirement as a CEO or CFO of a public company or exiting government or military service or business and civic leaders in the communities in which our facilities are located. Our Governance Committee also, from time to time, will engage firms that specialize in identifying director candidates. Our Governance Committee will also consider candidates recommended by our stockholders.
Once a person has been identified by our Governance Committee as a potential candidate, the committee may collect and review available information regarding the person to assess whether the person should be considered further. If our Governance Committee determines that the candidate warrants further consideration, the committee Chair or another member of our Governance Committee will contact the individual. Generally, if the individual expresses a willingness to be considered and to serve on our Board, our Governance Committee will request information from the candidate, review the persons accomplishments and qualifications, including in light of any other candidates that the committee might be considering, and conduct one or more interviews with the candidate. In certain instances, Governance Committee members may contact one or more references provided by the candidate or may contact other members of the business community or other persons that may have greater first-hand knowledge of the candidates accomplishments. Our Governance Committees evaluation process will be the same whether or not a candidate is recommended by a stockholder, although our Board may take into consideration the number of shares held by the recommending stockholder and the length of time that such shares have been held.
Our Governance Committee will consider director nominees of stockholders, provided that such recommendations are made in writing to the attention of our Corporate Secretary and received not less than 90 days in advance of our annual stockholder meeting. A stockholder must include the following information with each recommendation for a director nominee:
Our Board has four standing committees, whose names, current members and purposes are as follows:
Audit Committee William T. Van Kleef, Chair; Michael A. Cawley; and Scott D. Urban. The primary purpose of our Audit Committee is to: (1) assist our Board in fulfilling its responsibility to oversee the integrity of our financial statements, our compliance with legal and regulatory requirements, the independent auditors qualifications and independence, and the performance of our internal audit function and independent auditor and (2) prepare a committee report as required by the SEC to be included in our annual proxy statement. Our
Audit Committee held eight meetings during 2007. For more details, see information under the section Report of the Audit Committee.
Compensation, Benefits and Stock Option Committee Kirby L. Hedrick, Chair; Jeffrey L. Berenson; and Edward F. Cox. The purpose of our Compensation Committee is to: (1) review and approve our goals and objectives in the areas of: (a) salary and bonus compensation, (b) benefits, and (c) equity-based compensation, as they relate to our Chief Executive Officer (CEO), evaluating our CEOs performance based on those goals and objectives and, either as a committee or together with the other independent directors (as directed by our Board), determine and approve our CEOs compensation level based on that evaluation; (2) make recommendations to our Board with respect to non-CEO executive officer compensation, incentive-compensation plans and equity-based plans that are subject to Board approval; and (3) produce an annual report on executive compensation as required by the SEC to be included, or incorporated by reference, in our proxy statement or other applicable SEC filings. Our Board has delegated authority to our Compensation Committee to determine and approve our compensation philosophy; the annual salary, bonus, equity-based compensation and other benefits applicable to our executive officers; and equity-based compensation applicable to non-executive-officer employees. Our Compensation Committee held nine meetings during 2007. For more details, see information under the section Compensation Discussion and Analysis.
Corporate Governance and Nominating Committee Michael A. Cawley, Chair; Jeffrey L. Berenson; Edward F. Cox; Kirby L. Hedrick; Scott D. Urban; and William T. Van Kleef. The overall purpose of our Governance Committee is to: (1) take a leadership role in providing a focus on corporate governance to enable and enhance our short- and long-term performance; (2) engage in appropriate identification, selection, retention and development of qualified directors consistent with criteria approved by our Board; (3) develop, and recommend to our Board, a set of corporate governance principles or guidelines applicable to us; (4) advise our Board with respect to the Boards composition, procedures and committees; and (5) oversee the evaluation of our Board and management. Our Governance Committee held seven meetings during 2007.
Environment, Health and Safety Committee Edward F. Cox, Chair; Charles D. Davidson; Thomas J. Edelman; Kirby L. Hedrick; and Scott D. Urban. The overall purpose of our Environment, Health and Safety Committee is to assist our Board in determining whether we have appropriate policies and management systems in place with respect to environment, health and safety (EH&S) matters and to monitor and review compliance with applicable EH&S laws, rules and regulations. Our Environment, Health and Safety Committee held three meetings during 2007.
Each of our directors attended at least 75% of the meetings of our Board and its committees of which such director was a member during 2007.
Kirby L. Hedrick, Jeffrey L. Berenson and Edward F. Cox served on our Compensation Committee for all of 2007. There were no Compensation Committee interlocks nor insider (employee) participation during 2007.
The Audit Committee of our Board has appointed the firm of KPMG LLP to serve as our independent auditor for the fiscal year ending December 31, 2008. This firm has audited our accounts since May 2002. Although action by our stockholders on this matter is not required, our Audit Committee believes that it is important to seek stockholder ratification of this appointment in light of the critical role played by our independent auditor in maintaining the integrity of our financial controls and reporting.
One or more representatives of KPMG LLP are expected to be present at our annual meeting, will be able to make a statement if they so desire, and will be available to respond to appropriate questions.
Our Board unanimously recommends that stockholders vote FOR ratification of the appointment of KPMG LLP as our independent auditor.
The following tabulation sets forth, as of March 11, 2008, the shares of common stock beneficially owned by each director, each named executive officer listed in the Summary Compensation Table included in this proxy statement, and all directors and named executive officers as a group.
COMPENSATION DISCUSSION AND ANALYSIS
Our executive compensation program is overseen by our Compensation Committee, with input from our management and outside compensation consultants.
The purpose of our Compensation Committee is to:
Our Board has delegated authority to our Compensation Committee to determine and approve (1) our compensation philosophy, (2) the annual salary, bonus, equity-based compensation and other benefits applicable to our executive officers, and (3) equity-based compensation applicable to non-executive-officer employees.
Our Board appoints our Compensation Committee members and Chair, and these appointees continue to be members until their successors are elected and qualified or until their earlier resignation or removal. Any member of our Compensation Committee may be removed, with or without cause, by our Board. Our Governance Committee, after consultation with our Lead Independent Director, makes recommendations to our Board with respect to the appointment of Board members to all of its committees considering, in the case of our Compensation Committee, criteria such as experience in compensation matters, familiarity with our management and other key personnel, understanding of public company compensation issues, time availability necessary to fulfill committee responsibilities and independence and other regulatory requirements. No member of our Compensation Committee participates in any of our employee compensation programs, and our Board has determined that none of our Compensation Committee members has any material business relationship with us.
We believe that Kirby L. Hedrick, Jeffrey L. Berenson and Edward F. Cox, who currently serve on our Compensation Committee and served on the committee throughout 2007, satisfy these criteria. Each member of our Compensation Committee has been determined by our Board to meet the NYSE standards for independence, to be a Non-Employee Director as defined in Rule 16b-3 under the Exchange Act, and to be an outside director as defined for purposes of Section 162(m) of the Internal Revenue Code.
Our Compensation Committees meeting schedule is determined annually, and meeting agendas are based on an annual calendar of recurring agenda items approved by the committee. The meeting agendas may include additional items as determined by the committee in its discretion. All Compensation Committee meeting agendas are reviewed by our Lead Independent Director and approved by the committee Chair. Special meetings may also be held by the committee. Our Compensation Committee held nine meetings during 2007.
In an effort to minimize the need for special meetings of our Compensation Committee to address routine compensation matters involving non-executive-officer employees, the committee has delegated limited authority to our CEO to grant stock options and restricted stock to non-executive-officer new hires for employment inducement purposes. Grants made by the CEO under these delegations are required to be reported to our Compensation Committee at its next regularly scheduled meeting and the appropriateness of the delegation is reviewed by our Compensation Committee on an annual basis.
Our Compensation Committee charter was last revised and approved by our Board on January 23, 2007. A copy can be obtained free of charge from our website, www.nobleenergyinc.com, by written request to us at the address appearing on the first page of this proxy statement to the attention of our Corporate Secretary or by calling (281) 872-3100.
Our CEO and our Vice President Human Resources generally attend Compensation Committee meetings and provide input to the committee with respect to executive compensation, key job responsibilities, performance objectives and compensation trends. They also coordinate with our compensation consultant to ensure that committee requests regarding executive compensation matters are addressed. We believe that our CEO and Vice President Human Resources are best qualified to support the committee in these areas given their understanding of our business and personnel, compensation program and competitive environment. In this supporting role they may provide information and recommendations relevant to establishing performance measures, weightings, targets, and similar items that affect compensation, including that of our CEO and other executive officers, and may request that our Compensation Committee schedule special meetings to address executive compensation matters as appropriate. Our CEO is closely involved in assessing the performance of our executive officers, other than himself, and advising our Compensation Committee in that regard. Our CEO and Vice President Human Resources may also communicate directly with our compensation consultant in this supporting role. Our Compensation Committee is not obligated to accept our managements recommendations with respect to executive compensation matters, and meets in executive session to discuss executive compensation matters outside of the presence of our management.
Our Compensation Committee may retain, at our expense, independent compensation consultants it deems advisable to assist it in executive compensation matters. The committee meets with the compensation consultants, with and outside the presence of our management, to review findings based on market research regarding executive compensation and considers those findings in determining and making adjustments to our executive compensation program.
The committee retained Towers Perrin as its independent compensation consultant for purposes of reviewing our 2007 executive compensation program and providing comparative market data on compensation practices and programs based on an analysis of our peer companies and other factors. Towers Perrin continues to advise our Compensation Committee in 2008.
Towers Perrin also provided similar services to our Governance Committee in 2007, and continuing in 2008, to assist it in reviewing and determining fees and equity compensation paid or awarded, as the case may be, to our non-employee directors.
When making compensation decisions, we also look at the compensation of our CEO and other executive officers relative to the compensation paid to similarly-situated executives at companies that we consider to be our peers this is often referred to as benchmarking. We believe, however, that a benchmark should be just that a point of reference for measurement but not the determinative factor for our executives compensation. Because comparative compensation information is just one of the several analytic tools that are used in setting executive compensation, our Compensation Committee has discretion in determining the nature and extent of its use. Further, given the limitations associated with comparative pay information for setting individual executive compensation, the committee may elect to not use comparative compensation information at all in the course of making compensation decisions.
Our Compensation Committee established our current peer group of companies in 2007, which consists of larger and smaller publicly traded oil and gas exploration and production companies that have similar operating and financial characteristics. With the assistance of our compensation consultant, as appropriate, our Compensation
Committee reviews the composition of the peer group annually to ensure that companies remain relevant for comparative purposes. After review in January 2008, our Compensation Committee retained the same compensation peer group from 2007 except for Pogo Producing Company, which was acquired by Plains Exploration and Production Company during 2007. Our compensation peer group, therefore, consists of:
We believe that this group of companies is representative of the sector in which we operate, and was chosen because of each of the companies relative leadership position in our sector, the relative complexity of their business and the roles and responsibilities of their executive officers.
When making executive compensation decisions, our Compensation Committee analyzes total compensation with a focus on base salary, short term incentive plan and long term incentive plan elements. To facilitate this analysis, our CEO and Vice President Human Resources work with our compensation consultant to present to the committee compensation information in these areas for each executive officer, along with summary information on post-employment compensation trends, executive benefits and other relevant factors. This information is compiled in written report format and includes recent publicly available information and other market data. Although these reports do not include tally sheets detailing all components of each executive officers compensation, we believe that they provide our Compensation Committee with a sufficient basis to evaluate executive officer compensation by presenting a comprehensive review of compensation data on each executive officer and the opportunity for related discussion with our compensation consultant.
While comparisons to compensation levels at companies in our compensation peer group are helpful in assessing the overall competitiveness of our executive compensation program, we believe that our program must also be internally consistent and equitable. In its review of total compensation, our Compensation Committee considers the relationship between our CEOs total compensation and the total compensation of our other executive officers. In this regard, our Compensation Committee increased the total compensation of our Executive Vice President and Chief Operating Officer (COO) in 2007 relative to our other named executive officers in light of the growth of the Company and its business, the COOs broadened responsibilities over all domestic and international operations (with certain named executive officers now reporting directly to the COO), and the COOs increased role in developing and implementing our business strategy. We believe that the total compensation of our other named executive officers is equitable in light of their roles, responsibilities and reporting within the Company, as each is a Senior Vice President with distinct but comparably broad responsibilities.
Our executive compensation program is designed to reward performance measured against performance goals and supports our long-term growth strategy, which is focused on value creation for our stockholders. The objectives of our executive compensation program are to:
We believe that linking executive compensation to Company performance is in the best interest of our stockholders. As performance goals are met or exceeded, resulting in increased value to stockholders, our executive officers should be rewarded commensurately. We believe that our 2007 executive compensation program fulfilled these objectives.
Elements of Our Executive Compensation Program
Our executive compensation program consists of four principal elements: base salary, a short-term incentive plan, a long-term incentive plan and post-employment compensation. In determining the amount and significance of each of these four principal elements, we believe that:
The following is a discussion of each of the four principal elements of our executive compensation program:
Base Salary: Base salary for executive officer positions is determined principally by competitive factors. Our Compensation Committee believes that base salaries for executive officers should be competitive with comparable positions in peer companies and obtains competitor information through oil and gas industry compensation surveys and other analyses conducted by our compensation consultant. Our Compensation Committee analyzes this information and makes appropriate annual adjustments. The policy of our Compensation Committee generally is to establish base salary levels that in aggregate approximate market median. Based on the results of market data provided by Towers Perrin regarding 2007 executive compensation, adjustments were made in 2007 to certain executive officers base salaries to more closely approximate market median.
Short-Term Incentive Plan: Our short-term incentive plan (STIP) is a performance-based annual incentive bonus plan available to all of our full-time employees, including executive officers. The target bonus for an employee is the employees base salary at year-end multiplied by the percentage factor assigned to the employees salary classification. Target bonus percentage factors range from 6 to 100%, with factors of 100% for the CEO and either 75% or 90% for the other named executive officers, with the differences primarily attributable to each officers level of experience and scope of responsibility within the Company. Payout under the plan may range from 0 to 2.5 times the aggregate target bonus pool for all employees.
In January of each year, our Compensation Committee approves annual STIP performance-based measures, including their relative weighting and specified targets, in addition to a discretionary component to be determined by the committee as discussed below. The performance-based measures, weighting and specified targets are communicated to our executive officers at that time. The 2007 performance-based measures approved by our Compensation Committee on January 21, 2007 accounted for 50% of the STIP formula and consisted of quantitative targets for proved reserve additions, production, and controllable unit costs, which are equally weighted, as well as discretionary cash flow, which is weighted less. Discretionary cash flow is a non-GAAP financial measure that is composed of net income, adding back depreciation, depletion and amortization and various other non-cash expense items.
Our Compensation Committee approves the specified target for each performance measure after considering prior year financial and operational results and planned projects and capital budget for the upcoming year. Our Compensation Committee also considers that the achievement of those targets can be significantly affected by
availability of labor and equipment, acquisitions and sales, weather, product demand and pricing, competition and other industry conditions that cannot be determined with certainty at the time the targets are set. We believe that our targets are set aggressively in light of these variables and require achievement of significant performance, as demonstrated by the fact that over the last six years payouts have ranged from well below to well above target.
Targets for 2007 were set higher than those of 2006 as to proved reserve additions, production and discretionary cash flow, with the same target involving a relative measure against our compensation peer group being used for controllable unit costs. Payout curves were approved for each measure at the time targets were set, ranging from a factor of 0 to 2.5, with a 1.0 factor at each target. The Companys 2007 performance exceeded the specified targets for proved reserve additions, controllable unit costs and discretionary cash flow, but fell short of the specified target for production. Our Compensation Committee reviewed information provided by management on actual performance for each measure as applied to the measures payout curve to determine the bonus factor for that measure. Each bonus factor was then multiplied by the weighting for its respective measure, with the sum of the four bonus factors, as adjusted for weighting, yielding the performance-based STIP component.
The discretionary component, which accounted for the remaining 50% of the 2007 STIP formula, was determined by our Compensation Committee based on the committees review of overall Company performance, including other performance-based measures such as annual stockholder return compared to that of our compensation peer group.
The sum of the performance-based and discretionary components was applied to the Companys aggregate target bonus pool to determine our total bonus amount to be paid. This amount was then proportionately allocated between executive officers and other employees. In the case of executive officers, the Committee considered the performance of the CEO as measured against operational and financial goals submitted by the CEO earlier in the year, as well as the CEOs assessment of the performance of the other executive officers as measured against goals each submitted earlier in the year for his or her business unit or organization, and allocated the pool based on that assessment and each executive officers respective target bonus percentage. Payout under the plan based on the Companys 2007 performance occurred in February 2008.
The 2008 performance-based measures and specified targets were approved by our Compensation Committee on January 22, 2008 and communicated to our executive officers. Our Compensation Committee elected to retain the same four performance-based measures used in 2007 with the same relative weighting, but different specified targets. We believe that the approved specified targets for 2008 are aligned with stockholder value but will be appropriately difficult to achieve since they will be affected by the same challenges and uncertainties as described above.
Long-Term Incentive Plan: Our long-term incentive plan (LTIP) was approved by our Compensation Committee and adopted by our Board on January 27, 2004 and is available to our executive officers and certain other key employees determined on an annual basis. Its objectives are to:
Under our LTIP, which was effective January 1, 2004, grants or awards of stock options, restricted stock and performance units were made in 2004, 2005 and 2006. The stock options and restricted stock were granted under our 1992 Plan, which was approved by our stockholders in 1992 and most recently amended in 2007. The 1992 Plan permits the use of nonqualified stock options, with or without stock appreciation rights, and restricted stock. Option grants represent the right to purchase shares of our common stock over a period of up to ten years at fair market value, as defined in the 1992 Plan, on the date of grant and upon such terms and conditions, consistent with the
provisions of the plan, as are specified by our Compensation Committee at the time of grant. Restricted stock may be granted by our Compensation Committee subject to such terms and conditions as may be specified by the committee. Restricted stock granted under the LTIP in 2004, 2005 and 2006 generally vests after three years, provided that certain performance goals are satisfied during the relevant three-year performance period; specifically, that total stockholder return over that period is at or above the 25th percentile of total stockholder return for our compensation peer group as defined at the time of the grant. In January 2008, our Compensation Committee reviewed the Companys performance for the three-year performance period covered by the restricted stock granted in 2005, confirming that the relevant performance goal necessary for vesting had been achieved.
Performance units awarded under our LTIP in 2004, 2005 and 2006 vest and are paid out in cash at the end of the three-year period following the date of the award based on the levels of achievement of certain performance goals during the three-year period. Performance units have a target value of $1.00 per unit with a maximum payout of $2.00 per unit. Our Compensation Committee established the performance goals and target award levels prior to the beginning of each performance period. For 2005 awards with a three-year performance period ending December 31, 2007, the performance goals were growth in reserves and production per share, both debt-adjusted, and total stockholder return, in each case relative to our compensation peer group as defined at the time of the award. The payout of performance units awarded in 2005 will be determined at a meeting of our Compensation Committee in April 2008.
In January 2007, and with information regarding competitive compensation practices from Towers Perrin, our Compensation Committee reviewed the effectiveness of the LTIP structure in light of the LTIP objectives. Based on that review, our Compensation Committee concluded that a combination of stock options and time-vested restricted stock would reduce plan complexity and most effectively meet the LTIP objectives. Accordingly, our Compensation Committee suspended the making of performance criteria grants under the LTIP in 2007, and in 2007 and 2008 made 1992 Plan grants of stock options and time-vested restricted stock.
Equity Granting Practices
Stock options and shares of restricted stock are granted to our executive officers under our 1992 Plan. Our Compensation Committee approves all such grants, which are determined based on input from the CEO and market data provided by our compensation consultant. Grants for the CEO and other executive officers are approved by our Compensation Committee and discussed with our Board, outside the presence of the CEO or other executive officers. In approving such grants, our Compensation Committee also assesses the reasonableness of grant levels considering the Companys relative performance versus our compensation peer group on measures such as our three-year total stockholder return, debt-adjusted per share growth in reserves and production, executive officer total compensation and internal pay equity.
The regular Board and Compensation Committee meeting schedule for the upcoming year is set in April of the prior year, with regular Board meetings held in January, April, July, October and December. Our Compensation Committee meetings are usually held the day before each Board meeting. The timing of these meetings is not determined by executive officers and is usually in advance of the announcement of earnings. We do not time the release of material non-public information for the purpose of affecting the values of executive compensation. At the time of making stock option and restricted stock grant decisions, our Compensation Committee may be aware of approximate earnings results, but it does not adjust the size or timing of grants to reflect possible market reaction.
Generally, annual stock option and restricted stock grants are approved at the January meeting of our Compensation Committee. Stock options and restricted stock are granted annually on February 1 (or the nearest business day if February 1 falls on a Saturday, Sunday or holiday), effective and priced on that date. It is our policy to make grants to executive officers and other employees at the same time. However, specific grants of stock options or restricted stock may be approved at other regular or special meetings to recognize the completion of a significant transaction, a change in an employees responsibility or a specific achievement, or as an inducement to, or for the retention of, employment. No such special grants were made to executive officers in 2007. We communicate grants to executive officers and other employees shortly after the date of approval, in accordance with our customary human resource practices.
Stock option grants represent the right to purchase shares of our common stock over a period of up to ten years at fair market value, as defined in the 1992 Plan, on the date of grant and upon such terms and conditions, consistent
with the provisions of the plan, as are specified by our Compensation Committee at the time of grant. The 1992 Plan defines fair market value for grant purposes as the average of the reported high and low trading price of our common stock on the NYSE on the date of grant (or if there was no reported sale on such date, on the last preceding date on which any reported sale occurred). We believe that this method of determining fair market value is neutral to the use of the closing price of our common stock and provides a valid representation of fair market value. Therefore, consistent with the terms of our 1992 Plan, we continue to grant stock options on this basis.
Our Compensation Committee has not delegated to the CEO any of its authority to grant stock options or restricted stock to executive officers. However, as noted above, it has delegated limited authority to the CEO to grant stock options and restricted stock to non-executive-officer new hires for employment inducement purposes.
We encourage, but do not require, stock ownership by our executive officers and directors. Historically, our executive officers have received significant grants of shares of restricted stock and stock options under our 1992 Plan, consistent with the objectives of our executive compensation program, providing them with meaningful equity ownership in the Company and allowing them to demonstrate their commitment as stockholders in the Company. We believe that our executive officers and directors generally maintain shares sufficiently significant in value to align their interests with those of our stockholders. If circumstances change, we will review whether stock ownership requirements are appropriate.
Post-Employment Compensation: Our post-employment compensation is provided under qualified and non-qualified defined benefit plans, qualified and non-qualified defined contribution plans, and either individual change of control agreements or, alternatively, a change of control plan.
Qualified Defined Benefit Plan
Our qualified defined benefit plan (Retirement Plan) provides employees, including our executive officers, with retirement income benefits commencing upon retirement after attaining the normal retirement age of 65 or upon early or deferred vested retirement after attaining age 55 and completing 5 years of vesting service. Early retirement reductions apply if retirement benefits are commenced prior to age 65. The amount of an employees monthly Retirement Plan benefit will depend upon the employees final average monthly compensation, age and the number of his or her years of credited service (which are limited to a maximum of 30 years). Monthly Retirement Plan benefits commencing upon retirement after attaining the normal retirement age of 65 are calculated using the greater of the following two formulas:
Final average monthly compensation generally means the employees average monthly compensation from the Company for the 60 consecutive months prior to retirement that results in the highest average monthly compensation for the employee. The compensation taken into account for Retirement Plan purposes includes the employees salary and STIP payment. The annual amount of compensation that can be taken into account for Retirement Plan purposes is limited by the Internal Revenue Code. This annual compensation limit was $225,000 for 2007 and is $230,000 for 2008. The maximum annual benefit that may be paid to an employee under our Retirement Plan is also limited by the Internal Revenue Code. This maximum annual benefit was $180,000 for 2007 and is $185,000 for 2008.
With information regarding competitive compensation practices from Towers Perrin, during 2006 our Compensation Committee reviewed our Retirement Plan in light of costs, competitive considerations and other available post-employment compensation arrangements. Based on that review, our Compensation Committee concluded that an enhanced defined contribution plan would better address our needs. Accordingly, beginning on May 1, 2006, our Retirement Plan was closed to new participants and new employees became eligible to instead receive an enhanced Company contribution in the qualified defined contribution plan described below. Employees hired prior to May 1, 2006, which include all of our current executive officers, continue to accrue benefits under the Retirement Plan.
Effective January 1, 2008, we amended our Retirement Plan to allow existing plan participants to elect to receive a lump-sum distribution upon separation from service.
Non-Qualified Defined Benefit Plan
Our non-qualified defined benefit plan (Restoration Plan) is an unfunded plan that provides the benefits under the Retirement Plans benefit formula that cannot be provided by the Retirement Plan because of the annual compensation and annual benefit limitations applicable to the Retirement Plan under the Internal Revenue Code. The amount of an employees monthly Restoration Plan benefit will depend upon the employees final average monthly compensation, age and the number of his or her years of credited service (which are limited to a maximum of 30 years). Existing plan participants were allowed to make a one-time election prior to January 1, 2008 to receive plan benefits through a lump sum payment upon separation from service, as permitted by the transition relief provisions of Internal Revenue Code Section 409A. Restoration Plan benefits are calculated using the same methodology utilized for our Retirement Plan. Employees hired prior to May 1, 2006, which include all of our current executive officers, continue to accrue benefits under the Restoration Plan.
Qualified Defined Contribution Plan
Our qualified defined contribution plan (Thrift Plan) allows employees to make pre-tax contributions to the plan out of their basic compensation. For the purposes of the Thrift Plan, basic compensation generally means cash compensation, including overtime but excluding incentive payments, bonuses, allowances and other extraordinary remuneration. The amount of an employees basic compensation taken into account under the Thrift Plan cannot exceed the Internal Revenue Code limit, which was $225,000 for 2007 and is $230,000 for 2008. The annual contribution made by an employee to the Thrift Plan cannot exceed 50% of his or her basic compensation and is limited to a maximum contribution amount specified under the Internal Revenue Code (which for 2007 was, and for 2008 is, $15,500, plus a catch-up contribution of $5,000 for employees who are at least 50 years of age). An employees pre-tax contributions (other than catch-up contributions) made to the Thrift Plan are matched by the Company on a dollar-for-dollar basis up to 6% of the employees basic compensation. In addition, beginning in 2006, the Company makes the following age-weighted contribution to the Thrift Plan for each participant whose initial employment date with the Company is on or after May 1, 2006 and who is employed by or on authorized leave of absence from the Company on the last day of the calendar year (or whose retirement, permanent disability or death occurred during such year while employed by or on authorized leave of absence from the Company):
The contributions made to our Thrift Plan by or for a participant are credited to accounts maintained for such participant under the plan. The amounts credited to a participants accounts are invested at the direction of the participant in various investment fund options available under the Thrift Plan, including investment in shares of our common stock. The amounts credited to a participants accounts that are attributable to his or her pre-tax contributions are immediately 100% vested. Amounts attributable to the Companys matching contributions become 34% vested upon the completion of one year of service, 67% vested upon the completion of two years of
service, and 100% vested upon the completion of three years of service. The amounts attributable to the Companys age-weighted contributions become vested after three years of service. The amounts credited to a participants accounts become distributable upon the participants termination of employment with the Company, and certain amounts are available for loans, hardship distributions and in-service withdrawals.
Non-Qualified Deferred Compensation Plan
Our non-qualified deferred compensation plan (Deferred Compensation Plan) allows executive officers, and certain other employees, to save for retirement in a tax-effective way at minimal cost to us. Under the Deferred Compensation Plan, participants are allowed to defer portions of their salary and bonus and to receive certain matching contributions that would have been made to our Thrift Plan if the Thrift Plan had not been subject to Internal Revenue Code compensation and contribution limitations. Under this unfunded program, amounts deferred by the participant are credited annually with interest at a rate equal to the greater of 125% of the 120-month rolling average of 10-year U.S. Treasury Notes or the 120-month rolling average of the prime rate as published in The Wall Street Journal.
Change of Control Arrangements
We have adopted change of control arrangements for our executive officers and certain other employees. These arrangements are intended to preserve morale and productivity and encourage retention in the face of the disruptive impact of an actual or rumored change of control of the Company. Based on information provided by Towers Perrin, we believe that these arrangements are common practice and align our executive officer interests with those of our stockholders by enabling our executive officers to consider corporate transactions that are in the best interest of stockholders without undue concern over whether the transactions may jeopardize their continued employment.
A change of control will be deemed to have occurred under our change of control arrangements if any of the following events occur:
We believe that these change of control events are an accurate depiction of circumstances that could reasonably be expected to result in a material change in the leadership and direction of the Company, creating uncertainties among employees and executive officers in such areas as the continuity of management, continued employment opportunities, and our ability to execute existing programs.
All of our change of control arrangements include provisions regarding severance benefits that our executive officers and certain other employees may be entitled to receive if they are terminated within two years following a change of control of the Company. Under these arrangements, if a named executive officer is terminated for any reason (other than for cause, disability or death) within two years after a change of control, we will then pay or provide the following to that named executive officer:
In addition, our change of control arrangements provide that a named executive officers LTIP performance units become vested and payable at their target performance level ($1.00 per unit) if a change of control of the Company occurs during the three-year performance period applicable to such performance units.
If we terminate the named executive officer for cause, no benefit is payable to, or with respect to, that named executive officer under our change of control arrangements. A termination for cause may only be made by the affirmative vote of a majority of the members of our Board.
Our change of control arrangements also provide for a tax gross-up payment to the named executive officer that will fully offset the effect of (1) any excise tax imposed by Section 4999 of the Internal Revenue Code upon the benefits payable under such arrangements (or under any other Company plan, arrangement or agreement), and (2) any federal, state or local income tax or additional Section 4999 excise tax that is attributable to the tax gross-up payment.
Our change of control arrangements include a plan or, in the alternative, individual change of control agreements. Specifically, on October 24, 2006, our Board approved a Change of Control Severance Plan for Executives (Executive Change of Control Plan), which became effective on that date. The plan covers our executive officers and certain key employees, provided that they are not already party to pre-existing change of control agreements with us. All of our named executive officers, however, are parties to pre-existing change of control agreements and therefore may not participate in the plan at this time.
Severance Benefit Plan
Our Severance Benefit Plan (Severance Benefit Plan) is an unfunded plan that provides for severance benefits to eligible employees, including our executive officers, in certain instances based upon years of completed service. The severance benefits are comprised of:
Because all of our named executive officers are parties to pre-existing change of control agreements, they are not eligible to receive severance benefits under our Severance Benefit Plan in the event of a change of control of the Company.
Perquisites: We do not consider perquisites to be a principal element of executive compensation. In 2007, certain of our executive officers received non-material personal benefits in the following circumstances: a club membership and an executive physical examination.
We offer a number of other benefits to our executive officers pursuant to benefit programs that provide for broad-based employee participation. These benefit programs include medical, dental and vision insurance, long-
term disability (LTD) and short-term disability insurance, life and accidental death and dismemberment (AD&D) insurance, health and dependent care flexible spending accounts, relocation/expatriate programs and services, educational assistance, employee assistance and certain other benefits.
We have entered into an indemnification agreement with each of our non-employee directors and our named executive officers. These agreements provide for us to indemnify such persons against certain liabilities that may arise by reason of their status or service as directors or executive officers and to advance their expenses incurred as a result of a proceeding as to which they may be indemnified. We also cover such persons under a directors and officers liability insurance policy that we choose, in our discretion, to maintain. These indemnification agreements are intended to provide indemnification rights to the fullest extent permitted under applicable indemnification rights statutes in the State of Delaware and are in addition to any other rights the individual may have under our Certificate of Incorporation, By-laws and applicable law. We believe these indemnification agreements enhance our ability to attract and retain knowledgeable and experienced executive officers and non-employee directors.
Under Section 409A of the Internal Revenue Code, amounts deferred for an executive officer under a nonqualified deferred compensation plan may be included in gross income when vested and subject to a 20% or more additional federal tax, unless the plan complies with certain requirements related to the timing of deferral election and distribution decisions. Effective January 1, 2008, our Board approved the amendment of the following compensatory plans and arrangements in which our named executive officers participate to comply with recently issued Section 409A final regulations: LTIP, Restoration Plan, Deferred Compensation Plan, Executive Change of Control Plan and the corresponding form executive change of control agreement, and the form 2006 performance unit agreement.
Section 162(m) of the Internal Revenue Code may limit our ability to deduct annual compensation in excess of $1,000,000 that is paid to our CEO and other named executive officers, unless that compensation is performance-based compensation within the meaning of Section 162(m) and the regulations promulgated thereunder. We believe that all of the stock options granted under the 1992 Plan qualify as performance-based compensation and therefore are not subject to the deduction limitation of Section 162(m). However, the salary and STIP payouts paid to our executive officers, certain restricted stock and performance units awards, and certain payments provided for under our change of control agreements with the named executive officers are not exempt from this deduction limit.
Section 280G of the Internal Revenue Code limits our ability to deduct amounts paid to certain disqualified individuals, including our executive officers, that are treated as excess parachute payments. Excess parachute payments are also subject to an excise tax payable by the recipient of such payment. Parachute payments are payments that are contingent on a change in the ownership or effective control of the Company or in the ownership of a substantial portion of our assets, and they become excess parachute payments with respect to a disqualified individual to the extent that the total amount of the parachute payments made to such individual exceeds a certain threshold amount. Examples of the types of payments that could give rise to parachute payments are the accelerated vesting of stock options and restricted stock upon a change of control and severance payments made upon a termination of employment in connection with a change of control.
Although we consider tax deductibility in the design and administration of our executive officer compensation plans and programs, we believe that there are circumstances where our interests are best served by maintaining flexibility in the way compensation is provided, even if it results in the non-deductibility of certain compensation under the Internal Revenue Code. For example, our Compensation Committee has determined that the benefit of enhanced flexibility in our STIP program outweighs the value of the lost deduction.
Rules under generally accepted accounting principles determine the manner in which we account in our financial statements for grants of equity-based compensation to our employees. Our accounting policies for equity-based compensation are further discussed in Notes to Consolidated Financial Statements, Footnotes 2 and 9, of our 2007 Form 10-K.
The following report of the Compensation, Benefits and Stock Option Committee of the Board of Directors shall not be deemed to be soliciting material or to be filed with the SEC or subject to the SECs proxy rules, except for the required disclosure in this proxy statement, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934 (Exchange Act), and the information shall not be deemed to be incorporated by reference into any filing made by the Company under the Securities Act of 1933 or the Exchange Act.
The Compensation, Benefits and Stock Option Committee has reviewed the Compensation Discussion and Analysis contained in this Proxy Statement and discussed this disclosure with management. Based on this review and discussions with management, the Compensation, Benefits and Stock Option Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007 for filing with the SEC.
March 21, 2008
Compensation, Benefits and
Stock Option Committee
Kirby L. Hedrick, Chair
Jeffrey L. Berenson
Edward F. Cox
Summary Compensation Table
The following table sets forth certain summary information concerning the compensation earned by our CEO and Chief Financial Officer and each of our three most-highly compensated executive officers other than the CEO and Chief Financial Officer (collectively, the named executive officers) during 2006 and 2007.
As reflected in the table above, the salary received by each of our named executive officers as a percentage of their respective total compensation during the year indicated was as follows:
Grants of Plan Based Awards
The table below sets forth information regarding grants of plan-based awards made to our named executive officers during 2007.
Our Compensation Committee, with input from our other directors, evaluates Mr. Davidsons performance, with that evaluation supporting the determination of Mr. Davidsons compensation level. The Companys key accomplishments during 2007 under Mr. Davidsons leadership include:
Stockholder return represents the change in capital value of our common stock for the period beginning January 1, 2007 and ending December 31, 2007, plus dividends, expressed as a percentage.
Mr. Davidson earned a total salary of $1,025,000 in 2007. Mr. Davidson did not receive a base salary increase in 2007. Based on the results of Towers Perrins review of 2007 executive compensation, our Compensation Committee determined that Mr. Davidsons salary was appropriate based on the market median for his position relative to our compensation peer group giving consideration to the scope and nature of our operations.
Mr. Davidson received a total STIP payment of $2,600,000 in February 2008, based on our Compensation Committees review of overall performance of the Company for the 2007 fiscal year, as well as Mr. Davidsons performance, as measured against operational and financial goals for 2007 that he submitted earlier in the year, considering the Companys 2007 accomplishments under Mr. Davidsons leadership.
Mr. Davidson was granted awards under our LTIP of 164,118 stock options and 58,262 shares of restricted stock on February 1, 2007, based in part on market data from Towers Perrin and considering our performance against our compensation peer group and Mr. Davidsons leadership performance.
We believe that Mr. Davidsons compensation level is consistent with the objectives of our compensation program, provides an appropriate mix of salary and incentive compensation, rewards leadership performance by Mr. Davidson that has resulted in significant accomplishments by the Company in 2007 and provides motivation for the future achievement of short-term and long-term goals necessary to stockholder value creation. We also believe that it is internally consistent and equitable compared to our other executive officers in light of Mr. Davidsons leadership role and responsibilities within the Company and externally with our stockholders, the investment community and our industry.
In determining the compensation of Messrs. Tong, Stover and Bullington and Ms. Cunningham for 2007, our Compensation Committee considered their respective roles, responsibilities and reporting within the Company; their respective contributions to the overall performance of the Company; the performance of their respective business units or organizations; comparisons to our compensation peer group; and internal pay equity.
Based on the results of Towers Perrins review of 2007 executive compensation, our Compensation Committee determined that an increase in base salary for each of our named executive officers was appropriate to more closely approximate market median for their respective positions relative to our compensation peer group giving consideration to the scope and nature of our operations. Effective August 1, 2007, Mr. Stovers base salary was increased to $525,000, Mr. Tongs base salary was increased to $425,000 and Mr. Bullingtons and Ms. Cunninghams base salaries were increased to $420,000.
After reviewing the overall performance of the Company for the 2007 fiscal year and the contributions to that performance of each non-CEO named executive officer and his or her respective business unit or organization, our Compensation Committee approved the following STIP payments: Mr. Tong $656,268; Mr. Stover $1,010,655; Mr. Bullington $614,448; and Ms. Cunningham $667,025. The STIP payments for 2007 performance for Mr. Tong, Mr. Stover and Ms. Cunningham increased approximately 1%, 3%, and 11%, respectively, over 2006. The STIP payment for 2007 performance for Mr. Bullington decreased approximately 1% over 2006. We believe that these STIP payments are appropriate in light of the Companys performance in 2007 and reflect the relative contributions of these executive officers.
On February 1, 2007, Messrs. Tong, Stover, and Bullington and Ms. Cunningham were granted awards of stock options under our LTIP of 32,957, 48,610, 35,953, and 34,455, respectively. On that same date, Messrs. Tong, Stover and Bullington and Ms. Cunningham were awarded 11,700, 17,257, 12,763 and 12,231 shares of restricted stock, respectively. Our Compensation Committee considered the Companys performance against our compensation peer group plus individual performance in determining the level of these grants. These grants were also based
on market data from Towers Perrin regarding our compensation program and appropriate long-term incentive grant levels in light of compensation peer group practices.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information with respect to restricted stock and stock options held by our named executive officers as of December 31, 2007.
Stock Option Exercises and Stock Vesting
The following table sets forth certain information with respect to vesting of restricted stock and the exercise of stock options held by our named executive officers during fiscal year 2007.
The amounts reported in the table below reflect the present value of accumulated benefits as of December 31, 2007 for the named executive officers under our Retirement Plan and Restoration Plan. The estimates assume that benefits are received in the form of a ten-year certain and life annuity.
Nonqualified Deferred Compensation Table
The following table sets forth certain information with respect to contributions made to our Deferred Compensation Plan by our named executive officers during fiscal year 2007.
The matching contributions and a portion of the interest earnings credited to the Deferred Compensation Plan accounts of our named executive officers are reflected in the All Other Compensation and the Change in Pension Value columns of the Summary Compensation Table above, respectively.
The tables below estimate the amount of compensation payable to each of our named executive officers upon voluntary and involuntary termination of employment, termination following a change of control and in the event of disability or death, in each case effective as of December 31, 2007. The actual amount of compensation payable to each of our named executive officers can only be determined at the time of his or her separation from the Company.
Upon termination of employment for reasons other than disability, death or in connection with a change of control, each named executive officer is entitled to receive amounts earned during his or her term of employment. Such amounts include:
In the event of the retirement of a named executive officer, in addition to the items identified above, the named executive officer:
In the event of the death or disability of a named executive officer, in addition to the benefits listed under the headings Payments Made Upon Termination and Payments Made Upon Retirement above, the named executive officer or his or her named beneficiary will receive benefits under our disability plan or payments under our life insurance plan, as appropriate.
We have entered into change of control agreements with each of our named executive officers. If a named executive officers employment is terminated within two years after a change of control of the Company, he or she may be entitled to receive certain severance benefits pursuant to the terms of his or her change of control agreement. These benefits are described above more fully in this proxy statement under the heading Change of Control Arrangements.
Charles D. Davidson
The following table shows the potential payments to Mr. Davidson, President, CEO and Chairman of our Board, in the event of his termination of employment as of December 31, 2007.