Noble Energy DEF 14A 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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Noble Energy, Inc.
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TABLE OF CONTENTS
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 28, 2009, 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 10, 2009 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 2008 and its financial statements for the fiscal year ended December 31, 2008 are contained in the Companys 2008 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
Senior Vice President, General Counsel and Secretary
March 23, 2009
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR
THE 2009 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 28, 2009.
The Companys Proxy Statement for the 2009 Annual Meeting of Stockholders, Annual Report to Stockholders for the fiscal year ended December 31, 2008 and Annual Report on Form 10-K for the fiscal year ended December 31, 2008 are available at http://materials.proxyvote.com/655044.
100 Glenborough Drive
Houston, Texas 77067
For Annual Meeting of Stockholders
To Be Held On April 28, 2009
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 28, 2009, 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 25, 2009.
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 anniversary of the previous years annual meeting of stockholders; 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 2010 annual meeting must be received by us no later than December 29, 2009.
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 2009 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 such item (so-called broker non-votes), the shares they hold will have no effect on the vote. For purposes of our 2009 annual meeting, brokers will be prohibited from exercising discretionary authority with respect to the proposal to approve the amendment to our 1992 Stock Option and Restricted Stock Plan (1992 Plan).
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.
Our Board recently approved an amendment to our By-laws that will require each of our directors to receive a majority of the votes cast in uncontested elections. In contested elections, the vote standard will continue to be a plurality of votes cast. Our Board also approved an amendment to our Corporate Governance Guidelines to address situations where a director nominee fails to receive the required majority vote in an uncontested election, requiring a director nominee to execute an irrevocable letter of resignation in order to be nominated by our Board for election. The tendered resignation will only go into effect if (1) that nominee does not receive a majority of the votes cast in the uncontested election and (2) the nominees resignation is accepted by our Board. These amendments will not apply to the director election covered by this proxy statement, which will utilize the plurality vote standard, but will become effective on June 1, 2009.
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 $120,000 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 is a current partner or employee of our internal or external auditor; (b) the director has an immediate family member who is a current partner of that firm; (c) the director has an immediate family member who is a current employee of that firm and personally works on our audit; or (d) the director or an immediate family member was, within the last three years, a partner or employee of that firm and personally worked on our audit during 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 17, 2009, 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 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, Grubman, 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.
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 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: 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 10, 2009, 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 173,328,806 shares of common stock. Each share of common stock is entitled to one vote.
The following tabulation sets forth, as of March 10, 2009, 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 amended (the Exchange Act).
As of the date of this proxy statement, our Board consists of nine directors, seven 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 will be elected by plurality vote of the shares present at the 2009 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 nine 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 nine 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 58, 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 61, 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 62, is Of Counsel to, and prior to 2009 was a partner in, the law firm of Patterson Belknap Webb & Tyler llp, New York, New York, for more than five years serving 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 community college and charter school committees 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. In 2006 and 2007, Mr. Cox served as the New York State Chair of Senator John McCains presidential campaign. Mr. Cox has served on our Board since 1984.
Charles D. Davidson Mr. Davidson, age 59, 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 58, founded Patina Oil & Gas Corporation and served as its Chairman and Chief Executive Officer from its formation in 1996 through its merger with Noble Energy, Inc. in 2005. He co-founded Snyder Oil Corporation and was its President from 1981 through 1997. He served as Chairman and Chief Executive Officer and later 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 is Managing Partner of White Deer Energy LP, an energy private equity fund, and serves as Chairman of Berenson & Company. He is also President of Lenox Hill Neighborhood House, a Trustee and Chair of the Investment Committee of The Hotchkiss School and a member of the Board of Directors of Georgetown University.
Eric P. Grubman Mr. Grubman, age 51, has served as Executive Vice President of the National Football League since 2004. He was responsible for Finance and Strategic Transactions from 2004 to 2006, and has served as the Leagues President of Business Ventures from 2006 to present. He was a private investor from 2001 to 2004, Co-President of Constellation Energy Group, Inc. from 2000 to 2001 and Partner and Co-Head of the Energy Group at Goldman Sachs from 1996 to 2000. Mr. Grubman joined our Board on January 27, 2009.
Kirby L. Hedrick Mr. Hedrick, age 56, served as Executive Vice President over upstream operations for Phillips Petroleum Company from 1997 until his retirement in 2000. He joined our Board on August 1, 2002.
Scott D. Urban Mr. Urban, age 55, 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, and a member of the Board of Directors of Pioneer Drilling. Mr. Urban joined our Board on October 23, 2007.
William T. Van Kleef Mr. Van Kleef, age 57, served in executive management positions at Tesoro Corporation (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 120 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 2010 annual meeting of stockholders must be received by us no later than December 29, 2009.
Our Board unanimously recommends that stockholders vote FOR the election of each of its nine nominees.
Our Board held eleven meetings in 2008, consisting of five regular meetings, its annual organizational meeting and five 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 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 person warrants further consideration, the committee Chair or another member of our Governance Committee will contact the individual. Generally, if the person expresses a willingness to be considered and to serve on our Board, our Governance Committee will request information, 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 Secretary and generally received not less than 120 days before the anniversary date of the immediately previous years annual meeting of stockholders. A stockholder must include the following information with each recommendation for a director nominee:
Bruce A. Smith resigned from our Board effective February 1, 2008. After evaluation of director candidates to fill the position vacated by Mr. Smith, Eric P. Grubman was appointed to our Board on January 27, 2009.
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 2008. 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 seven meetings during 2008. 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 five meetings during 2008.
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 2008.
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 2008.
Kirby L. Hedrick, Jeffrey L. Berenson and Edward F. Cox served on our Compensation Committee for all of 2008. There were no Compensation Committee interlocks nor insider (employee) participation during 2008.
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, 2009. 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.
APPROVAL OF AMENDMENT TO
Our 1992 Plan was adopted by our Board and approved by our stockholders at the 1992 annual meeting of stockholders, and was most recently amended in 2007. At the 2009 annual meeting, our stockholders are being asked to approve an amendment to our 1992 Plan to increase the number of shares of common stock authorized for issuance under the 1992 Plan from 22,000,000 shares to 24,000,000 shares (an increase of 2,000,000 shares). Our Board unanimously adopted this amendment on March 18, 2009, subject to stockholder approval at our annual meeting.
Our Board recommends approval of the amendment to the 1992 Plan to enable the continued use of the 1992 Plan for stock-based grants consistent with the objectives of our compensation program in order to:
We believe that the success of our compensation program, including the use of stock-based grants under our 1992 Plan, is well-evidenced by the performance of our common stock over the last several years, as we ranked third
among our peer group in total stockholder return for the three-year period 2006 through 2008 at 24.9%. Stockholder return represents the change in capital value of our common stock for the period indicated, plus dividends, expressed as a percentage.
The use of stock-based grants under our 1992 Plan continues to be an important part of our compensation program. Of the 22,000,000 shares currently authorized for issuance under the 1992 Plan, 2,805,109 shares remain as of March 10, 2009 after January 31, 2009 grants totaling 1,893,679 shares. We do not believe that this leaves sufficient shares available for more than one additional year of grants under the 1992 Plan. By increasing the number of shares authorized for issuance under our 1992 Plan by 2,000,000, a total of 4,805,109 shares would be available. This increase would, in essence, replenish the shares consumed in our January 31, 2009 grants and give us the flexibility to continue to make stock-based grants over the next two years in amounts determined appropriate by our Compensation Committee. The proposed amendment will not be implemented unless approved by our stockholders. If the proposed amendment is not approved by our stockholders, the 1992 Plan will remain in effect in its present form.
As of the record date of March 10, 2009, there were a total of 173,328,806 shares of our common stock issued and outstanding. In addition to the shares remaining available for issuance under the 1992 Plan, there were 568,841 shares available for grant under the 2005 Stock Plan for Non-Employee Directors of Noble Energy, Inc. (2005 Plan). The Company had a total of 7,004,445 stock options outstanding with a weighted average exercise price of $44.55 and a weighted average remaining term of 6.6 years, and 1,341,989 shares of restricted stock outstanding as of the record date.
The following is a summary of the principal features of our 1992 Plan as amended to reflect the proposed plan amendment. The summary does not purport to be a complete description of all provisions of our 1992 Plan and is qualified in its entirety by the text of the 1992 Plan, a copy of which (as amended to reflect the proposed plan amendment) is attached to this proxy statement as Appendix A. Capitalized terms not otherwise defined below have the meanings ascribed to them in the 1992 Plan.
Under our 1992 Plan, shares of Common Stock may be subject to grants of Nonqualified Options, SARs or awards of Restricted Stock to officers and other employees of the Company or one of its Affiliates. Our 1992 Plan originally also permitted grants of Incentive Options but was amended in 1996 to provide, among other things, that no Incentive Options or any SARs that relate to such Incentive Options could be granted after December 9, 2006. Nonqualified Options and any SARs related thereto may be granted, and Restricted Stock may be awarded, until the shares of Common Stock available under the 1992 Plan have been exhausted or the 1992 Plan has been terminated. Shares of Common Stock covered by a Nonqualified Option that expires or terminates prior to exercise and shares of Restricted Stock returned to the Company are again available for grant of Nonqualified Options and awards of Restricted Stock. Our 1992 Plan contains antidilution provisions that apply in the event of an increase or decrease in the number of outstanding shares of Common Stock, effected without receipt of consideration therefor by the Company, through a stock dividend or through a stock split, combination or exchange of our shares that results from a recapitalization, merger or other restructuring in which the Company is the surviving company. In the event of such increase or decrease, appropriate adjustments will be made in the maximum number of shares subject to the 1992 Plan and the number of shares and option prices under then outstanding Nonqualified Options.
Our 1992 Plan provides that it is to be administered by a committee of our Board. The committee must consist of two or more of our directors, all of whom must be (1) Non-Employee Directors as defined in Rule 16b-3 of the Exchange Act and (2) Outside Directors as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (Internal Revenue Code), and the regulations promulgated thereunder. Our Compensation Committee meets these requirements and thus administers our 1992 Plan. In doing so, our Compensation Committee determines the grants of Nonqualified Options and awards of Restricted Stock, the terms and provisions of the respective agreements covering the grants or awards and all other decisions concerning the 1992 Plan. Our 1992 Plan provides that the determination of the committee is binding with respect to all questions of interpretation and
application of the 1992 Plan and of Nonqualified Options granted or awards of Restricted Stock made thereunder, subject to the express provisions of the 1992 Plan and except as set forth below under Stock Options and SARs and Amendment and Duration of the 1992 Plan.
All of our regular salaried executive officers and other employees and those of our Affiliates are eligible to participate in the 1992 Plan. As of March 10, 2009, all of our executive officers and approximately 492 other current employees participate in the 1992 Plan.
On March 10, 2009, the reported closing price per share of our Common Stock on the NYSE was $45.74.
Our 1992 Plan provides that, from time to time during the term of the plan, the committee, in its sole discretion, may grant Nonqualified Options, Restricted Stock or any combination thereof to any employee eligible under the 1992 Plan. Each person who accepts a Nonqualified Option is required to enter into an agreement with the Company whereupon the person shall become a participant in the 1992 Plan in accordance with the terms of the agreement.
The committee may, from time to time, grant SARs in conjunction with all or any portion of a Nonqualified Option either at the time of the initial Nonqualified Option grant or at any time after the initial grant while the Nonqualified Option is outstanding. SARs generally will be subject to the same terms and conditions and exercisable to the same extent as Nonqualified Options, as described above. SARs entitle an Optionee to receive without payment to the Company (except for applicable withholding taxes) the excess of the aggregate fair market value per share with respect to which the SAR is then being exercised (determined as of the date of the exercise) over the aggregate purchase price of the shares as provided in the related Nonqualified Option. Payment may be made in shares of already owned Common Stock or in cash, or a combination thereof, as determined by the committee.
The option price for each Share covered by a Nonqualified Option shall not be less than the greater of (1) the par value of the Share or (2) 100% of the Fair Market Value of the Share at the time the Nonqualified Option is granted. If the Company agrees to substitute a new option under the 1992 Plan for an old Nonqualified Option, or to assume an old Nonqualified Option, as provided for in the 1992 Plan, the option price of the Shares covered by each new Nonqualified Option or assumed Nonqualified Option may be otherwise determined by a formula; provided, however, in no event shall: (a) the excess of the aggregate Fair Market Value of the Shares subject to the Nonqualified Option immediately after the substitution or assumption over the aggregate option price of the Shares be more than the excess of the aggregate Fair Market Value of all Shares subject to the option immediately prior to the substitution or assumption over the aggregate option price of the Shares; or (b) the ratio of the option price to the Fair Market Value of the stock subject to the Nonqualified Option immediately after the substitution or assumption be more favorable to the Optionee than the ratio of the option price to the Fair Market Value of the stock subject to the old Nonqualified Option immediately prior to the substitution or assumption, on a Share by Share basis.
Our 1992 Plan provides that Restricted Stock may be awarded by the committee to the eligible recipients as it may determine from time to time. The eligible recipients are those individuals who are eligible for Nonqualified Option grants. Restricted Stock is Common Stock that may not be sold, assigned, transferred, discounted, exchanged, pledged or otherwise encumbered or disposed of until the terms and conditions set by the committee, which terms and conditions may include, among other things, the achievement of specific goals, have been satisfied (Restricted Period). During the Restricted Period, unless specifically provided otherwise in accordance with the terms of the 1992 Plan, the recipient of Restricted Stock would be the record owner of the shares and have all the
rights of a stockholder with respect to the shares, including the right to vote and the right to receive dividends or other distributions made or paid with respect to the shares.
Our 1992 Plan provides that the committee has the authority to cancel all or any portion of any outstanding restrictions prior to the end of the Restricted Period with respect to any and all of the shares of Restricted Stock awarded to an individual on the terms and conditions as the committee may deem appropriate. If the terms and conditions for the removal of the restrictions on the Restricted Stock that has been awarded to a recipient are not satisfied, the Restricted Stock is forfeited by the recipient and returned to the Company.
The Board may at any time amend, suspend or terminate our 1992 Plan; provided, however, the Board may not, without the approval of the stockholders of the Company, amend the 1992 Plan so as to (1) increase the maximum number of shares subject thereto, or (2) reduce the option price per share covered by Options granted under the 1992 Plan below the price specified in the 1992 Plan. Additionally, the Board may not modify, impair or cancel any outstanding Option or SARs related thereto, or the restrictions, terms or conditions applicable to Shares of Restricted Stock, without the consent of the holder thereof.
The following summary is based upon an analysis of the Internal Revenue Code, existing laws, judicial decisions, administrative rulings, regulations and proposed regulations, all of which are subject to change. Moreover, the following is only a summary of United States federal income tax consequences and the consequences may be either more or less favorable than those described below depending on an employees particular circumstances.
Nonqualified Options. No income will be recognized by an Optionee for federal income tax purposes upon the grant of a Nonqualified Option. Upon exercise of a Nonqualified Option, the Optionee will recognize ordinary income in an amount equal to the excess of the fair market value of the shares on the date of exercise over the amount paid for such shares and, subject to the deduction limitations described below, the Company will be entitled to a deduction equal to the ordinary income recognized by the Optionee.
The basis of shares transferred to an Optionee pursuant to exercise of a Nonqualified Option is the price paid for the shares plus an amount equal to any income recognized by the Optionee as a result of the exercise of the option. If an Optionee thereafter sells shares acquired upon exercise of a Nonqualified Option, any amount realized over the basis of the shares will constitute capital gain to the Optionee for federal income tax purposes.
If an Optionee uses already-owned shares of Common Stock to pay the exercise price for shares under a Nonqualified Option, the number of shares received pursuant to the Nonqualified Option which is equal to the number of shares delivered in payment of the exercise price will be considered received in a nontaxable exchange, and the fair market value of the remaining shares received by the Optionee upon the exercise will be taxable to the Optionee as ordinary income. If the already-owned shares of Common Stock are not statutory option stock (as defined in Section 424(c)(3)(B) of the Internal Revenue Code) or are statutory option stock with respect to which the applicable holding period referred to in Section 424(c)(3)(A) of the Internal Revenue Code has been satisfied, the shares received pursuant to the exercise of the Nonqualified Option will not be statutory option stock and the Optionees basis in the number of shares received in exchange for the stock delivered in payment of the exercise price will be equal to the basis of the shares delivered in payment. The basis of the remaining shares received upon the exercise will be equal to the fair market value of the shares. However, if the already-owned shares of Common Stock are statutory option stock with respect to which the applicable holding period has not been satisfied, it is not presently clear whether the exercise will be considered a disqualifying disposition of the statutory option stock, whether the shares received upon the exercise will be statutory option stock, or how the Optionees basis will be allocated among the shares received.
The ordinary income recognized by an Optionee upon the exercise of a Nonqualified Option is compensation subject to withholding for federal income tax purposes, and the Company must make arrangements with the Optionee to ensure that the amount of the tax required to be withheld by the Company is paid to the Internal
Revenue Service for the benefit of the Optionee. This tax withholding obligation may be satisfied by an Optionee at the time of the exercise of a Nonqualified Option by paying cash to the Company or by transferring already-owned shares of Common Stock to the Company. If an Optionee transfers already-owned shares of Common Stock to the Company in order to satisfy the Companys tax withholding obligation, the transfer of such shares will be a taxable event.
If the already-owned shares of Common Stock are not statutory option stock or are statutory option stock with respect to which the applicable holding period has been satisfied, the amount by which the consideration received by the Optionee (i.e., the amount of the Optionees tax withholding that is satisfied by the transfer, plus any cash paid by the Company to the Optionee in lieu of a fractional share) exceeds the Optionees basis in the transferred stock will be a capital gain to the Optionee (or, if the consideration received is less than the Optionees basis, the difference will be a capital loss to the Optionee). If the already-owned shares of Common Stock are statutory option stock with respect to which the applicable holding period has not been satisfied, the transfer of the shares will be a disqualifying disposition of statutory option stock.
SARs. There will be no federal income tax consequences to either the recipient or the Company upon the grant of SARs. Generally, the recipient will recognize ordinary income subject to withholding upon the exercise of SARs in an amount equal to the amount of cash received and the fair market value of any shares acquired pursuant to the exercise. Subject to the deduction limitations described below, the Company generally will be entitled to a corresponding tax deduction equal to the amount includable in the recipients income.
Restricted Stock. If the restrictions on an award of Restricted Stock are of a nature that the shares are both subject to a substantial risk of forfeiture and are not freely transferable within the meaning of Section 83 of the Internal Revenue Code, the recipient will not recognize income for federal income tax purposes at the time of the award unless the recipient affirmatively elects to include the fair market value of the shares of restricted stock on the date of the award, less any amount paid therefor, in gross income for the year of the award pursuant to Section 83(b) of the Internal Revenue Code. In the absence of an election, the recipient will be required to include in income for federal income tax purposes in the year in which the shares either become freely transferable or are no longer subject to a substantial risk of forfeiture within the meaning of Section 83 of the Internal Revenue Code, the fair market value of the shares of restricted stock on that date, less any amount paid therefor. The Company will be entitled to a deduction at the time of income recognition to the recipient in an amount equal to the amount the recipient is required to include in income with respect to the shares, subject to the deduction limitations described below. If a Section 83(b) election is made within 30 days after the date the Restricted Stock is received, the recipient will recognize ordinary income at the time of receipt of the Restricted Stock and the Company will be entitled to a corresponding deduction equal to the fair market value (determined without regard to applicable restrictions) of the shares at the time less the amount paid, if any, by the recipient for the Restricted Stock. If a Section 83(b) election is made, no additional income will be recognized by the recipient upon the lapse of restrictions on the Restricted Stock, but, if the Restricted Stock is subsequently forfeited, no deduction will be allowed to the recipient with respect to the forfeiture. Dividends paid to a recipient holding restricted stock before the expiration of the restriction period will be additional compensation taxable as ordinary income to the recipient, unless the recipient made an election under Section 83(b). Subject to the deduction limitations described below, the Company generally will be entitled to a corresponding tax deduction equal to the dividends includable in the recipients income as compensation. If the recipient has made a Section 83(b) election, the dividends will be dividend income rather than additional compensation to the recipient.
If the restrictions on an award of Restricted Stock are not of a nature that the shares are both subject to a substantial risk of forfeiture and not freely transferable, within the meaning of Section 83 of the Internal Revenue Code, the recipient will recognize ordinary income for federal income tax purposes at the time of the award in an amount equal to the fair market value of the shares of Restricted Stock on the date of the award, less any amount paid therefor. The Company will be entitled to a deduction at that time in an amount equal to the amount the recipient is required to include in income with respect to the shares, subject to the deduction limitations described below.
Limitations on the Companys Compensation Deduction. Section 162(m) of the Internal Revenue Code limits the deduction that the Company may take for otherwise deductible compensation payable to certain officers of the Company to the extent that compensation paid to any such officer for the year exceeds $1.0 million, unless the
compensation is performance-based. Compensation attributable to a stock option or stock appreciation right is deemed to satisfy the requirements for performance-based compensation if (1) the grant or award is made by a compensation committee composed of two or more outside directors; (2) the plan under which the option or right is granted states the maximum number of shares with respect to which options or rights may be granted during a specified period to any employee; and (3) under the terms of the option or right, the amount of compensation the employee could receive is based solely on an increase in the value of the stock after the date of the grant or award. The 1992 Plan has been designed to enable awards of Options and SARs granted by the committee to qualify as performance-based compensation for purposes of Section 162(m) of the Internal Revenue Code.
Our Board unanimously recommends that stockholders vote FOR the approval of the proposed amendment to our 1992 Plan.
The following tabulation sets forth, as of March 10, 2009, 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.
The first part of our Compensation Discussion and Analysis, entitled Compensation Considerations in the Current Environment, discusses how our executive compensation program operates in the current economic environment. The second part, entitled Overview of Our Executive Compensation Program, discusses the elements and provides an analysis of our executive compensation program. The third part includes a presentation of executive compensation in tabular form.
Our Compensation Committee evaluated and set 2008 executive compensation in the context of the Companys operational performance, the current global economic environment and the recent decline in the oil and natural gas commodity market. In this difficult environment, we believe that our 2008 compensation program is balanced and reasonable. Our goal is to link compensation strongly to performance through the use of financial incentives that are tied to the Companys operational and financial performance. We do not use highly leveraged incentives that might encourage adverse short-term behavior, but instead strive to incentivize consistent, longer-term performance and achievement of strategic objectives.
We recognize that value-creating performance by a group of executives does not always translate immediately into appreciation in our stock price, particularly in periods of economic stress and commodity price declines. Our Compensation Committee considered the impact that recent global economic and commodity market declines have had on our stock price. It is the committees belief that the Company made exceptional progress on a number of strategic objectives during 2008, significantly enhancing the future value of the Company.
Performance during 2008 was a one of extreme contrasts. We reported record net income of $1.4 billion and record discretionary cash flow of $2.4 billion. We also saw record annual daily production, up eight percent from 2007. We replaced 147% of our production (before adjustment of reserves for year-end prices), and had the most successful exploration effort in the Companys history with significant discoveries in West Africa, Israel, and the deepwater Gulf of Mexico. In contrast to this excellent operational and financial performance, our stockholder return for the year was a negative 37.5%. Although this was within the median range of our peer group and the Standard & Poors 500, it was disappointing to experience such a sudden loss in stockholder value given our operational and financial performance. Over the longer term, we ranked third among our peer group in total stockholder return for the three-year period 2006 through 2008 at 24.9%. Taking these factors into account, we reduced the payout versus target of our 2008 Short Term Incentive Plan award compared to 2007 by an average of 31.5% for executive officers other than the CEO. The CEOs payout was reduced approximately 45% compared to 2007.
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 set out in detail in the committees charter but generally is to:
The committee also serves an important role in setting the overall compensation philosophy, goals and objectives of the Company.
Our Board has delegated authority to our Compensation Committee to determine and approve (1) our compensation philosophy, (2) the compensation of our non-CEO 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 these membership criteria are met by Kirby L. Hedrick, Jeffrey L. Berenson and Edward F. Cox, who currently serve on our Compensation Committee and did so throughout 2008. Each 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, and the committee may also hold special meetings. Committee meeting agendas are reviewed by our Lead Independent Director and approved by the committee Chair. Our Compensation Committee held seven meetings during 2008.
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 (1) grant stock options and restricted stock to new hires for employment inducement purposes, (2) approve cash retention payments, and (3) make adjustments related to change of control severance plan participation resulting from organizational changes affecting employees not participating in the Change of Control Severance Plan for Executives. Actions taken by our CEO under these delegations are required to be reported to our Compensation Committee at its next regularly scheduled meeting and the committee reviews the appropriateness of the delegation on an annual basis.
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, 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 such matters outside of the presence of our management. During 2008, the committee held four executive sessions.
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 2008 executive compensation program and providing comparative market data on compensation practices and programs based on an analysis of our peer companies and other factors. The committee further reviewed its compensation consultant needs in January 2009, considering Towers Perrins past performance and its familiarity with our executive compensation program and the compensation programs of our peer companies and sector, the benefits of retaining the same consultant compared to those of engaging a different consultant, and independence taking into account that of the total approximate $81,000 we paid to Towers Perrin in 2008, approximately $66,000 represented consulting services in the area of executive compensation. Based on this review, our Compensation Committee found Towers Perrin to be independent and retained Towers Perrin as its compensation consultant for 2009.
Towers Perrin also provided compensation consulting services to our Governance Committee in 2008, and in 2009 continues 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 that paid to similarly-situated executives at companies that we consider to be our peers this is often referred to as benchmarking. We consider benchmarking data in determining executive officer base salary, our short term incentive plan target bonus percentage factors, equity grant levels and the overall structure of our compensation program. 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 decide 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 2008, 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 CEO and 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 2009, our Compensation Committee retained the same compensation peer group from 2008. Our compensation peer group, therefore, consists of:
We believe that this group of companies continues to be representative of the sector in which we operate, and was chosen for a variety of reasons including each of the companies market size and geographic scope of operations, the nature and relative complexity of their businesses 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 provide the committee comparative compensation information in these areas for each executive officer, along with summary information on post-employment compensation trends, benefits and other relevant factors. This information is compiled in written report format and includes recent publicly available information and other market data, as well as tally sheets detailing the base salary, short term incentive plan and long term incentive plan elements. We believe that this information provides 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 that of our other executive officers. The committee has not adopted a formal policy regarding internal pay equity, but in 2008 concluded that CEO compensation was equitable compared to that of our Chief Operating Officer (COO) and other named executive officers in recognition of the CEOs broad responsibility and accountability for the Companys strategy and operations, compliance and controls, investor relations and role as Chairman of the Board of Directors. The 2008 total compensation of the COO was likewise found to be equitable compared to that of the next named executive officer in recognition of the COOs broad responsibility for the Companys worldwide exploration and production operations, our Compensation Committees views on that position relative to the other named executive officer positions and the fact that two of the other named executive officers report directly to the COO. The Compensation Committee likewise concluded that the compensation of our other named executive officers was equitable in light of their respective roles, responsibilities and reporting relationships.
Our executive compensation program is designed to incentivize consistent, longer-term performance and achievement of strategic objectives in a manner that will:
We believe that linking executive compensation to Company performance is in the best interest of our stockholders and, as an individuals level of responsibility increases, a greater portion of total compensation should be at risk and the mix of total compensation should be weighted more heavily in favor of incentive-based compensation including equity-linked compensation. As performance goals are met or exceeded, resulting in increased value to stockholders, our executive officers should be rewarded commensurately. Our Compensation Committee believes that our 2008 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. The following is a discussion of each of these elements and their respective roles in our compensation program.
Base salary provides a cash foundation for our total compensation program that helps us attract and retain individuals of high quality. Our Compensation Committee believes that base salaries for executive officers should be competitive with comparable positions in peer companies to allow us to attract and retain such individuals. The policy of our Compensation Committee generally is to establish base salary levels that approximate the market median. Competitive information is obtained 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. Based on the results of market data provided by Towers Perrin regarding 2008 executive compensation, adjustments were made in 2008 to certain executive officers base salaries to more closely approximate the market median.
Our short-term incentive plan (STIP) is a performance-based annual incentive bonus plan that is payable in cash and available to all of our full-time employees, including executive officers. It provides a performance-based incentive beyond base salary that is designed to motivate performance and compensate employees for the value of their annual contributions. In addition, given its annual nature and discretionary component, the STIP has flexibility to respond to changing market conditions.
The target STIP 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 from 75% to 90% for the other named executive officers, with the differences primarily attributable to each officers respective 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 specific targets, in addition to a discretionary component to be determined by the committee as discussed below. The measures, weighting and targets are communicated to our executive officers at that time. The 2008 measures approved by our Compensation Committee on January 21, 2008 accounted for 50% of the STIP formula and consisted of quantitative targets for proved reserve additions, production, controllable unit costs, and discretionary cash flow. Discretionary cash flow is a non-GAAP financial measure that is calculated by adding back depreciation, depletion, amortization and various other non-cash expense items to net income.
Our Compensation Committee approves the target for each performance measure after considering prior year financial and operational results, the Board-approved budget, planned projects and capital spending plans 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. This is particularly true in the current economic and commodity price environment. We believe that our targets are set aggressively in light of these variables and require achievement of significant performance.
The targets for the annual STIP performance measures may include certain adjustments that are not normally included in publicly reported results. For instance, the production target is significantly reduced from reported production by discounting gas volumes sold at a lower price in Equatorial Guinea. In addition, any significant acquisitions or divestitures are excluded when considering performance against the production and discretionary cash flow targets. Also, the reserve target is adjusted at the end of the year to reflect actual capital expenditures and the discretionary cash flow target excludes deferred taxes. Including these adjustments, the targets for 2008 were 120.7 million barrels of oil equivalent for proved reserve additions, 187.2 thousand barrels oil equivalent per day for production, the 50th percentile relative to compensation peer group for controllable unit costs for the 12-month period ending September 30, 2008 and $1.72 million in discretionary cash flow. The first three targets were weighted 14% each and the discretionary cash flow target was weighted 8%. The remaining 50% is the discretionary component determined by the Compensation Committee.
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 2008 performance exceeded the targets for production, controllable unit costs and discretionary cash flow, but fell short of the target for proved reserve additions due to commodity price-related revisions. 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 2008 STIP formula, was determined by our Compensation Committee based on the committees review of overall Company performance, including other performance-based measures such as exceptional exploration results, strong operational performance after adjusting for the impact of Hurricane Ike, average relative stockholder return versus peers, and the negative annual stockholder return.
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 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 of individual performance and each executive officers respective target bonus percentage factor. A cash payout under the plan based on the Companys 2008 performance occurred in February 2009.
The 2009 performance-based measures and specified targets were approved by our Compensation Committee on January 26, 2009 and communicated to our executive officers. Our Compensation Committee elected to retain the same four performance-based measures used in 2008 with the same relative weighting, but different specified targets. We believe that the approved targets for 2009 will be appropriately difficult to achieve since they will be affected by many of the same challenges and uncertainties as described above. While those targets are disclosed above in the context of historical 2008 performance, we believe that the disclosure of 2009 targets would result in competitive harm to us and are therefore omitted since (1) we are engaged in a highly competitive business, (2) we may pursue opportunities in areas without first publicly disclosing our intention to do so and (3) disclosure of these targets might enable our competitors to determine our strategic areas of interest and priorities throughout the year. We also do not believe that the disclosure of 2009 targets is material to an understanding of our 2008 executive compensation program as covered by this proxy statement.
Our long-term incentive plan (LTIP) was approved by our Compensation Committee and adopted by our Board on January 27, 2004 and is primarily an equity-linked plan that is available to our executive officers and certain other key employees determined on an annual basis. It is designed to attract, motivate and retain individuals of high quality by:
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. Pursuant to the 1992 Plan, stock options may be granted for 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 set 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 must be 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 2009, our Compensation Committee reviewed the Companys performance for the three-year performance period covered by the restricted stock granted in 2006, 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 2006 awards with a three-year performance period ending December 31, 2008, 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 2006 will be determined at a meeting of our Compensation Committee in April 2009. Subject to final audit and approval by our Compensation Committee, the preliminary estimate of payout for the units awarded in 2006 is $1.78 per unit, which was used in making the estimate shown in the compensation tables. This estimate is based on the Company achieving the highest stockholder return, the highest debt-adjusted production growth per share and fifth highest debt-adjusted reserve growth per share over the three-year period relative to the compensation peer group.
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 our LTIP and compensation program 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 more effectively meet our compensation program objectives. Accordingly, our Compensation Committee suspended the granting of performance-based restricted stock and performance units under the LTIP in 2007, and began making 1992 Plan grants of stock options that vested ratably over a three-year period and restricted stock that did not vest until the end of the third year. In January 2009 our Compensation Committee made grants of stock options on the same terms but, in order to facilitate grant administration while encouraging retention consistent with our compensation program objectives, began making 1992 Plan grants of restricted stock that time-vested 20% after year one, an additional 30% after year two and the remaining 50% after year three.
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 total stockholder return, debt-adjusted per share growth in reserves and production versus our compensation peer group, 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. Our Compensation Committee may be aware of approximate earnings results at the time of making equity grant decisions, 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 preceding business day if February 1 falls on a Saturday, Sunday or holiday). 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 2008. 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.
We encourage, but do not require, stock ownership by our executive officers and directors. We also do not require our executive officers and directors to hold a substantial portion of their equity awards until they retire from service. Historically, our executive officers have received periodic 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 periodically review stock ownership by our executive officers and directors and believe that they 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 or holding requirements are appropriate.
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. Through its various components, our post-employment compensation facilitates our efforts to retain individuals of high quality and support a long-standing internal culture of loyalty and dedication to our interests.
Our qualified defined benefit plan (Retirement Plan) provides employees originally hired prior to May 1, 2006, which includes our named 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 is 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 $230,000 for 2008 and is $245,000 for 2009. 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 $185,000 for 2008 and is $245,000 for 2009.
Our Compensation Committee reviewed our Retirement Plan in 2006 and concluded that an enhanced defined contribution plan would be better aligned with our compensation program objectives because it would offer employees more investment choices, be portable and be more cost-effective to the Company. 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 originally hired prior to May 1, 2006, which include all of our named executive officers, continue to accrue benefits under the Retirement Plan.
We amended our Retirement Plan effective January 1, 2008 to allow existing plan participants to elect to receive a lump-sum distribution upon separation from service. Lump sums are calculated using Internal Revenue Service mandated rates.
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 is 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 in 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 originally hired prior to May 1, 2006, which include all of our named executive officers, continue to accrue benefits under the Restoration 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 $230,000 for 2008 and is $245,000 for 2009. 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 2008 was $15,500 and is $16,500 for 2009, plus a catch-up contribution of $5,000 for 2008 and $5,500 for 2009 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 (which does not include any of our named executive officers) 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.
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.
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 occurs:
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:
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, except Mr. Cook, are parties to pre-existing change of control agreements and therefore may not participate in the plan at this time. Mr. Cook currently participates in our Executive Change of Control 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:
Perquisites: We do not consider perquisites to be a principal element of executive compensation. In 2008, certain of our executive officers received non-material personal benefits in the form of club membership dues reimbursement.
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 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 law 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, 2009, 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: the Restoration Plan and the Deferred Compensation Plan.
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 awards, and certain payments provided for under our change of control arrangements 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.
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 13, of our 2008 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, 2008 for filing with the SEC.
March 23, 2009
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, 2007 and 2008.
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 2008.
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 results during 2008 under Mr. Davidsons leadership include:
Stockholder return represents the change in capital value of our common stock for the period indicated, plus dividends, expressed as a percentage.
Mr. Davidson earned a total salary of $1,025,000 in 2008. Mr. Davidson did not receive a base salary increase in 2008. Based on the results of Towers Perrins review of 2008 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 $1,435,000 in February 2009, based on our Compensation Committees review of overall performance of the Company for the 2008 fiscal year, as well as Mr. Davidsons performance, as measured against operational and financial goals for 2008 that he submitted earlier in the year. Mr. Davidsons STIP payment for 2008 performance decreased approximately 45% compared to 2007.
Mr. Davidson was granted awards under our LTIP of 125,200 stock options and 48,459 shares of restricted stock on February 1, 2008, 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 produced some key results by the Company in 2008 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 recognition of Mr. Davidsons broad responsibility and accountability for the Companys strategy and operations, compliance and controls, investor relations and role as Chairman of the Board of Directors.
In determining the compensation of Messrs. Tong and Stover, Ms. Cunningham, and Mr. Cook for 2008, 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 2008 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, 2008, Mr. Stovers base salary was increased to $600,000, Mr. Tongs base salary was increased to $445,000, Ms. Cunninghams base salary was increased to $440,000, and Mr. Cooks base salary was increased to $385,000.
After reviewing the overall performance of the Company for the 2008 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 $417,188; Mr. Stover $764,296; Ms. Cunningham $493,831; and Mr. Cook $432,437. The STIP payments for 2008 performance for Mr. Tong, Mr. Stover and Ms. Cunningham decreased approximately 36%, 24%, and 26%, respectively, compared to 2007. We believe that these STIP payments are appropriate in light of the Companys performance in 2008 and reflect the relative contributions of these executive officers.
On February 1, 2008, Messrs. Tong and Stover, Ms. Cunningham and Mr. Cook were granted awards of stock options under our LTIP of 27,669, 59,749, 29,622, and 18,780, respectively. On that same date, Messrs. Tong, Stover, Ms. Cunningham and Mr. Cook were awarded 10,709, 23,126, 11,465 and 10,269 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, 2008.
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 2008.
The amounts reported in the table below reflect the present value of accumulated benefits as of December 31, 2008 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 2008.