DEF 14A 1 d335277ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Filed by the Registrant                               Filed by a Party other than the Registrant  

Check the appropriate box:

 

 

Preliminary Proxy Statement

  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Proxy Statement

 

Definitive Additional Materials

 

Soliciting Material under Rule 14a-12


DEVON ENERGY CORPORATION
(Name of registrant as specified in its charter)
(Name of person(s) filing proxy statement, if other than the registrant)

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Table of Contents
LOGO    Commitment Runs Deep

2017

Notice of Annual Meeting

and Proxy Statement

LOGO


Table of Contents

LETTER TO STOCKHOLDERS

FROM THE BOARD OF DIRECTORS

 

 

 

LOGO

Dear Fellow Stockholders,

We are pleased to invite you to the 2017 Annual Meeting of Stockholders of Devon Energy Corporation to be held at 8:00 a.m. Central Time on Wednesday, June 7, 2017, in the Devon Energy Center Auditorium located at 333 W. Sheridan Avenue, Oklahoma City, Oklahoma 73102.

While 2016 will be remembered for volatility in the energy markets, at Devon, we successfully focused on controllable aspects of our business, which produced several noteworthy highlights during the year:

 

   

We reshaped our portfolio by materially expanding upon our leading position in the Oklahoma STACK play and further high-graded our asset base in North America.

 

   

We strengthened our investment-grade financial position, divesting $3.1 billion of noncore assets.

 

   

We executed on drilling programs that generated the best well productivity in Devon’s 45-year history.

 

   

We achieved $1.3 billion of annual savings through cost-reduction efforts that enhanced the value of every barrel produced.

 

   

We grew Devon’s reserves, led by our U.S. assets, which replaced more than 175% of production.

The future looks bright for Devon. We have the quality and depth of resource to deliver high-return, sustainable growth and peer-leading performance for all of our stakeholders for many years to come.

The Notice of Meeting and Proxy Statement (the Notice) on the following pages provide further information on the Company’s performance and corporate governance, and describe the matters to be presented at the 2017 Annual Meeting. Whether or not you plan to attend the meeting in person, your vote on these matters is important to us. We urge you to promptly submit your vote by proxy following the instructions provided in the Notice.

We thank you for your continued support and investment in our business.

Sincerely,

 

 

LOGO

John Richels

Chairman of the Board

 

Commitment Runs Deep


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DEVON ENERGY CORPORATION

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

Time   

8:00 a.m. (central time) on Wednesday, June 7, 2017

Place   

Devon Energy Center Auditorium

333 W. Sheridan Avenue

Oklahoma City, Oklahoma 73102

Items of Business   

•    Elect nine directors for a term of one year;

•    Approve, in an advisory vote, executive compensation;

•    Advisory vote on the frequency of the advisory vote on executive compensation;

•    Ratify the appointment of the independent auditors for 2017;

•    Consider and vote upon the Annual Incentive Compensation Plan;

•    Consider and vote upon the 2017 Long-Term Incentive Plan;

•    Consider and vote upon the stockholder proposals set forth in this Proxy Statement, if presented; and

•    Transact such other business as may properly come before the meeting or any adjournment of the meeting.

Who Can Vote   

Stockholders of record at the close of business on April 10, 2017 are entitled to notice of and to vote at the meeting. You may examine a complete list of stockholders entitled to vote at the meeting during normal business hours for the ten days prior to the meeting at our offices and at the meeting.

Voting by Proxy   

Please submit a proxy as soon as possible so that your shares can be voted at the meeting in accordance with your instructions. You may submit your proxy by:

 

•    internet;

•    telephone; or

•    mail.

For specific information, please refer to the section entitled “Information About the Annual Meeting” beginning on page 4.

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to be Held on June 7, 2017:

Our 2017 Proxy Materials, including the 2017 Proxy Statement and Annual Report on Form 10-K for the year ended December 31, 2016, are available at www.proxydocs.com/dvn.

BY ORDER OF THE BOARD OF DIRECTORS

 

LOGO

Carla D. Brockman

Vice President Corporate Governance

and Corporate Secretary

Oklahoma City, Oklahoma

April 26, 2017

 

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PROXY STATEMENT TABLE OF CONTENTS

 

PROXY STATEMENT SUMMARY

    1  

INFORMATION ABOUT THE ANNUAL MEETING

    4  

AGENDA ITEM 1. ELECTION OF DIRECTORS

    8  

CORPORATE GOVERNANCE

    18  

Board of Directors’ Information

    18  

Practices for Considering Diversity

    18  

Committees

    19  

Director Independence

    21  

Leadership Structure

    21  

Lead Director

    21  

Board Involvement in Risk Oversight

    22  

Stockholder Engagement

    22  

Director Contact Information

    22  

Compensation Committee Interlocks and Insider Participation

    22  

Related Party Transactions

    22  

Director Compensation for the Year Ended December 31, 2016

    23  

Annual Retainer and Meeting Fees

    23  

Equity Awards to Directors

    24  

Changes to Director Compensation

    25  

GOVERNANCE COMMITTEE REPORT

    26  

Corporate Governance

    26  

Board of Director Nominations

    26  

AUDIT COMMITTEE REPORT

    29  

Fees to Independent Auditor

    30  

Audit Committee Pre-Approval Policies and Procedures

    30  

RESERVES COMMITTEE REPORT

    31  

AGENDA ITEM 2. APPROVE, IN AN ADVISORY VOTE, EXECUTIVE COMPENSATION

    32  

AGENDA ITEM 3. ADVISORY VOTE ON THE FREQUENCY OF AN ADVISORY VOTE ON EXECUTIVE COMPENSATION

    33  

NAMED EXECUTIVE OFFICER COMPENSATION

    34  

COMPENSATION DISCUSSION AND ANALYSIS

    34  

Introduction

    35  

Executive Summary

    36  

Compensation Decisions for 2016

    41  

Comparison of Total Direct Pay

    48  

Effect of Company Performance on President & CEO Realizable Pay

    49  

Compensation Process Background

    50  

Additional Benefits and Corporation Information

    52  

COMPENSATION COMMITTEE REPORT

    55  

SUMMARY COMPENSATION TABLE

    56  

GRANTS OF PLAN-BASED AWARDS

    58  

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

    60  

OPTION EXERCISES AND STOCK VESTED DURING 2016

    62  

PENSION BENEFITS

    62  

BENEFIT PLANS

    64  

Defined Benefit Plan

    64  

Benefit Restoration Plan

    65  

Supplemental Retirement Income Plan

  66

Nonqualified Deferred Compensation

  67

401(k) Plan

  68

Deferred Compensation Plan

  68

Supplemental Contribution Restoration Plans

  68

Supplemental Executive Retirement Plan

  68

Potential payments Upon Termination or Change in Control

  69

Accrued Payments Upon Termination of Employment

  69

Rights Upon Termination for Death or Disability

  69

Rights Upon Termination Without Cause and Constructive Discharge

  69

Termination Following a Change in Control

  70

Long-term Incentive Awards

  71

Potential Payments Upon Termination or Change of Control Tables

  72

EQUITY COMPENSATION PLAN INFORMATION

  76

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  77

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

  79

INFORMATION ABOUT EXECUTIVE OFFICERS

  79

AGENDA ITEM 4. RATIFICATION OF INDEPENDENT AUDITORS FOR 2017

  81

AGENDA ITEM 5. APPROVE THE ANNUAL INCENTIVE COMPENSATION PLAN

  82

AGENDA ITEM 6. APPROVE THE DEVON ENERGY CORPORATION 2017 LONG-TERM INCENTIVE PLAN

  88

AGENDA ITEM 7. STOCKHOLDER PROPOSAL FOR A REPORT ON PUBLIC POLICY ADVOCACY RELATED TO ENERGY POLICY AND CLIMATE CHANGE

  101

AGENDA ITEM 8. STOCKHOLDER PROPOSAL FOR AN ASSESSMENT ON THE IMPACT OF GLOBAL CLIMATE CHANGE POLICIES

  104

AGENDA ITEM 9. STOCKHOLDER PROPOSAL FOR A REPORT ON LOBBYING POLICY AND ACTIVITY

  108

AGENDA ITEM 10. STOCKHOLDER PROPOSAL FOR AN ASSESSMENT OF BENEFITS AND RISKS OF USING RESERVE ADDITIONS AS A COMPENSATION METRIC

  111

SUBMISSION OF STOCKHOLDER PROPOSALS AND NOMINATIONS

  114

OTHER MATTERS

  115

APPENDIX A. EXPLANATION AND RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

  A-1

APPENDIX B. DEVON ENERGY CORPORATION ANNUAL INCENTIVE COMPENSATION PLAN

  B-1

APPENDIX C. DEVON ENERGY CORPORATION 2017 LONG-TERM INCENTIVE PLAN

  C-1
 

 

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PROXY STATEMENT SUMMARY

 

We provide below highlights of certain information in this Proxy Statement. As it is only a summary, please refer to the complete 2017 Proxy Statement and Annual Report for the year ended December 31, 2016 before you vote.

2017 ANNUAL MEETING OF STOCKHOLDERS

 

Date and Time:

June 7, 2017, 8:00 a.m. (central time)

Place:

Devon Energy Center Auditorium

333 W. Sheridan Avenue

Oklahoma City, Oklahoma 73102

Record Date:

April 10, 2017

Voting:

   

internet

   

telephone; or

   

mail

 

 

VOTING MATTERS AND BOARD RECOMMENDATIONS

 

Proposals    Board’s Recommendation    Page  

Agenda Item 1: Election of Directors

   FOR each of the nominees      8  

Agenda Item 2: Approve, in an Advisory Vote, Executive Compensation

   FOR      32  

Agenda Item 3: Advisory Vote on the Frequency of an Advisory Vote on Executive Compensation

   ONE YEAR      33  

Agenda Item 4: Ratification of Independent Auditors for 2017

   FOR      81  

Agenda Item 5: Approve the Annual Incentive Compensation Plan

   FOR      82  

Agenda Item 6: Approve the Devon Energy Corporation 2017 Long-Term Incentive Plan

   FOR      88  

Agenda Item 7: Stockholder Proposal for a Report on Public Policy Advocacy Related to Energy Policy and Climate Change

   AGAINST      101  

Agenda Item 8: Stockholder Proposal for an Assessment on the Impact of Global Climate Change Policies

   AGAINST      104  

Agenda Item 9: Stockholder Proposal for a Report on Lobbying Policy and Activity

   AGAINST      108  

Agenda Item 10: Stockholder Proposal for an Assessment of Benefits and Risks of Using Reserve Additions as a Compensation Metric

   AGAINST      111  

 



 

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PROXY STATEMENT SUMMARY (cont’d)

 

STOCKHOLDER ENGAGEMENT

As part of Devon’s commitment to corporate governance, we conduct investor outreach throughout the year to obtain feedback from our stockholders on our corporate governance practices and executive compensation programs. We value the input we receive from this engagement and, as a result, have been responsive by making meaningful changes to our corporate governance practices and executive compensation program over the years. Many of these changes are highlighted below.

CORPORATE GOVERNANCE

 

 

   

Annual Election of All Directors

 

   

Majority Voting and Director Resignation Policy in Uncontested Elections

 

   

Stockholder Right to Call a Special Meeting

 

   

Independent Lead Director

 

   

Proxy Access Rights

   

Seven of Nine of Directors Are Independent

 

   

Executive Sessions of Independent Directors Held at Each Regularly Scheduled Board Meeting

 

   

Director Stock Ownership Guidelines

 

   

Board Participation in Succession Planning

 

EXECUTIVE COMPENSATION PROGRAM

 

 

   

Long-Term Incentive Stock Awards are Performance-Based

 

   

Quantitative Process Utilized for Performance Cash Bonus Awards

 

   

Realizable Pay Opportunities are Tied to Company Performance

   

Stock Ownership Requirements

 

   

Recoupment Policy

 

   

Double Trigger Vesting of Long-Term Incentives upon Change in Control

 

 



 

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PROXY STATEMENT SUMMARY (cont’d)

 

Say-on-Pay Vote and Response to Stockholder Feedback

At the Company’s 2016 Annual Meeting, 95% of the shares voted were for the approval of the Company’s executive compensation for 2015. We continue to engage in discussions with stockholders on executive compensation and its tie to Company performance. Stockholders have reacted favorably to the Company’s compensation practices, including the changes made over the past few years, which are detailed in the Compensation Discussion and Analysis section beginning on page 34 of this Proxy Statement.

2016 Company Performance and Pay Alignment

The actions taken and leadership provided by the executives during the year led to the Company posting strong operational and financial results in the challenging commodity price environment of 2016. The Company met or exceeded all of the goals established at the beginning of the year for the performance scorecard.

With respect to operational and financial metrics, the Company exceeded production guidance, with oil, a higher-margin commodity, representing the largest component of the mix of retained asset production volumes. The Company reduced field operating and general and administrative expenses, which resulted in a savings of $845 million and reduced exploratory and development capital investment by $2.8 billion. The Company also reduced debt by $3.1 billion, while continuing to maintain a strong liquidity position, and realized sale proceeds of approximately $3.1 billion through asset divestitures.

During 2016, Devon’s stock price reached a high of $50.68, which was approximately 58% above the 2015 year-end price, and recorded a total stockholder return (TSR) of 44.7% for the year. The Company consistently achieved TSR in the top-half relative to its peer group and finished the year ranked 6th out of 15 within the peer group.

The structure of the Company’s compensation program coupled with the Compensation Committee’s processes and decision making ensure a strong link between Company performance and executive pay.

Please see the Compensation Discussion and Analysis section beginning on page 34 of this Proxy Statement for a detailed description of our executive compensation.

 



 

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INFORMATION ABOUT THE ANNUAL MEETING

 

We are furnishing you this Proxy Statement in connection with the solicitation of proxies by our Board of Directors (Board) to be used at the Annual Meeting and any adjournment thereof. The Annual Meeting will be held on Wednesday, June 7, 2017 at 8:00 a.m. Central Time.

All references in this Proxy Statement to we, our, us, or the Company refer to Devon Energy Corporation.

What are the Board of Directors’ voting recommendations?

 

   

For the election of the nine Director nominees named in this Proxy Statement for a term expiring at the next Annual Meeting of Stockholders;

 

   

For the approval, on an advisory basis, of executive compensation;

 

   

For the option of one year as the frequency for the advisory vote on executive compensation;

 

   

For the ratification of the appointment of our independent auditors for 2017;

 

   

For the adoption of the Annual Incentive Plan;

 

   

For the adoption of the 2017 Long-Term Incentive Plan; and

 

   

Against each of the stockholder proposals set forth in this Proxy Statement, if presented.

Who is entitled to vote?

Stockholders as of the close of business on April 10, 2017 (the Record Date) are eligible to vote their shares at the Annual Meeting. As of the Record Date, there were 525,664,012 shares of our common stock outstanding. Each share of common stock is entitled to one vote at the Annual Meeting.

How do I vote?

You may:

 

   

attend the Annual Meeting and vote in person; or

 

   

dial the toll-free number listed on the Proxy Card or Voting Instruction Form. Easy-to-follow voice prompts allow you to vote your shares and confirm that your voting instructions have been properly recorded. Telephone voting will be available 24 hours a day and will close at 11:59 p.m. Eastern Time on June 6, 2017; or

 

   

go to the website www.proxyvote.com and follow the instructions, and confirm that your voting instructions have been properly recorded. If you vote using the website, you can request electronic delivery of future proxy materials. Internet voting will be available 24 hours a day and will close at 11:59 p.m. Eastern Time on June 6, 2017; or

 

   

if you elected to receive a paper copy of your proxy materials, mark your selections on the Proxy Card, date and sign it, and return the card in the pre-addressed, postage-paid envelope provided.

Why did I receive a Notice Regarding the Internet Availability of Proxy Materials in the mail instead of a full set of proxy materials?

The United States Securities and Exchange Commission (the SEC) rules allow companies to furnish proxy materials over the Internet. We have sent a Notice of Internet Availability of Proxy Materials (the Notice) to most of our stockholders instead of a paper copy of the proxy materials. Instructions on how to access the proxy materials over the Internet or to request a paper copy may be found in the Notice. In addition, stockholders may request to receive future proxy materials in printed

 

 

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INFORMATION ABOUT THE ANNUAL MEETING (cont’d)

 

form by mail or electronically by email. A stockholder’s election to receive proxy materials by mail or email will remain in effect until the stockholder terminates it.

Why did I receive paper copies of proxy materials?

We are providing paper copies of the proxy materials instead of the Notice to certain stockholders, including those who have previously requested to receive them. If you prefer to no longer receive printed proxy materials, you may consent to receive all future proxy materials electronically via email. To sign up for electronic delivery, please follow the instructions provided in your proxy materials. When prompted, indicate that you agree to receive or access stockholder communications electronically in the future.

How do I vote the shares held in my Devon 401(k) Plan account?

If you are a current employee participating in the Devon Energy Corporation Incentive Savings Plan (the 401(k) Plan), please follow the instructions you received via email from Broadridge Financial Solutions, Inc. (Broadridge).

If you are a former employee and have shares of our common stock credited to your 401(k) Plan account as of the Record Date, such shares are shown on the Voting Instruction Form you received from Broadridge. You have the right to direct Fidelity Management Trust Company (the 401(k) Plan Trustee) regarding how to vote those shares, which you can do by voting your shares in the same manner as provided above.

The 401(k) Plan Trustee will vote your shares in the 401(k) Plan account in accordance with your instructions. If instructions are not received by June 4, 2017, the shares credited to your account will not be voted.

Will each stockholder in our household receive proxy materials?

Generally, no. We try to provide only one set of proxy materials to be delivered to multiple stockholders sharing an address unless you have given us other instructions. Any stockholder at a shared address may request delivery of single or multiple copies of proxy materials for future meetings or an additional copy of the proxy materials for this meeting by contacting us at Devon Energy Corporation, Attention: Corporate Secretary, 333 W. Sheridan Avenue, Oklahoma City, Oklahoma 73102, email: corporatesecretary@dvn.com or by calling (405) 235-3611 and requesting to speak to the Corporate Secretary.

Who will be admitted to the Annual Meeting?

Admission to the Annual Meeting will be limited to our stockholders of record, persons holding proxies from our stockholders, beneficial owners of our common stock and our employees. If your shares are registered in your name, we will verify your ownership at the meeting in our list of stockholders as of the Record Date. If your shares are held through a broker, bank or other nominee, you must bring proof of your ownership of the shares. This proof could consist of, for example, a bank or brokerage firm account statement or a letter from your bank or broker confirming your ownership as of the Record Date.

If I vote via telephone or the Internet or by mailing my Proxy Card, may I still attend the Annual Meeting?

Yes.

What if I want to change my vote?

You may revoke your proxy before it is voted by submitting a new proxy with a later date (by mail, telephone or Internet), by voting at the

 

 

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INFORMATION ABOUT THE ANNUAL MEETING (cont’d)

 

Annual Meeting, or by filing a written revocation with our Corporate Secretary. Your attendance at the Annual Meeting will not automatically revoke your proxy.

Who will count the votes?

Broadridge will tabulate the votes.

What constitutes a quorum?

A majority of the shares entitled to vote, present in person or represented by proxy, constitutes a quorum. If you vote by telephone or Internet or by returning your Proxy Card, you will be considered part of the quorum. Broadridge, the Inspector of Election, will treat shares represented by a properly executed proxy as present at the meeting. Abstentions and broker non-votes will be counted for purposes of determining a quorum. A broker non-vote occurs when a nominee holding shares for a beneficial owner submits a proxy but does not vote on a particular proposal because the nominee does not have discretionary voting power for that item and has not received instructions from the beneficial owner.

How many votes will be required to approve a proposal?

For the election of Directors, a nominee for Director in an uncontested election shall be elected if the votes cast “for” such nominee’s election exceed the votes “withheld” in such nominee’s election. Any nominee for Director in a contested election shall be elected by a plurality of the votes cast.

Our Corporate Governance Guidelines and Bylaws contain a director resignation policy which provides that any nominee for Director in an uncontested election who fails to receive a greater number of votes cast “for” such nominee’s election than the votes cast “withheld” in such nominee’s election shall tender his or her written offer of resignation to

the Governance Committee of the Board of Directors within 90 days from the date of the election. The Governance Committee will consider all of the relevant facts and circumstances and recommend to the Board the action to be taken with respect to such offer of resignation.

For the proposal relating to the frequency of future advisory votes on our executive compensation, the frequency (every one, two or three years) receiving the greatest number of votes will be considered the frequency recommended by stockholders in an advisory manner.

With respect to all other matters, the affirmative vote of the holders of a majority of the total number of votes represented at the Annual Meeting is required to take the action.

Shares cannot be voted at the Annual Meeting unless the holder of record is present in person or by proxy.

Can brokers who hold shares in street name vote those shares if they have received no instructions?

Under the rules of the New York Stock Exchange (the NYSE), brokers may not vote the shares held by them in street name for their customers and for which they have not received instructions, except with respect to a routine matter. The only matter to be voted on at the Annual Meeting that is considered routine for these purposes is the ratification of the appointment of the independent auditors. This means that brokers may not vote your shares on any other matter if you have not given instructions as to how to vote. Please be sure to give voting instructions to your broker so that your vote will be counted.

 

 

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INFORMATION ABOUT THE ANNUAL MEETING (cont’d)

 

How will you treat abstentions and broker non-votes?

We will:

 

   

count abstentions and broker non-votes for purposes of determining the presence of a quorum at the Annual Meeting;

 

   

consider neither abstentions nor broker non-votes for the election of Directors;

 

   

consider neither abstentions nor broker non-votes for the proposal on the frequency of future advisory votes on our executive compensation;

 

   

treat abstentions as votes not cast but as shares represented at the Annual Meeting for determining results on actions requiring a majority of shares present and entitled to vote at the Annual Meeting; and

 

   

not consider broker non-votes for determining actions requiring a majority of shares present and entitled to vote at the Annual Meeting.

Who pays the solicitation expenses?

We will bear the cost of solicitation of proxies. Proxies may be solicited by mail or personally by our Directors, officers or employees, none of whom will receive additional compensation for such solicitation. We have retained D.F. King & Co. to assist in the solicitation of proxies at an estimated cost of $10,500 plus reasonable expenses. Those holding shares of common stock of record for the benefit of others, or nominee holders, are being asked to distribute proxy soliciting materials to, and request voting instructions from, the beneficial owners of such shares. We will reimburse nominee holders for their reasonable out-of-pocket expenses.

Where can I find the voting results of the Annual Meeting?

We will announce preliminary voting results at the Annual Meeting, and we will publish final results in a Form 8-K that will be filed with the SEC within four business days after the Annual Meeting. You may obtain a copy of this and other reports free of charge at www.devonenergy.com, or by contacting us at (405) 235-3611 or corporatesecretary@dvn.com, or by accessing the SEC’s website at www.sec.gov.

Will the Company’s independent auditors be available at the Annual Meeting to respond to questions?

Yes. The Audit Committee of the Board of Directors has approved KPMG LLP to serve as our independent auditors for the year ending December 31, 2017. Representatives of KPMG LLP will be present at the Annual Meeting. They will have an opportunity to make a statement, if they desire to do so, and will be available to respond to stockholder questions.

Where can I contact the Company?

Our contact information is:

Corporate Secretary

Devon Energy Corporation

333 W. Sheridan Avenue

Oklahoma City, Oklahoma 73102

(405) 235-3611

 

 

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AGENDA ITEM 1.

ELECTION OF DIRECTORS

Our Board of Directors has nominated nine directors for election at the Annual Meeting. Each Director will serve for a term ending at the next Annual Meeting and until his or her successor is duly elected and qualified, subject to such Director’s earlier death, disqualification, resignation or removal. All nine of the nominees are currently Devon directors who were elected by stockholders at the 2016 Annual Meeting.

Within each nominee’s biography below, we have highlighted certain notable skills and qualifications that contributed to his or her selection as a member of our Board of Directors.

We have no reason to believe that any of the nominees for director will be unable to serve if elected. However, if any of these nominees becomes unavailable, the persons named in the proxy intend to vote for any alternate designated by the current Board. Proxies cannot be voted for a greater number of persons than the nominees named.

 

Our Board of Directors recommends that stockholders vote “FOR” the election of the following directors.

 

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AGENDA ITEM 1.

ELECTION OF DIRECTORS (cont’d)

 

Director Nominees

 

 

LOGO

 

    

Experience and Qualifications

 

Barbara M. Baumann is a former BP Amoco executive who currently serves as President and owner of Cross Creek Energy Corporation, an energy advisory firm with investments in the domestic oil and gas business. Prior to founding her own firm in 2003, Baumann was Executive Vice President of Associated Energy Managers, a private equity firm investing in small energy companies. Ms. Baumann began her 18-year career with Amoco (later BP Amoco) in 1981. She served in various areas of finance and operations, including Chief Financial Officer of Ecova Corporation, Amoco’s wholly-owned environmental remediation business, and Vice President of Amoco’s San Juan Basin business unit. She brings to the Board her extensive knowledge of the energy industry and her experience as an accomplished leader and business professional.

 

Education

 

Ms. Baumann earned a bachelor’s degree from Mount Holyoke College and a master’s in business administration from the Wharton School of the University of Pennsylvania.

 

Other Boards and Appointments

 

Ms. Baumann is a director of Buckeye Partners, L.P. where she serves on the audit committee and the compensation committee. Ms. Baumann is also a member of the independent board of trustees of Putnam Mutual Funds. She is a director of privately held Hat Creek Energy Corporation where she chairs the compensation committee and serves on the audit committee. She previously served on the boards of Cody Resources Management, LLC, CVR Energy, SM Energy, and UNS Energy.

 

Barbara M. Baumann

Director since 2014

Age 61

 

Committees:

•  Audit

•  Governance

 

    
    
    
    
    
    
    
    
    
    
    
    

 

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AGENDA ITEM 1.

ELECTION OF DIRECTORS (cont’d)

 

 

LOGO

 

    

Experience and Qualifications

 

John E. Bethancourt is a retired Chevron executive. He most recently served as Executive Vice President for technology and services where he was responsible for overseeing Chevron’s environmental, health and safety efforts, major project management, procurement and mining operations. Mr. Bethancourt began his career in 1974 with Getty Oil Company and joined Texaco Inc. in 1984 when the two companies merged. During his career with Texaco and later Chevron, Mr. Bethancourt served in various executive leadership roles overseeing business development, worldwide production operations and human resources. He brings to the Board his extensive knowledge of the energy industry and his experience as an accomplished leader and business professional.

 

Education

 

Mr. Bethancourt earned a bachelor’s degree in petroleum engineering from Texas A&M University.

 

Other Boards and Appointments

 

Mr. Bethancourt previously served on the board of trustees of the Texas A&M Foundation and is a past director of both the Society of Petroleum Engineers and the National Action Council for Minorities in Engineering, Inc.

 

John E. Bethancourt

Director since 2014

Age 65

 

Committees:

•  Compensation

•  Governance

•  Reserves

 

    
    
    
    
    
    

 

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AGENDA ITEM 1.

ELECTION OF DIRECTORS (cont’d)

 

 

LOGO

 

    

Experience and Qualifications

 

David A. Hager was elected by the Board of Directors to the position of President and Chief Executive Officer on August 1, 2015. He joined the Company in March 2009 and held the position of Executive Vice President Exploration and Production from 2009 until 2013 and Chief Operating Officer from 2013 to 2015. Mr. Hager started in the oil and gas business as a geophysicist with Mobil Corp. He joined Sun Oil in 1981 and continued with Oryx Energy following its spin off from Sun Oil. During his tenure at Oryx, he managed new ventures and deepwater projects around the world. After Oryx merged with Kerr-McGee in 1999, Mr. Hager managed Kerr-McGee’s worldwide deepwater exploration and production operations and assumed responsibility for all exploration and production activities in 2003. He later served as Kerr-McGee’s Chief Operating Officer until it was acquired by Anadarko Corp. in 2006.

 

Education

 

Mr. Hager has a bachelor’s degree in geophysics from Purdue University and a master’s degree in business administration from Southern Methodist University.

 

Other Boards and Appointments

 

From 2007 until joining the Company as an executive officer, Mr. Hager served as a member of Devon’s Board of Directors. Mr. Hager currently serves on the boards of the managing member and general partner of EnLink Midstream, LLC (ENLC) and EnLink Midstream Partners, LP (ENLK), respectively, and on their compensation committees. Devon owns a controlling interest in ENLC and ENLK.

 

David A. Hager

Director since 2016

Age 60

 

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

 

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AGENDA ITEM 1.

ELECTION OF DIRECTORS (cont’d)

 

 

LOGO

 

    

Experience and Qualifications

 

Robert H. Henry is a legal and foreign relations scholar, public servant and leader. He has served as the President and Chief Executive Officer of Oklahoma City University since 2010. Mr. Henry brings to the Board his experience and knowledge of the law, which enable him to provide valuable insights in the areas of governance and public policy.

 

Mr. Henry has had a distinguished career in public service. In 1994, President Bill Clinton appointed Mr. Henry to the United States Court of Appeals for the Tenth Circuit, where he served until June 2010, most recently as Chief Judge. Mr. Henry was elected and re-elected Attorney General of the State of Oklahoma from 1986 to 1991. He served in the Oklahoma House of Representatives from 1976 to 1986 where he was principal author of the 1986 Oklahoma General Corporation Act, which moved Oklahoma law to the Delaware corporate law model.

 

Mr. Henry was Dean and Professor of Law at Oklahoma City University School of Law from 1991 to 1994. Mr. Henry also taught at the University of Oklahoma Honors College (Oxford Program), the University of Oklahoma College of Law, and Oklahoma Baptist University (Business Law) and served as Distinguished Judge in Residence at the University of Tulsa College of Law.

 

Education

 

Mr. Henry received his bachelor’s degree and juris doctorate from the University of Oklahoma. He received an honorary degree of doctor of humane letters from the University of Tulsa and an honorary degree of doctor of laws from Oklahoma City University.

 

Other Boards and Appointments

 

Mr. Henry is a life member of the National Conference of Commissioners on Uniform State Laws, and a member of the Council on Foreign Relations, the American Law Institute, and the William J. Holloway, Jr. American Inn of Court, Master of the Court. While a federal judge, Mr. Henry served as chair of the committee on International Relations of the Judicial Conference of the United States. He is a life and founding member of the Tenth Judicial Circuit’s Historical Society. Mr. Henry serves on the Board of Directors of iCivics, Allied Arts and the Oklahoma Medical Research Foundation. He previously served on the board of LSB Industries, Inc.

 

Robert H. Henry

Director since 2010

Age 64

 

Committees:

• Audit

• Governance

 

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

 

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AGENDA ITEM 1.

ELECTION OF DIRECTORS (cont’d)

 

 

LOGO

 

    

Experience and Qualifications

 

Michael Kanovsky is a Professional Engineer and has been involved with investment banking and oil and gas businesses for over 40 years. He has been President of Sky Energy Corporation since 1993. Mr. Kanovsky brings to the Board an extensive knowledge of the energy industry and finance, with a wealth of experience with Canadian assets and areas of operation.

 

In 1978, Mr. Kanovsky co-founded Canadian Northstar Corporation and its successor, Northstar Energy Corporation, where he was primarily responsible for strategic development, finance and acquisitions until its acquisition by Devon Energy Corporation in 1998. In 1997, Mr. Kanovsky founded Bonavista Petroleum Ltd. Mr. Kanovsky has also held other executive positions, including Chief Executive Officer of Arrowstar Drilling and Vice President of Corporate Finance, Western Canada, for a large Canadian investment dealer.

 

Education

 

Mr. Kanovsky received a bachelor’s degree in mechanical engineering from Queen’s University as well as a master’s degree in business administration from the Ivey School of Business at Western University.

 

Other Boards and Appointments

 

Mr. Kanovsky is a director of Bonavista Energy Corporation, serves as lead director, and as chairman of the governance and nominating committee, and is a member of the reserves, audit and compensation committees. He is a director of Pure Technologies Ltd. and serves as lead director and a member of the corporate governance and nominating committee. As of the date of this Proxy Statement, Mr. Kanovsky is also a director of Seven Generations Energy Ltd. and serves on the audit and finance committee and is chairman of the risk management committee. However, Mr. Kanovsky will retire from Seven Generations Energy Ltd.’s board this year, and his term as a director will expire immediately prior to the company’s annual and special meeting scheduled for May 4, 2017.

 

Mr. Kanovsky previously served on the boards of TransAlta Corporation and ARC Resources Ltd. He also served as chairman of the Board of Taro Industries and vice chairman of Precision Drilling, Inc. He co-founded PowerLink Corporation, an electrical cogeneration company and former subsidiary of Northstar Energy Corporation, and served as its senior executive board chairman.

 

Michael M. Kanovsky

Director since 1999

Age 68

 

Committees:

• Chair, Reserves

• Audit

 

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

 

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AGENDA ITEM 1.

ELECTION OF DIRECTORS (cont’d)

 

 

LOGO

 

    

Experience and Qualifications

 

Robert A. Mosbacher, Jr. is an accomplished business leader with more than 30 years in the energy industry. He is Chairman of Mosbacher Energy Company, an independent oil and gas exploration and production company. Mr. Mosbacher brings to the Board his extensive background in the energy industry, his leadership skills, and his economic development experience in global markets.

 

Mr. Mosbacher is founder and chairman of BizCorps, a Washington based non-profit organization that places graduates of top business schools with entrepreneurs in emerging markets. In 2005, Mr. Mosbacher was appointed by President George W. Bush to the position of President and Chief Executive Officer of the Overseas Private Investment Corporation, an independent agency of the U.S. government that supports private capital investment in emerging markets around the world. He served in that capacity until 2009. Mr. Mosbacher had a distinguished public service career that included serving as Chairman of the Board of the Texas Department of Human Services and as a staff member in the office of Senator Howard Baker of Tennessee.

 

Education

 

Mr. Mosbacher received a bachelor’s degree in political science from Georgetown University and a juris doctorate degree from Southern Methodist University.

 

Other Boards and Appointments

 

Mr. Mosbacher is a director of Calpine Corporation and currently serves on Calpine’s nominating and governance committee and is chairman of the compensation committee. In addition, Mr. Mosbacher is chairman of the board of Global Communities. Mr. Mosbacher previously served as a member of Devon’s Board from 1999 until 2005.

 

Robert A. Mosbacher, Jr.

Director since 2009

Age 65

 

Lead Director

 

Committees:

•  Chair, Governance

•  Compensation

 

    
    
    
    
    
    
    
    
    
    
    
    
    
    

 

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AGENDA ITEM 1.

ELECTION OF DIRECTORS (cont’d)

 

 

LOGO

 

    

Experience and Qualifications

 

Duane C. Radtke has over 45 years of experience in management, engineering and business development in the energy industry. Mr. Radtke has been President and Chief Executive Officer of Valiant Exploration LLC since 2008. Mr. Radtke brings to the Board extensive knowledge of the energy business, including experience with the Company’s assets and operations.

 

Mr. Radtke served as the Chief Executive Officer and President of Dominion Exploration and Production, a subsidiary of Dominion Resources, Inc., from 2001 to 2007. During that period, he also served as Executive Vice President of Consolidated Natural Gas Company, a subsidiary of Dominion Resources Inc. Prior to his tenure with Dominion Resources, Inc., Mr. Radtke was an executive with Santa Fe Snyder where he served in various capacities, including Executive Vice President of Production. Following Devon’s acquisition of Santa Fe Snyder in 2000, Mr. Radtke served as President of the Company’s international division until joining Dominion.

 

Education

 

Mr. Radtke holds a bachelor’s degree in mining engineering from the University of Wisconsin.

 

Other Boards and Appointments

 

Mr. Radtke is a director of Kris Energy Ltd. and serves as the chairman of the investment committee and a member of the compensation and governance committee. He previously served as lead director of Sabine Oil & Gas Corporation, as chairman of the American Exploration and Production Council, as a director of Smith International, Inc. and as a director of Consolidated Natural Gas Company. Mr. Radtke is also non-executive chairman of Bazean Corporation, a private investment company.

 

Duane C. Radtke

Director since 2010

Age 68

 

Committees:

•  Chair, Compensation

•  Reserves

 

    
    
    
    
    
    
    
    
    
    
    
    
    
    

 

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AGENDA ITEM 1.

ELECTION OF DIRECTORS (cont’d)

 

 

LOGO

 

    

Experience and Qualifications

 

Mary P. Ricciardello is a licensed Certified Public Accountant and a financial executive with over 30 years of experience in the energy industry. She brings to the Board her qualifications as a financial expert and her extensive experience in the energy industry and with respect to corporate finance and tax matters.

 

In 2002, Ms. Ricciardello retired after a 20-year career with Reliant Energy Inc., a leading independent power producer and marketer. She served in various financial management positions with the company, including Comptroller, Vice President and most recently Senior Vice President and Chief Accounting Officer.

 

Education

 

Ms. Ricciardello holds a bachelor’s degree in business administration from the University of South Dakota and a master’s degree in business administration with an emphasis in finance from the University of Houston.

 

Other Boards and Appointments

 

Ms. Ricciardello is currently a director of Noble Corporation where she is the designated financial expert, serves as the audit committee chairperson and is a member of the nominating & governance committee. Ms. Ricciardello serves on the boards of the managing member and general partner of ENLC and ENLK, respectively, and on their audit committees. Devon owns a controlling interest in ENLC and ENLK. She also serves on the board of the National Association of Corporate Directors (NACD) Houston Chapter and received the NACD designation “Board Leadership Fellow”. Ms. Ricciardello was previously a director of US Concrete and of Midstates Petroleum Company. Ms. Ricciardello is also an editorial advisor for the Journal of Accountancy.

 

Mary P. Ricciardello

Director since 2007

Age 61

 

Committees:

•  Chair, Audit

•  Governance

 

    
    
    
    
    
    
    
    
    
    
    
    
    
    

 

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AGENDA ITEM 1.

ELECTION OF DIRECTORS (cont’d)

 

 

LOGO

 

    

Experience and Qualifications

 

John Richels is an accomplished business leader with 35 years of experience in the oil and gas industry and legal profession. He served as the Company’s President from 2004 through 2010 and President and Chief Executive Officer from 2010 until his retirement in 2015. He was elected Vice Chairman in December 2014 and was elected as Chairman of the Board in June 2016. Mr. Richels brings to the Board an extensive knowledge of the energy industry, including his experience with the Company’s assets and operations.

 

Mr. Richels joined Devon in 1998 when the Company acquired Northstar Energy Corporation, where he held the office of Executive Vice President and Chief Financial Officer. After the acquisition, he served as Senior Vice President of Devon and President and Chief Executive Officer of Devon’s Canadian subsidiary.

 

Prior to joining Northstar, Mr. Richels was Managing Partner, Chief Operating Partner and a member of the executive committee of the Canadian-based national law firm Bennett Jones. He joined Bennett Jones in 1978 practicing in the mergers and acquisitions, securities and corporate law areas, primarily in the oil and gas sector. During his legal career, Mr. Richels also served, on loan from Bennett Jones, as an officer of the XV Olympic Winter Games Organizing Committee in Calgary.

 

Education

 

Mr. Richels received a bachelor’s degree in economics from York University. He also received a law degree from the University of Windsor.

 

Other Boards and Appointments

 

Mr. Richels is a director of TransCanada Corporation and serves on the compensation committee and the health, safety and environmental committee. Mr. Richels previously served as a director of BOK Financial Corporation and as Chairman of the Boards of the managing member and general partner of ENLC and ENLK, respectively.

 

Mr. Richels is a member of the executive committee and board of directors of the E Foundation for Oklahoma and serves on the board of trustees of Oklahoma City University. He is also a member-at-large of the Independent Petroleum Association of America.

 

John Richels

Director since 2007

Age 66

 

Chairman of the Board

 

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

 

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CORPORATE GOVERNANCE

Board of Directors’ Information

Our Board of Directors met eight times in 2016. All Directors attended at least 95% of the total meetings of the Board of Directors and the respective Committees on which they served with the exception of J. Larry Nichols, who attended 60% of the total meetings of the Board of Directors prior to his retirement in June 2016.

The Board expects our Directors to be in attendance at our Annual Meetings of Stockholders. All Directors attended the 2016 Annual Meeting.

Copies of the following governance documents are available at www.devonenergy.com and in print to any stockholder upon request:

 

   

Certificate of Incorporation;

 

   

Bylaws;

 

   

Corporate Governance Guidelines;

 

   

Code of Business Conduct and Ethics;

 

   

Code of Ethics for Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Chief Accounting Officer (CAO); and

 

   

Anti-Corruption Policy and Procedures.

Amendments to and waivers from any provision of the Code of Ethics for the CEO, CFO, and CAO will be posted on our website.

Our website also includes our Corporate Social Responsibility Report and information on our environmental and safety initiatives.

Practices for Considering Diversity

The Charter of the Governance Committee provides that the committee shall periodically review the appropriate skills and characteristics of members of the Board of Directors in the context of the then-current composition of the Board. This assessment includes the following factors: diversity (including diversity of skills, background and experience); business and professional background; financial literacy and expertise; availability and commitment; independence; and other criteria that the Governance Committee or the full Board finds relevant. It is the practice of the Governance Committee to consider these factors when screening and evaluating candidates for nomination to the Board of Directors.

 

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CORPORATE GOVERNANCE (cont’d)

 

Committees

The Board of Directors has four standing Committees: Audit, Compensation, Governance and Reserves. The Charters for these Committees are available on the Company’s website, www.devonenergy.com. The following table shows each Committee’s current membership, function and the number of meetings each Committee held in 2016:

 

LOGO

 

  19   Commitment Runs Deep

Members Functions of Committee Number of Meetings in 2016 Audit Committee Mary P. Ricciardello 1,2 Barbara M. Baumann Robert H. Henry Michael M. Kanovsky Monitors the integrity of the Company’s financial statements and reporting system; 8 Oversees the Company’s compliance with legal and regulatory requirements; Appoints the independent auditors and monitors their qualifications and independence; Monitors the performance of the Company’s internal auditors and independent auditors; Reviews the Company’s financial risk exposure and the steps management has taken to monitor and control such exposure; and Monitors the business practices and ethical standards of the Company. Members Functions of Committee Number of Meetings in 2016 Compensation Committee Duane C. Radtke 1 John E. Bethancourt Robert A. Mosbacher, Jr. Reviews and approves the Company’s compensation philosophy and strategy; 6 Directs management to administer the annual compensation process in accordance with the stated compensation strategy of the Company and any requirements of the appropriate regulatory bodies; Reviews and approves the Company’s employee benefit and incentive programs; Annually reviews and determines total compensation for each management Director; Reviews and approves total compensation for the Company’s executive officers in consultation with the President and CEO; Reviews with the President and CEO and advises the Board with regard to executive officer succession planning; and Assesses and considers the independence of any advisor that provides advice to the Committee.


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CORPORATE GOVERNANCE (cont’d)

 

LOGO

 

1 

Chairman

 

2 

Audit Committee financial expert

 

  20   Commitment Runs Deep

Members Functions of Committee Number of Meetings in 2016 Governance Committee Robert A. Mosbacher, Jr. 1 Barbara M. Baumann John E. Bethancourt Robert H. Henry Mary P. Ricciardello Identifies and recommends qualified individuals to become Board members; 5 Evaluates and recommends nominees for election as directors at the annual stockholders’ meetings or for appointment between annual stockholders’ meetings; Evaluates and recommends compensation or revisions to compensation for members of the Board; and Develops, recommends and reviews corporate governance guidelines for the Company. Members Functions of Committee Number of Meetings in 2016 Reserves Committee Michael M. Kanovsky 1 John E. Bethancourt Duane C. Radtke Oversees an annual review and evaluation of the Company’s consolidated oil, bitumen, natural gas and natural gas liquids reserves; 2 Oversees the integrity of the Company’s reserves evaluation and reporting system; Assesses the reserves disclosure for the Company’s compliance with legal and regulatory requirements related to its oil, bitumen, natural gas and natural gas liquids reserves; Reviews the qualifications and independence of the Company’s independent engineering consultants; Monitors the performance of the Company’s independent engineering consultants; and Monitors and evaluates the Company’s business practices and standards in relation to the preparation and disclosure of its oil, bitumen, natural gas and natural gas liquids reserves.


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CORPORATE GOVERNANCE (cont’d)

 

Director Independence

The Company’s Corporate Governance Guidelines provide that an independent director is a director who meets the NYSE definition of independence, as determined by the Board. In making this determination, the Board considers transactions and relationships between each Director or any member of the Director’s immediate family and the Company or any of its subsidiaries or affiliates. The Board has affirmatively determined that each of the current Directors and each person who served as a Director during 2016, with the exception of J. Larry Nichols, who retired from the Board in June 2016, Chairman, John Richels, and David A. Hager, was or is an independent Director as defined by the standards for director independence established by applicable laws, rules, and listing standards, including, without limitation, the standards for independent directors established by the NYSE and the SEC, has or had no material relationship with us that would interfere with the exercise of independent judgment and, therefore, is or was independent under our Corporate Governance Guidelines and the standards established by the NYSE.

In evaluating the independence of Mr. Robert H. Henry, the Board considered the charitable contributions made by Devon to Oklahoma City University (OCU) in recent years. While these charitable contributions do not affect Mr. Henry’s independence status, disclosure of the contributions are provided below. Consistent with the Company’s practice of making contributions to other major universities in Oklahoma, in 2014, 2015 and 2016 the Company made charitable contributions to OCU of $613,500, $508,500 and $55,000, respectively.

Leadership Structure

As stated in the Company’s Corporate Governance Guidelines, the Board reserves the right to determine, from time to time, how to configure the leadership of the Board and the Company in the way that best serves the Company. The Board specifically reserves the right to vest the responsibilities of Chairman of the Board and CEO in the same or in different individuals. The Board currently has no fixed policy with respect to combining or separating the positions of Chairman of the Board and CEO.

J. Larry Nichols, former Executive Chairman of the Board, retired from the Board following the 2016 Annual Meeting, at which time John Richels was appointed Chairman of the Board. David A. Hager, serves as President and CEO. The current structure fosters consensus building and tactical execution of a Board-approved vision and strategy at the top levels of the Company, which we believe promotes long-term stockholder value. The Board believes this structure is in the Company’s best interest at the present time; however, the Board may utilize a different structure in the future should circumstances change.

Lead Director

The Board has an independent Lead Director whose primary responsibility is to preside over the executive session of the Board meetings in which members of management do not participate. The Lead Director also performs other duties that the Board may from time to time delegate to assist the Board in the fulfillment of its responsibilities. Robert A. Mosbacher, Jr. has served as Lead Director since June 2015. In 2016, Mr. Mosbacher as Lead Director, presided over four executive sessions of the Board.

 

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CORPORATE GOVERNANCE (cont’d)

 

Board Involvement in Risk Oversight

The full Board has primary responsibility for risk oversight, with the Board’s standing committees supporting the Board by addressing the risks inherent in their respective areas of oversight. The Audit, Governance, Compensation and Reserves Committees have been delegated certain risk oversight responsibilities.

Stockholder Engagement

Each year we reach out to a significant number of our stockholders with respect to corporate governance topics and our executive compensation program. We value the direct input we receive from this engagement and, as a result, have been responsive by making meaningful changes to our corporate governance practices and executive compensation program over the years. Many of the changes to the executive compensation program are summarized on page 40 of the proxy statement.

Director Contact Information

Any stockholder or other interested party may contact any of our Non-Management Directors, including the Lead Director or Non-Management Directors as a group, by:

 

   

U.S. mail to the Lead Director or to Non-Management Directors, c/o Office of the Corporate Secretary, Devon Energy Corporation, 333 W. Sheridan Avenue, Oklahoma City, Oklahoma 73102;

 

   

calling our Non-Management Directors access line at (866) 888-6179; or

 

   

sending an email to nonmanagement.directors@dvn.com.

A Management Director may be contacted by:

 

   

U.S. mail to Management Directors, c/o Office of the Corporate Secretary, Devon Energy Corporation, 333 W. Sheridan Avenue, Oklahoma City, Oklahoma 73102;

 

   

contacting the Office of the Corporate Secretary at (405) 235-3611; or

 

   

sending an email to CorporateSecretary@dvn.com.

All calls or correspondence are anonymous and kept confidential to the extent possible. All such communications, other than advertisements or commercial solicitations, will be forwarded to the appropriate Director(s) for review.

Compensation Committee Interlocks and Insider Participation

During 2016, the Compensation Committee was comprised of three independent Directors with no interlocking relationships as defined by the SEC.

Related Party Transactions

The Company maintains a policy concerning “related person transactions” as defined by the SEC. Related persons include the Company’s directors and executive officers and their immediate family members and beneficial owners of more than five percent of the Company’s common stock.

 

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CORPORATE GOVERNANCE (cont’d)

 

The Board’s Audit Committee considers information about transactions involving related persons. If the transaction at issue involves a member of the Audit Committee, or a family member of a Committee member, then that member of the Committee would not participate in discussions. In the event the Committee concludes that a related person has a material interest in any Company transaction, the Committee then reviews the transaction to determine whether to approve or ratify it. Any transaction that meets the monetary threshold under the SEC rules and is determined to have a direct or indirect material benefit to a related party would be disclosed in accordance with SEC rules.

J. Larry Nichols served on the Board until his retirement on June 8, 2016. Mr. Nichols’ son-in-law is employed by the Company as an attorney. His total 2016 taxable compensation, including salary, bonus and stock grants, was approximately $300,000, which was commensurate with the compensation provided to similarly situated employees of the Company. Mr. Nichols was not involved in the evaluation of his son-in-law’s performance and his son-in-law’s compensation was determined in accordance with the Company’s standard human resources policies and procedures.

The son of Tony D. Vaughn, Chief Operating Officer, is employed by the Company as a manager in supply chain. His total 2016 taxable compensation, including salary, bonus and stock grants, was approximately $141,000, which was commensurate with the compensation provided to similarly situated employees of the Company. Mr. Vaughn was not involved in the evaluation of his son’s performance and his son’s compensation was determined in accordance with the Company’s standard human resources policies and procedures.

Director Compensation for the Year Ended December 31, 2016

Under our Corporate Governance Guidelines, Non-Management Director compensation is determined annually by the Board of Directors acting upon the recommendation of the Governance Committee. Devon employees receive no additional compensation for serving as directors.

Annual Retainer and Meeting Fees

The annual retainers and meeting fees for Non-Management Directors in effect during 2016 remained the same as in 2015. The following is a schedule of those annual retainers and meeting fees:

 

Type of Fee   Amount  

Annual Board Retainer

  $ 70,000  

Additional Annual Retainer to Executive Chairman of the Board

  $ 200,000  

Additional Annual Retainer to Chairman of Audit Committee

  $ 25,000  

Additional Annual Retainer to the Chairmen of Compensation, Governance and Reserves Committees

  $ 15,000  

Additional Annual Retainer for Lead Director

  $ 25,000  

Additional Annual Retainer to Audit Committee Members

  $ 2,000  

Fee for each Board or Committee Meeting attended in person

  $ 2,000  

Fee for each Board or Committee Meeting attended via telephone

  $ 1,000  

Each Non-Management Director is reimbursed for out-of-pocket expenses incurred while serving as a Director.

 

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CORPORATE GOVERNANCE (cont’d)

 

Equity Awards to Directors

The Board elects to compensate Directors through restricted stock awards (RSAs) in order to align the Directors’ and stockholders’ interests in the long-term performance of the Company. At its meeting in March 2016, the Board of Directors discussed the prospective director equity awards for 2016 in light of the downturn in the oil and gas industry, the decrease in the Company’s stock price in 2015 and early 2016, and the reduced level of Long-Term Incentive Awards granted to management in March 2016. Based on those discussions, the Board of Directors voted to reduce the director equity awards to be awarded in June 2016 to an amount that was 33% lower than the prior year’s grant.

Accordingly, Non-Management Directors were each granted RSAs valued at approximately $154,000 on June 8, 2016. Grants were made under the Company’s 2015 Long-Term Incentive Plan (“2015 LTIP”) that was approved at the 2015 annual meeting. Shares under each RSA will fully vest on the first anniversary of the grant date subject to the Director’s continued service to the Company. Unvested shares are entitled to cash dividends at the same times and in the same amounts as other shares of our outstanding common stock.

Total Compensation for Non-Management Directors for 2016

 

Name   Fees Earned or Paid
in Cash ($)
   

Stock Awards1

($)

   

Option Awards2

($)

   

All Other
Compensation3

($)

   

Total

($)

 

Barbara M. Baumann

    106,000       154,003                   260,003  

John E. Bethancourt

    104,000       154,003                   258,003  

Robert H. Henry

    105,000       154,003                   259,003  

Michael M. Kanovsky

    115,000       154,003                   269,003  

Robert A. Mosbacher, Jr.

    142,000       154,003                   296,003  

J. Larry Nichols4

    140,000                   15,177       155,177  

Duane C. Radtke

    111,000       154,003                   265,003  

Mary P. Ricciardello

    129,000       154,003                   283,003  

John Richels

    82,000       154,003             6,653       242,656  

 

1

The dollar amounts reported in this column represent the grant date fair values of the stock awards made to all Non-Management Directors on June 8, 2016, computed in accordance with FASB ASC Topic 718. The assumptions used to value stock awards are discussed in Note 4—Share-Based Compensation of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. As of December 31, 2016, our Non-Management Directors held the following unvested stock awards: Ms. Baumann—4,098; Mr. Bethancourt—4,098; Mr. Henry—4,098; Mr. Kanovsky—4,098; Mr. Mosbacher—4,098; Mr. Radtke—4,098; Ms. Ricciardello—4,098; and Mr. Richels—73,208.

 

2

No option awards were made to Non-Management Directors in 2016. As of December 31, 2016, our Non-Management Directors held the following outstanding and unexercised option awards: Mr. Henry—9,000; Mr. Kanovsky—12,000; Mr. Mosbacher—12,000; Mr. Nichols—396,100; Mr. Radtke—9,000; Ms. Ricciardello—12,000; and Mr. Richels—451,875.

 

3

The dollar amount reported represents the aggregate incremental cost to the Company for personal use of aircraft. The aggregate incremental cost to the Company for personal use of our aircraft is calculated based on our average variable operating costs. Variable operating costs include fuel, engine reserves, maintenance, weather-monitoring, on-board catering, landing/ramp fees and other miscellaneous variable costs. The total annual variable costs are divided by the annual number of hours our aircraft flew to determine an average variable cost per hour. This average variable cost per hour is then

 

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CORPORATE GOVERNANCE (cont’d)

 

 

multiplied by the hours flown for personal use to determine the incremental cost. The methodology excludes fixed costs that do not change based on usage, such as pilots’ and other employees’ salaries, purchase costs of the aircraft and non-trip related hangar expenses.

 

4 

Mr. Nichols retired from the Board on June 8, 2016.

Changes to Director Compensation

The Board of Directors determined that the annual retainers and meeting fees would remain the same in 2017 as it was in 2016, with one exception. With J. Larry Nichols’ retirement from the Board in June 2016, there is no longer an Executive Chairman of the Board and therefore no additional retainer for that Board position.

 

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GOVERNANCE COMMITTEE REPORT

The Governance Committee is currently comprised of five independent Directors and operates under a written charter approved by the Board of Directors. The Governance Committee Charter may be viewed at www.devonenergy.com.

Corporate Governance

The Governance Committee plays a leadership role in shaping the Company’s corporate governance. It periodically reviews the Company’s corporate governance practices along with best practices followed by other companies to maintain a corporate governance framework for the Company that is effective and functional and that addresses the interests of the Company’s stakeholders. Highlights of our corporate governance framework are:

 

   

Annual Election of all Directors;

 

   

Majority Voting in Uncontested Elections;

 

   

Independent Lead Director;

 

   

Executive Sessions of Independent Directors;

 

   

Stockholder Right to Call a Special Meeting;

 

   

Proxy Access Right; and

 

   

Board Participation in Succession Planning.

Additional corporate governance standards that have been approved by the Board are reflected in the:

 

   

Corporate Governance Guidelines;

 

   

Charters for each of the Board’s Committees;

 

   

Code of Business Conduct and Ethics for all Directors, officers and employees; and

 

   

Code of Ethics for the CEO, CFO and CAO.

The standards reflected in these documents implement and strengthen the Company’s corporate governance practices. These documents and others related to corporate governance are available at www.devonenergy.com.

Board of Director Nominations

The Governance Committee is responsible for nominating qualified candidates to serve on the Board of Directors and reviewing their qualifications with the Board, taking into account the composition and skills of the entire Board and specifically ensuring a sufficient number of the members of the Board are financially literate.

The Board takes reasonable steps to ensure that a diverse group of qualified candidates are in the pool from which the nominees for the Board are chosen. The Governance Committee may, at its discretion, seek third-party resources to assist in the process and make final director candidate recommendations to the Board. The Board considered the experience, qualifications, attributes and skills of each of the nominees for Director at the 2017 Annual Meeting. As identified in our Corporate Governance Guidelines, the basic qualifications that the Governance Committee looks for in a Director include such factors as:

 

   

integrity and accountability;

 

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GOVERNANCE COMMITTEE REPORT (cont’d)

 

   

informed judgment;

 

   

peer respect; and

 

   

high performance standards.

Following a Director’s election to the Board, the Corporate Governance Guidelines provide for:

 

   

mandatory retirement at the Annual Meeting immediately following the 73rd birthday of a Director;

 

   

ownership of Devon common stock equal to five times the Director’s annual retainer to be reached by the end of a five-year period after their election along with a holding requirement for those who have yet to meet the ownership requirement;

 

   

a recommendation that a Director not serve on more than five public company boards in addition to serving on the Company’s Board;

 

   

a requirement that a nominee for Director in an uncontested election submit an offer of resignation to the Governance Committee within 90 days of the date of the election if the nominee fails to receive a greater number of votes cast “for” such nominee’s election than the votes cast “withheld” in such nominee’s election. The Governance Committee will then consider all of the relevant facts and circumstances and recommend to the full Board the action to be taken with respect to the offer to resign;

 

   

approval of the Governance Committee to serve as a director, officer or employee of a competitor of the Company; and

 

   

notification to the Chairman of the Board and Chairman of the Governance Committee upon the acceptance of a directorship of any other public, private or non-profit company or any assignment to the audit or compensation committees of the board of any public, private or non-profit company.

The Governance Committee considers nominees recommended by stockholders and gives appropriate consideration in the same manner as given to other nominees. Stockholders who wish to submit recommendations for director nominees for election at our 2018 Annual Meeting of Stockholders may do so by submitting such nominee’s name in writing, in compliance with the procedures required by our Bylaws, to the Governance Committee of the Board of Directors, Attention: Chairman, c/o Office of the Corporate Secretary, Devon Energy Corporation, 333 W. Sheridan Avenue, Oklahoma City, Oklahoma 73102. Such a recommendation must be received between February 7, 2018 and March 9, 2018 in order to be considered a timely notice. The stockholder’s notice must contain, among other things:

 

   

all information that is required to be disclosed with respect to such person being nominated pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, including such person’s written consent to being named in the Proxy Statement as a nominee and to serving as a Director, if elected;

 

   

the name and address of the stockholder giving the notice and the beneficial owner;

 

   

the class and number of shares of our stock that are owned beneficially and of record by the stockholder giving the notice and the beneficial owner;

 

   

whether and the extent to which any hedging or other similar transaction has been entered into by or on behalf of the stockholder or beneficial owner;

 

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GOVERNANCE COMMITTEE REPORT (cont’d)

 

   

a description of all arrangements or understandings between the stockholder giving the notice and any other person or persons (including their names) in connection with the nomination;

 

   

a representation that the stockholder intends to appear in person or by proxy at the 2018 Annual Meeting to bring such business before the meeting; and

 

   

an undertaking by the stockholder giving the notice to update the information required to be included in the notice.

With the Company’s fundamental corporate governance practices firmly in place and regularly evaluated, the Governance Committee is prepared to respond quickly to new regulatory requirements and emerging best practices. The Governance Committee intends to continue to require an annual evaluation of the effectiveness of the Board and its Committees to enable the Company to maintain corporate governance best practices.

Robert A. Mosbacher, Jr., Chairman

Barbara M. Baumann

John E. Bethancourt

Robert H. Henry

Mary P. Ricciardello

 

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AUDIT COMMITTEE REPORT

The Audit Committee is currently comprised of four independent Directors. The Board and the Audit Committee believe that the Audit Committee’s current membership satisfies the rules of the NYSE and the SEC that govern audit committee composition, including the requirement that audit committee members all be independent directors, as that term is defined under the listing standards of the NYSE, and the requirement that at least one member of the Audit Committee is a financial expert. Mary P. Ricciardello currently serves on the audit committees of more than three public companies. However, Devon owns a controlling interest in two of those companies, ENLC and ENLK, which are consolidated into the Company’s financial statements. Therefore, the Board has determined that Ms. Ricciardello’s service on these audit committees is beneficial to her service on the Company’s Audit Committee. For purposes of complying with the listing standards of the NYSE, the Board has determined that Ms. Ricciardello’s simultaneous service on the audit committees of more than three public companies does not impair her ability to effectively serve on the Company’s Audit Committee. The Audit Committee operates under a written charter approved by the Board of Directors. The Audit Committee Charter is available at www.devonenergy.com.

The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the preparation of the financial statements and the establishment and maintenance of the system of internal controls. This system is designed to provide reasonable assurance regarding the achievement of objectives in the areas of reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations. In fulfilling its oversight responsibilities, the Audit Committee reviewed with management its internal controls over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board and the audited financial statements in the Annual Report. This review included a discussion of the quality and the acceptability of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.

In fulfilling its duties during 2016, the Audit Committee:

 

   

reviewed with the independent auditors their opinion on the conformity of the Company’s audited financial statements with U.S. generally accepted accounting principles and the effective operation of the Company’s internal controls over financial reporting;

 

   

reviewed with the independent auditors their judgment as to the quality and the acceptability of the Company’s accounting principles and other matters;

 

   

discussed with the independent auditors other matters under generally accepted auditing standards, including Statement on Auditing Standards No. 1301, Communications with Audit Committees;

 

   

discussed with the independent auditors the auditors’ independence, including the matters in the written disclosures and the letter received from the independent auditors required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditors’ communications with the Audit Committee concerning independence;

 

   

discussed with the independent auditors the overall scope and plans for their audit; and

 

   

met with the independent auditors, with and without management present, to discuss the results of their audit and the overall quality of the Company’s financial reporting.

 

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AUDIT COMMITTEE REPORT (cont’d)

 

Fees to Independent Auditor

Under the terms of its Charter, the Audit Committee has the responsibility to approve the fees paid to the independent auditors. For the years ended December 31, 2016 and December 31, 2015, the following fees were paid to KPMG LLP:

 

     2016     2015  

Audit fees

  $ 3,039,000     $ 3,459,000  

Audit-related fees

    314,000       465,000  

Tax fees

    61,000       68,000  

All other fees

           
    $ 3,414,000     $ 3,992,000  

Audit fees included services for the audits of the Company’s financial statements and the effective operation of its internal controls over financial reporting. KPMG LLP also serves as the independent auditors for EnLink Midstream, LLC and EnLink Midstream Partners, LP (collectively, “EnLink”). Fees for the audits of EnLink’s consolidated financial statements for 2016 were $2,214,000, which are not included in the table above.

Audit-related fees consisted principally of fees for audits of financial statements of certain of the Company’s affiliates and subsidiaries. Audit-related fees for EnLink for 2016 were zero.

Tax fees consisted of tax compliance and tax consulting fees.

Audit Committee Pre-Approval Policies and Procedures

The Audit Committee has pre-approval policies and procedures related to the provision of audit and non-audit services. Under these procedures, the Audit Committee pre-approves both the type of services to be provided by KPMG LLP and the estimated fees related to these services. During the approval process, the Audit Committee considers the impact of the types of services and the related fees on the independence of the auditors. The services and fees must be deemed compatible with the maintenance of the auditors’ independence, including compliance with SEC rules and regulations.

All of the 2016 and 2015 audit and non-audit services provided by KPMG LLP were approved by the Audit Committee. The non-audit services that were approved by the Audit Committee were also reviewed to ensure compatibility with maintaining the auditors’ independence, and the Audit Committee determined the auditors’ independence was not impaired.

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board, and the Board approved, that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 that has been filed with the SEC.

Mary P. Ricciardello, Chairperson

Barbara M. Baumann

Robert H. Henry

Michael M. Kanovsky

 

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RESERVES COMMITTEE REPORT

The Reserves Committee is currently comprised of three independent Directors and operates under a written charter approved by the Board of Directors. The Reserves Committee Charter is available at www.devonenergy.com. The Reserves Committee oversees, on behalf of the Board, the integrity of the Company’s oil, bitumen, natural gas and natural gas liquids reserves data. Management and our independent engineering consultants have the primary responsibility for the preparation of the reserves reports. In fulfilling its oversight responsibilities, the Reserves Committee reviewed with management the internal procedures relating to the disclosure of reserves in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, having regard to industry practices and all applicable laws and regulations. In fulfilling its duties during 2016, the Reserves Committee:

 

   

approved Deloitte LLP and LaRoche Petroleum Consultants, Ltd. as the Company’s independent engineering consultants for the year ended December 31, 2016;

 

   

reviewed with the independent engineering consultants the scope of the annual review of the Company’s reserves;

 

   

met with the independent engineering consultants, with and without management, to review and consider the evaluation of the reserves and any other matters of concern with respect to the evaluation of the reserves;

 

   

reviewed and approved any statement of reserves data or similar reserves information, and any report of the independent engineering consultants regarding such reserves to be filed with any securities regulatory authorities or to be disseminated to the public;

 

   

reviewed the internal procedures relating to the disclosure of reserves; and

 

   

reviewed the qualifications and independence of the independent engineering consultants prior to their appointment and throughout their engagement.

In reliance on the reviews and discussions referred to above, the Reserves Committee recommended to the Board, and the Board approved, that the reserves information be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 that has been filed with the SEC.

Michael M. Kanovsky, Chairman

John E. Bethancourt

Duane C. Radtke

 

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AGENDA ITEM 2.

APPROVE, IN AN ADVISORY VOTE, EXECUTIVE COMPENSATION

In accordance with Section 14A of the Securities Exchange Act of 1934, we are asking our stockholders to vote to approve, on an advisory basis, the compensation of our named executive officers as disclosed in this Proxy Statement. At the 2011 Annual Meeting, you approved our proposal to provide you with this opportunity on an annual basis. This vote is not intended to address any specific item of compensation, but rather our overall compensation policies and practices relating to our named executive officers as disclosed in our Compensation Discussion and Analysis, the Summary Compensation Table, and other related tables and narrative disclosure. Accordingly, we will ask our stockholders to vote “FOR” the following resolution at the 2017 Annual Meeting:

“RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the 2016 Summary Compensation Table and the other related tables and narrative disclosure.”

This vote, normally called a “say-on-pay” vote, is advisory, and therefore not binding on the Company, the Compensation Committee, or the Board. The Board will, however, as it has in prior years, take into account the outcome of the vote when considering future compensation arrangements.

 

Our Board of Directors recommends that stockholders vote “FOR” the approval, on an advisory basis, of the compensation of our named executive officers.

 

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AGENDA ITEM 3.

ADVISORY VOTE ON THE FREQUENCY OF AN ADVISORY VOTE

ON EXECUTIVE COMPENSATION

In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are asking our stockholders to indicate how frequently we should seek an advisory vote on the compensation of our named executive officers, as disclosed pursuant to the SEC’s compensation disclosure rules, such as Agenda Item 2 included on page 32 of this Proxy Statement. By voting on this Agenda Item 3, stockholders may indicate whether they would prefer an advisory vote on named executive officer compensation once every one, two, or three years.

After careful consideration of this proposal, the Board has determined that an advisory vote on executive compensation that occurs every year is the most appropriate alternative for Devon and our stockholders, and therefore the Board recommends that you vote for a one-year interval for the advisory vote on executive compensation. In reaching this recommendation, the Board considered that an annual vote allows stockholders to provide frequent, ongoing input on our executive compensation program. Moreover, the Board believes that seeking annual input from its stockholders on its executive compensation program is a key component of Devon’s ongoing dialogue with stockholders on executive compensation and other corporate governance matters.

Stockholders will not be voting to approve or disapprove the Board’s recommendation on this agenda item. Instead, you may cast your vote on the voting frequency by choosing among three frequency options: the option of one, two or three years or you may abstain from voting.

Although this advisory vote on the frequency of the “say-on-pay” vote is nonbinding, the Board and the Compensation Committee will take into account the outcome of the vote when considering the frequency of future advisory votes on executive compensation. The Board may decide that it is in the best interests of our stockholders and Devon to hold an advisory vote on executive compensation more or less frequently than the option receiving the highest number of votes from our stockholders.

 

Our Board of Directors recommends a vote for the option of “ONE YEAR” as the frequency with which stockholders are asked to provide an advisory vote on executive compensation.

 

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NAMED EXECUTIVE OFFICER COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

 

 

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

Introduction

Purpose of Compensation Discussion and Analysis

This Compensation Discussion and Analysis (“CD&A”) outlines our compensation philosophy and describes the material components of our executive compensation program for the “named executive officers.” This CD&A also summarizes decisions the Compensation Committee of the Board of Directors (the “Committee”) made under the program and the processes utilized and factors considered in making those decisions. In particular, this CD&A focuses on the decisions the Committee made during its January 2017 meetings at which the Committee evaluated the Company’s performance in 2016 as well as each executive officer’s performance for the year, including the performance of the business or organizational unit for which the officer was responsible. At the January 2017 meetings, the Committee considered prospective salary adjustments, cash bonuses for 2016 performance (“Bonus”) and long-term equity incentive awards (“LTI”). Additional information about the compensation of the named executive officers is provided in the 2016 Summary Compensation Table (the “SCT”) and other compensation tables that follow this CD&A. Pursuant to SEC guidance, the outcome of the Committee’s January 2017 decisions on base salaries for 2017 and LTI will appear in next year’s SCT while the Bonus is shown in this year’s SCT and other applicable tables.

Named Executive Officers

The named executive officers for 2016 are the following individuals:

 

Executive   Position

David A. Hager

  President and Chief Executive Officer

Thomas L. Mitchell

  Executive Vice President and Chief Financial Officer

Tony D. Vaughn

  Chief Operating Officer

Lyndon C. Taylor

  Executive Vice President and General Counsel

R. Alan Marcum

  Executive Vice President, Administration

Frank W. Rudolph

  Former Executive Vice President, Human Resources

In February 2016, Devon promoted Mr. Vaughn from Executive Vice President, Exploration and Production to Chief Operating Officer. Decisions made at the Committee’s January 2017 meetings resulted in pay increases that were designed, in part, to correspond with his increasing responsibilities with the Company.

In July 2016, Mr. Rudolph’s employment was terminated pursuant to the Company’s workforce reduction program. SEC rules require us to include him as a named executive officer in this CD&A. The SCT and other tables that follow this CD&A reflect the severance package Mr. Rudolph received in accordance with his employment agreement with the Company. Mr. Rudolph was not part of the Committee’s year-end performance and pay decision-making processes. Therefore, minimal references are made to Mr. Rudolph in this CD&A.

Mr. Mitchell left the Company on April 19, 2017. Mr. Mitchell is eligible to receive a severance package in accordance with the employment arrangements applicable to our named executive officers that are described in this CD&A and the tables that follow this CD&A.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

Executive Summary

Company Performance and Pay Alignment

Since 2010, the Company has successfully transitioned to a liquids-rich (oil and natural gas liquids), higher-margin, onshore North American production base and progressively improved its portfolio of assets. The Company continues to transform its organizational structures and processes to allocate capital investments to the Company’s most promising assets and thereby optimize returns. In 2016, the Company took significant steps to maximize returns during a prolonged period of low commodity prices. Those steps included a reduction in capital investments, the divestment of certain non-core assets, and the reduction and re-alignment of its workforce and overall cost structure. This, in turn, accelerated the Company’s on-going transformation and resulted in outstanding overall results for 2016.

Devon believes setting challenging annual performance goals is key to continuous improvement in the returns we achieve on our assets and capital investments. As reflected in the Company’s performance scorecard for 2016 (see page 43), Devon met or exceeded all of its corporate goals, which resulted in a Company performance score of 130% of target. This performance contrasts with 2015, a year that scored below target due to performance that fell short on some measures, including reserves additions and total stockholder return (which is measured by stock price changes and dividend payment value (“TSR”)).

The structure of the Company’s compensation program coupled with the Committee’s processes and decision making ensure a strong tie between Company performance and executive pay. This is especially illustrated by the compensation outcomes for our executives over the last two years. The chart below, “Summary of President and CEO Pay,” spotlights the negative TSR for Devon and below-target compensation awarded to the President and CEO in 2015 compared with the positive TSR for Devon and increase in compensation awarded to the President and CEO in 2016. Additional comparative detail about the tie between Company performance and named executive officer pay may be found below in the sections titled “Snapshot Comparison of Compensation Decisions Made Following 2016 and 2015 Company Performance” and “Effect of Company Performance on President and CEO Realizable Pay” found on pages 48 and 49, respectively.

 

Summary of President and CEO Pay  
Year   Total
Stockholder
Return for
the Year
    Salary Increase
Awarded Following
Year End
   

Bonus Awarded,

% of Target,
Following Year End

   

Long-Term
Incentives
Awarded,

% of Target,
Following Year End

 

2016

    +44.7     No salary increase       130     100

2015

    -46.6     No salary increase       90     67

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

2016 Company Performance Highlights

The commodity pricing challenges impacting the industry in 2015 continued in 2016. The actions taken and leadership provided by the executives during the year led to strong operational and financial results in the environment. The following performance highlights provide further context for the Committee’s considerations with respect to executive compensation for 2016:

Operational and financial achievements

 

   

Devon exceeded production guidance issued during the year and oil—a higher-margin commodity compared to other carbon-based energy commodities—represented the largest component of the Company’s production mix at 44% of retained asset production volumes;

 

   

following a significant expansion of its position in Oklahoma’s Anadarko Basin STACK play in early 2016, Devon accelerated development in the area and increased production by 37% compared to 2015;

 

   

in response to the low commodity price environment, the Company (i) reduced field operating and general and administrative expenses, which resulted in savings of $845 million, or 25%, as compared to the prior year, and (ii) reduced exploratory and development capital investment by $2.8 billion, or 65%, as compared to the prior year;

 

   

the Company continued to maintain a strong liquidity position, with cash and capacity under its senior credit facility totaling approximately $5.0 billion at year end; and

 

   

the Company reduced debt by $3.1 billion, or 31%, which included tender offers for long-term bonds that resulted in remaining debt with no significant maturities until 2021.

Asset portfolio enhancements

 

   

Devon successfully divested various assets, including its interest in the Access Pipeline in Canada and non-core upstream assets in the United States, and realized aggregate sale proceeds of approximately $3.1 billion, which exceeded targeted proceeds of $2 billion to $3 billion and allowed the Company to focus resources on its more productive assets; and

 

   

Devon replaced more than 100% of its production through significant additions to proved reserves.

Total Stockholder Return

 

   

During 2016, Devon’s stock price reached a high of $50.68, which was approximately 58% above 2015’s year-end price, and recorded a TSR of 44.7% for the year; and

 

   

Devon consistently achieved TSR in the top-half relative to its peer group (as described below in this CD&A) and finished the year ranked 6th out of 15 when compared to the Company’s peer group.

Compensation Philosophy and Objectives

Devon is committed to delivering consistent top-tier stockholder returns through a highly engaged culture focused on innovation, safety, operational excellence, environmental stewardship and social responsibility. We also maintain a strong commitment to financial strength and flexibility through all commodity price cycles, as reflected in the Company’s investment grade credit ratings. We focus our

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

business on building value per share by managing a premier asset portfolio, delivering top-tier results in our areas of operation, continuing disciplined capital allocation and maintaining significant financial strength.

This strategy requires a compensation philosophy that recognizes near-term operational and financial success as well as decision-making that supports long-term value creation. For these reasons, it is critical that the Company’s executive compensation program effectively allocates compensation opportunities to motivate executives over the contemplated time horizon. Overall, the value of an executive officer’s total compensation is weighted in favor of long-term incentives in order to focus the officer’s efforts on the long-term performance of the Company and to encourage the executive to remain at the Company.

The objectives of our compensation program are to:

 

   

attract and retain highly trained, experienced, and committed executives who have the skills, education, business acumen, and background to lead a large and diversified oil and gas business;

 

   

motivate and reward executives to drive and achieve our goal of increasing stockholder value;

 

   

allocate incentives for the achievement of near-term and long-term objectives, without motivating executives to take excessive risk; and

 

   

track and respond to developments, such as changes in competitive pay practices.

The primary components of our executive compensation program consist of base salary, a Bonus and LTI. We generally target each component, as well as the aggregate of the components, at approximately the 50th percentile of a group of peer companies in our industry (see section titled “Use of Peer Groups” on page 51 for additional information). Individual compensation levels may vary from these targets based on performance, expertise, experience or other factors unique to the individual and his role within the Company. We also provide retirement and other benefits typical for our peer group.

The Committee emphasizes TSR performance in the executive compensation program in order to make realizable pay highly dependent on one-year and multi-year TSR performance. When Devon’s TSR underperforms, the structure of Devon’s compensation program will result in the named executive officers generally receiving below-target Bonuses and lower-than-average overall compensation compared to executives in similar positions at peer companies because TSR is an important measure for Bonuses and the sole determinant of performance share unit payouts. The converse is true as well: When Devon’s TSR outperforms that of its peers, the named executive officers are likely to receive above-target pay and higher-than-average overall compensation compared to executives in similar positions at peer companies. Please see page 49 for a further discussion of realizable pay.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

What Devon Does and Doesn’t Do

 

Good Compensation Governance Practiced by Devon
 

•   Award Performance-Based LTI—The Company awards LTI in the form of performance share units tied to TSR (50%) and performance restricted stock tied to financial and operating metrics (50%). Goals for vesting in LTI are transparent; this CD&A discloses the metrics used. Target performance on performance share units requires TSR that exceeds the peer group median. The Company has not awarded stock options in several years.

•   Utilize a Quantitative Process for Bonuses—In determining Bonuses, the Committee assigns a score to the Company’s performance on goals set at the beginning of the year. The Committee then calculates a weighted score that determines the amount of any Bonuses.

•   Tie Realizable Pay Opportunities to Company Performance—The Committee regularly reviews the realizable pay of the President and CEO and other executive officers in light of Company performance. This has resulted in pay that generally tracks Company performance.

•   Require Executives to Hold Devon Stock—Board-adopted guidelines establish robust minimum stock ownership levels for the executive officers.

•   Provide for Clawback of Compensation—Pursuant to a Board-adopted policy, the Committee may clawback Bonuses and LTI if the Company restates its financial statements.

•   Interview Executives—On an annual basis, the Committee conducts in-depth, confidential, one-on-one interviews with each executive officer, which is a unique and highly effective tool in the Committee’s oversight of the executive compensation program.

 

Controversial Compensation Governance Not Practiced by Devon
 

   Enter into Egregious Employment AgreementsThe Company does not enter into contracts containing multi-year guarantees of salary increases or non-performance based bonuses or equity compensation.

   Provide Tax Gross-Ups—Employment agreements do not obligate the Company to make tax gross-up payments in the event of a change in control of the Company.

   Allow Excessive Severance Benefits and/or Liberal Change-in-Control PaymentsEmployment agreements do not require cash payments that exceed three times base salary plus target/average/last paid Bonus; do not contain liberal change-in-control definitions; and, do not provide severance payments without job loss (i.e., no “single trigger” cash severance or equity vesting with a change in control).

   Allow Speculation on Our Company’s Stock—Company policy prohibits the executives from engaging in short-term or speculative transactions involving our common stock.

   Reprice or Replace Underwater OptionsThe Company does not reprice or replace underwater stock options.

   Permit Abusive Perquisites PracticesPerquisites made available to the executives are limited.

 

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

Response to Stockholder Feedback

We conduct investor outreach throughout the year to ensure that management and the Board understand the compensation issues that matter to our stockholders. We also consider the results of the most recent advisory vote on executive compensation by Devon’s stockholders (“say-on-pay vote”). The chart set forth below highlights compensation program changes made over the past few years, including Committee action in 2017. Although in 2016’s say-on-pay vote approximately 95% of voting stockholders voted “for” Devon’s executive compensation in 2015, the Committee opted to adjust Devon’s compensation practices as described in the row below titled “2017 Proxy Statement” based on developments in pay practices.

 

Source for Detail   Change in Compensation Practice
2017 Proxy Statement  

•   For restricted stock grants under the long-term incentive plan submitted to stockholders for approval at this year’s annual meeting (the “2017 LTIP”), Devon will not pay dividends on any awards until they vest.

•   The 2017 LTIP provides that shares will not vest in the case of a change in control unless a job loss follows or the acquiring company fails to assume outstanding grants (i.e., no “single trigger” equity vesting with a change in control). This change in Devon’s long-term incentive plan memorializes the Company’s practice with grant agreements since 2015 (see below under 2015 Proxy Statement).

2016 Proxy Statement  

•   No significant changes made.

2015 Proxy Statement  

•   Since 2015, LTI grant agreements include change-in-control provisions that only permit vesting in the event a job loss follows the change in control or the acquiring company is not listed on a national securities exchange.

•   Stock ownership guidelines for the Company’s President and CEO increased the holding requirement from five to six times salary.

•   Pursuant to the stock ownership guidelines, executive officers are required to hold at least one-half of shares received from awards until minimum ownership levels are achieved.

2014 Proxy Statement  

•   The Board, at the Committee’s recommendation, adopted a clawback policy.

•   The cumulative effect of a series of modifications to the Bonus process resulted in the CD&A incorporating additional details on the specific goals and weightings assigned to performance measures and the overall Bonus process.

•   Performance share units required Devon to achieve superior TSR relative to most peers in order to pay out at target.

2013 Proxy Statement  

•   Pre-set Company performance measures used in determining Bonuses were assigned specific weightings.

•   All LTI awards were performance-based and delivered in the form of performance share units tied to TSR (50%) and performance restricted stock tied to a financial metric (50%). The Committee ceased awarding stock options.

2012 Proxy Statement  

•   Bonuses and LTI were re-designed to be performance-based compensation and eligible for tax deduction under IRS Section 162(m) (subject to certain stockholder approvals that were subsequently obtained).

•   Amendments to employment agreements eliminated tax gross-up payment obligations in the event of a change-in-control of the Company.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

Compensation Decisions for 2016

Overview of Pay Decisions

We believe that the proportion of any employee’s total direct compensation that varies based on performance should increase as the scope of an employee’s ability to influence our results increases. Because executive officers have the greatest influence over our results, a significant portion of their overall compensation consists of Bonuses and LTI awards that vary based on performance. This practice is consistent with norms in the oil and gas industry.

As illustrated below, compensation decisions made by the Committee during its January 2017 meetings resulted in awards heavily weighted in favor of components subject to performance-related variability, with Bonuses and LTI representing approximately 90% of the estimated value of total direct compensation awarded to the President and CEO and an average of approximately 84% for the other named executive officers. Further, approximately 79% of the compensation awarded to the President and CEO and 72% of the compensation awarded to the other named executive officers was contingent on metrics commonly used by investors in measuring the Company’s returns.

 

 

LOGO

Each year, the Committee refers to the following factors in considering any compensation decisions for the named executive officers:

 

   

Company performance in relation to goals pre-approved by the Committee and the Board of Directors, including the Company’s TSR performance as compared to peers;

 

   

each named executive officer’s individual performance during the year, including the performance of the business or organizational unit for which the officer is responsible;

 

   

our compensation philosophy;

 

   

confidential interviews individually conducted by the Committee with each executive officer;

 

   

input from the Compensation Consultant (see section titled “Role of Compensation Consultant” on page 51 for additional information);

 

   

the Committee’s own review of competitive market data; and

 

   

the President and CEO’s recommendations with respect to the compensation of the other named executive officers.

The Committee regularly reviews the factors used when considering compensation decisions and may from time to time change them or supplement its analysis with other factors.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

Base Salary

Base salary typically represents a smaller portion of executive pay than compensation elements that vary year to year based on performance. Competitive salaries, however, are vital to ensuring that the Company attracts and retains executives who have a combination of business acumen, significant industry experience and longevity with the Company. In evaluating salary levels each year, the Committee generally considers the following factors:

 

   

the competitive position of the executive’s base salary compared to similarly situated executives at peer companies;

 

   

the scope of responsibility, experience and tenure of the executive and his potential to take on greater or different responsibilities; and

 

   

the Company’s cost structure.

Based on the foregoing considerations, the Committee determined in its January 2017 meetings that salary increases were only warranted for Messrs. Mitchell and Vaughn. Mr. Mitchell received a 4.9% increase from his salary in effect at year-end 2016 to ensure his salary was competitive within the peer group. The Committee raised Mr. Vaughn’s salary by 8.1% over his salary in effect at year-end 2016 due, in part, to the increase in his responsibilities arising from his promotion to Chief Operating Officer. The limited salary increases awarded by the Committee in its January 2017 meetings follow similarly limited salary increases for the prior year. Please note that the SCT’s entries for “Salary” reflect the salaries received by the named executive officers during 2016. The footnotes that accompany this year’s SCT and the discussion of salaries in last year’s CD&A provide additional information on salaries in effect for 2016.

Annual Performance Cash Bonus

In awarding Bonuses, the Committee utilizes a formula that establishes a pre-determined Bonus target for each executive officer based on a percentage of his base salary. For 2016, Bonus targets for named executive officers ranged from 80% to 135% of base salaries depending on industry benchmarks for the relevant officer position. Actual Bonus payouts depend on the Company’s performance in relation to the structured and measurable goals approved by the Board at the beginning of the year and the individual executive’s contributions to achievement of those goals. The goals are not only critical to the Company’s near-term performance but also to its prospects for sustainable growth in returns and creation of long-term value for the Company and its stockholders.

The table below provides detail on the Company’s performance on the goals set for 2016. As reflected in the table, the Committee assigns a separate weighting to each performance measure in order to reflect the relative importance of those areas for the year. The Committee aggregates the weighted performance score for each measure to arrive at an overall Company performance score. For operational and financial goals, the Committee generally views (i) a 30% or greater shortfall from a goal as the threshold at which a score of no more than 25% may be assigned for the goal, and (ii) a 30% or greater outperformance on a goal as maximizing performance such that a score of up to 200% could be assigned for the goal. Although the structure of the Bonus process relies on Company performance measures and the application of set formulas to arrive at Bonus amounts, the Committee maintains the authority to adjust the amount of an executive’s Bonus within the range of the Bonus pool (0% to 200% of target) based on individual contributions.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

Measure   Goal   Outcome   Weight     Score    

Weighted

Score

 
Oil and Gas Production   213.5 million barrel of oil equivalent (“BOE”)   223.5 million BOE     15     125     18.75
Total Stockholder Return1   Top half of the peer group on a 1-year basis   1-year TSR ranked 6th out of 15 in relation to the peer group     15     125     18.75
Lease Operating Expenses per BOE   $8.44 per BOE   $7.08 per BOE     15     150     22.50
Oil and Gas Reserves Additions   102.0 million BOE added   262.5 million BOE added     10     200     20.00
Improve the Overall Value of Devon’s Risked Resource Portfolio   Achieve successes in acquisitions and divestitures, exploration, appraisal of prospects and technical areas   Exceeded top end of range of expected asset divestiture proceeds; progressed to commerciality a portion of the risked resource equal to 125% of 2016 production; evaluated >20% of overall amount of sub-commercial resource; evaluated material additions equivalent to 90% of total Devon risked resource     10     125     12.50
Environmental, Health and Safety2   Continuous improvement on various key measures   Improved SIF rate, recordable incident rate, SIF vehicle rate, spill rate compliance to protocols     10     125     12.50
Total Capital Expenditures   $1.676 billion   $1.560 billion     10     100     10.00
Pre-Tax Cash Margin per BOE, Normalized3   $3.66 per BOE   $3.85 per BOE     5     100     5.00
Learning and People   Hold health care cost inflation below the national average; promote improved execution   Held health care cost inflation below the national average; aligned team leadership and communication to promote improved execution     5     100     5.00
Improve Business Environment   Increase stakeholder alignment to improve public policy and business operating environment for Devon   Engaged stakeholders, legislators and associations on local, state and federal ordinances and regulations     5     100     5.00

2016 Company Performance Score

  130%

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

1 

For TSR, the Company is ranked in relation to the 14 peer companies listed under “Use of Peer Groups” on page 51.

 

2 

Environmental, Health and Safety measures consisted of employee recordable incident rate, contractor recordable incident rate, preventable vehicle incident rate, spill rate, and lost spill rate. The “SIF” rate records serious incidents or fatalities.

 

3 

Pre-tax cash margin per BOE, normalized is a non-GAAP financial measure. Please refer to Appendix A for additional information.

The performance scorecard reflects that the Company posted strong results in the challenging commodity price environment of 2016. The Company met or exceeded all of the goals established at the beginning of the year for the performance scorecard. With respect to operational and financial metrics, the Company posted results that generally exceeded goals, with lease operating expenses per BOE and reserves additions outperforming goals by a wide margin. The Committee noted that, in addition to meeting its goal for relative TSR performance, the Company also posted a high TSR overall.

The determination of a Company performance score supplements the Bonus eligibility approvals that the Committee makes at the start of each year for purposes of establishing a tax-efficient Bonus pool under Section 162(m) of the Internal Revenue Code. For 2016, the Committee established a Bonus pool that could provide Bonuses between zero and 200% of the aggregate target Bonus amount for executive officers. The Committee tied the funding of a Bonus pool to the same performance metrics as the performance restricted stock awards that were made at the start of 2016. Specifically, the Company was required to attain in 2016 either cash flow before balance sheet changes of at least $500 million or production of at least 175 million BOE in order for a Bonus pool to be established. The Company achieved above-target performance on both metrics. Please refer to Appendix A for additional information about cash flow before balance sheet changes, which is a non-GAAP financial measure.

The following table outlines the calculations made for the Bonuses awarded for 20161:

 

Executive  

2016

Salary2

          Performance
Bonus
Target
          Company
Performance
Score
          Process
Determined
Bonus
Amount
   

Actual

Amount
Awarded

 

David A. Hager

  $ 1,275         135           $ 2,238     $ 2,238  

Thomas L. Mitchell

  $ 610         100           $ 793     $ 793  

Tony D. Vaughn

  $ 740       X       100     X       130     =     $ 962     $ 1,480  

Lyndon C. Taylor

  $ 625         80           $ 650     $ 650  

R. Alan Marcum

  $ 550         80               $ 572     $ 572  

 

1

All dollar amounts in thousands.

 

2 

Annualized base salary in effect as of December 31, 2016.

The Committee adjusted Mr. Vaughn’s Bonus to the top end of the Bonus pool range to recognize his leadership in the Company’s successful efforts to improve Company returns through technological and process enhancements as well as cost controls. The Committee made no other adjustments to named executive officer Bonuses from the calculated Company performance score.

Please note that the entries in the SCT below for “Non-Equity Incentive Plan Compensation” in 2016 reflect the annual Bonuses listed under the column above titled “Actual Amount Awarded.”

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

Long-Term Incentives

A key element of our compensation program is to reward executive officers for long-term strategic accomplishments and enhancement of long-term stockholder value through equity-based incentives that vest over an extended period of time. LTI compensation plays an essential role in attracting and retaining executive officers and aligns their interests with the long-term interests of our stockholders.

At its March 2016 meeting, the Committee reviewed market data for LTI granted to executives at peer companies. At that time, the Committee determined from a competitive standpoint that approving grants targeting the 50th market percentile would in most years be appropriate, which, for last year, would have resulted in LTI valued at $8.5 million for the President and CEO. However, based on (a) the Company’s negative TSR in 2015 and (b) the Committee’s desire to preserve shares in the Company’s long-term incentive plan, the Committee approved LTI grants valued at approximately one-third less than the targeted value for each executive. The entries for 2016 in the “Stock Awards” column of the SCT below reflect the LTI grants approved by the Committee in March 2016. Please refer to the CD&A in last year’s proxy statement for additional information on those awards.

At its January 2017 meetings, the Committee determined that, based on strong 2016 Company performance, the 2017 awards of LTI should be made at the competitive target of the 50th market percentile. In making this decision, the Committee took into account the Company’s high overall and relative TSR for 2016, the Company’s strong operational and financial performance for the year, and the Company’s progress on, and each executive’s leadership with respect to, the Company’s strategic objectives. The table provided below details the awards made to named executive officers. The SCT in next year’s proxy statement will reflect the value of these grants as “Stock Awards” for 2017.

LTI Granted in 20171

 

Executive   Item2     Performance
Restricted
Stock
   

Performance
Share

Units3

 

David A. Hager

    Shares       93,592       93,592  
    Value     $ 4,250     $ 4,250  

Thomas L. Mitchell

    Shares       27,527       27,527  
    Value     $ 1,250     $ 1,250  

Tony D. Vaughn

    Shares       38,538       38,538  
    Value     $ 1,750     $ 1,750  

Lyndon C. Taylor

    Shares       25,325       25,325  
    Value     $ 1,150     $ 1,150  

R. Alan Marcum

    Shares       19,820       19,820  
    Value     $ 900     $ 900  

 

1 

Dollar values in thousands.

 

2

For each named executive officer, the Committee first determines the total value of LTI to be awarded then divides the total value approximately equally between performance restricted stock and performance share units.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

3

In accordance with applicable accounting requirements, we use a different valuation method in the SCT (in this case, a “Monte Carlo” simulation) for performance share units than in this table. The Monte Carlo simulation for performance share units, when valued for purposes of inclusion in next year’s SCT as compensation for 2017, may require us to assign a higher or lower value per unit than the closing price of the Company’s stock as of the grant approval date.

Consistent with the grants of LTI awards in recent years, the Committee determined at its January 2017 meetings that the creation of stockholder value would be promoted by linking all LTI awarded in the year to Company performance. Accordingly, the two types of LTI granted to named executive officers—performance restricted stock (“PRS”) and performance share units (“PSU”)—only vest if certain levels of performance are achieved. The Committee also certified the Company’s performance for PRS granted in the first quarter of 2016 and PSU granted in the first quarter of 2014 that were subject to a three-year performance period. Please refer to the “Outstanding Equity Awards at Fiscal Year End” table below and corresponding footnotes for additional detail.

 

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The following table describes the purpose and structure of the LTI granted to the named executive officers at the Committee’s meetings in January 2017:

 

Type of LTI Award        Purpose        Additional Background and Detail

Performance Restricted Stock (PRS)

   

Awards of PRS encourage executives to work toward achievement of a pre-set financial metric.

   

•   Tying PRS to a financial metric is designed to promote tax efficiency in awarding compensation to named executive officers.

 

•   Shares only vest if the Company meets the pre-set financial metric: cash flow before balance sheet changes1 of at least $700 million for 2017.

 

•   If the metric is achieved, shares will vest 25% per year over four years. If the metric is not achieved, the grant will be forfeited.

 

•   The use of a relatively short-term financial metric coupled with a long-term vesting schedule incentivizes Company performance for the year while promoting the long-term retention of the executive officer.

     

Performance Share Units

(PSU)

     

Awards of PSU encourage executives to make decisions and take actions that promote mid-term stockholder return.

     

•   Executives may earn between 0% and 200% of the shares underlying the grant based on the Company’s TSR relative to companies in the peer group over a three-year performance period (January 1, 2017 through December 31, 2019).

 

•   Payout will be determined as of the end of the performance period based on actual TSR performance over the period. The grid below further details the relationship between relative performance and payout levels.

 

•   If the Company’s TSR outperforms that of its peers, executives may earn the targeted number of shares (100%) or more. If the Company’s TSR is at or below median as compared to peers, executives earn fewer shares than targeted with the potential for no payout.

   
        The Company’s TSR against its peers2        Payout percent of shares underlying grant
   

1-3

   

200%

   

4

   

175%

   

5

   

150%

   

6

   

125%

   

7 (target # of shares)

   

100%

   

8 (median TSR)

   

90%

   

9

   

80%

   

10

   

70%

   

11

   

60%

   

12

   

50%

   

13-15

     

0%

 

1 

Cash flow before balance sheet changes is a non-GAAP financial measure. Please refer to Appendix A for additional information.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

2 

The Company and the peer companies listed under “Use of Peer Groups” on page 51 constitute the 15 companies whose TSR will be ranked from highest to lowest to determine share payout under PSU grants.

Snapshot Comparison of Compensation Decisions Made Following 2016 and 2015 Company Performance

Pursuant to the Company’s 2016 performance and pay cycle, the Committee, at its January 2017 meetings, considered salary adjustments, Bonus awards for 2016 and LTI grants. In accordance with SEC guidance, the base salary and LTI grants approved at the meetings will appear in next year’s SCT as compensation for 2017 while the Bonus will be reported in this year’s SCT as compensation for 2016.

The tables below illustrate the difference in compensation awarded by the Committee to the named executive officers in the first quarter of 2017 and 2016, respectively, in light of Company performance for the year preceding those Committee meetings. The fluctuations in year-over-year total direct pay primarily correlate to the Company’s TSR for the respective years, particularly so for executives in the same position for both years of the comparison.

Comparison of Total Direct Pay1

Aggregate NEO Total Direct Pay

 

Year2   Total Stockholder Return     Average % Change in Total Direct
Pay from Prior Year3
 

2016

    +44.7     +40.2

2015

    -46.6     -26.3

Individual NEO Total Direct Pay

 

Executive   Year2    

Base

Salary

Rate

    Performance  Cash
Bonus4
    Value of
Annual LTI
Grant6
   

Total Direct
Pay

Awarded

    Change
from prior
Year
 
      $     % of
Target5
       

David A. Hager

    2016     $ 1,275     $ 2,238       130   $ 8,500     $ 12,013       +41.5%  
    2015     $ 1,275     $ 1,549       90   $ 5,667     $ 8,491       +0.08%  

Thomas L. Mitchell

    2016     $ 640     $ 793       130   $ 2,500     $ 3,933       +46.1%  
    2015     $ 610     $ 549       90   $ 1,533     $ 2,692       -27.9%  

Tony D. Vaughn

    2016     $ 800     $ 1,480       200   $ 3,500     $ 5,780       +70.8%  
    2015     $ 740     $ 644       90   $ 2,000     $ 3,384       -21.2%  

Lyndon C. Taylor

    2016     $ 625     $ 650       130   $ 2,300     $ 3,575       +37.1%  
    2015     $ 625     $ 450       90   $ 1,533     $ 2,608       -28.4%  

R. Alan Marcum

    2016     $ 550     $ 572       130   $ 1,800     $ 2,922       +36.2  
    2015     $ 530     $ 396       90   $ 1,200     $ 2,146       -27.6

 

1

All dollar amounts shown in thousands.

 

2

References to “Year” are to the pay decisions made by the Committee following the applicable year and may not align with the amounts shown in the SCT for the respective years due to SEC rules for presentation of data in the SCT.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

3

Averages shown are for named executive officers in the same position as the prior year. For 2016, this group consisted of Messrs. Hager, Mitchell, Taylor and Marcum. For 2015, the group consisted of Messrs. Mitchell, Vaughn, Taylor and Marcum. The table excludes Mr. Vaughn from the 2016 calculation and Mr. Hager from the 2015 calculation since the respective promotions they received in those years and corresponding changes in compensation distort the averages.

 

4

Bonus targets are set as a percentage of base salary in effect as of year-end. Please refer to the section titled “Annual Performance Cash Bonus” for additional information about the process for 2016.

 

5 

Bonus targets for the NEOs are as follows: Mr. Hager - 135%; Mr. Mitchell - 100%; Mr. Vaughn - 100%; Mr. Taylor - 80%; and, Mr. Marcum - 80%. In each case, targets are a percentage of the prior year’s annualized salary rate applicable to the officer.

 

6

All amounts calculated using the face-value method (value divided by the closing price of the Company stock as of the grant effective date).

Effect of Company Performance on President and CEO Realizable Pay

The following chart demonstrates that the executive compensation program is meeting one of its key objectives: The realizable compensation of the executives should be directly tied to Company TSR performance relative to peer companies. The chart compares Mr. Hager’s target pay at the time of compensation decisions for the applicable year to realizable pay as of December 31, 2016. The chart illustrates that strong relative and overall TSR performance—like that of 2016—drives realizable pay above targets while weak relative and overall TSR performance results in pay below target—such as that for 2014 and 2015.

President and CEO Realizable Pay1

 

LOGO

 

1 

All dollar amounts shown in thousands.

Explanatory notes to “President and CEO Realizable Pay” chart

Amounts shown for each “Target” column reflect (1) base salary paid during the year, (2) Bonus target for the year and (3) face value (shares multiplied by grant date fair market value) of the Performance Restricted Stock and Performance Share Units granted at the beginning of the year. For

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

2016, the “target” LTI is $8.5 million. The Committee reduced the LTI award for the year by one-third due to the factors described in the section titled “Long-Term Incentives” on page 45 above.

Amounts shown for each “Realizable” column reflect (1) base salary paid during the year, (2) the Bonus awarded for the year through the Committee’s Bonus determination process and (3) the value of (a) the Performance Restricted Stock based on the closing price of Devon’s common stock as of 2016 year end and (b) the Performance Share Units based on a payout percentage for Devon’s position within the peer group for the relevant performance period up to December 31, 2016. Following year end, the Performance Share Units granted in 2014 paid out at 100% of target and the Performance Share Units granted in 2015 and 2016, respectively, were trending to pay out at 70% of target.

“% TSR Change” covers, (a) for the first column, the period from December 31, 2013 to December 31, 2016, (b) for the second column, the period from December 31, 2014 to December 31, 2016, and (c) for the third column, the period from December 31, 2015 to December 31, 2016.

“% Difference between Realizable and Target Pay” reflects the difference, expressed as a percentage of “Target,” between “Target” and “Realizable” pay as of December 31, 2016 for each respective column.

Compensation Process Background

The Committee is responsible for and directs the process of reviewing and determining compensation for the named executive officers. The Committee retains an external compensation consultant to provide assistance with the process. The role of the Committee and the compensation consultant, which includes the development of a peer group we use for benchmarking and comparing the executive officers’ compensation, is further described in the following sections.

Role of the Committee

The Committee establishes our executive compensation philosophy and administers the overall executive compensation program. The Committee operates under a written charter approved by the Board of Directors, a copy of which is available at the Company’s website, www.devonenergy.com.

Each year, the Committee conducts an individual, in-depth, confidential interview with each executive officer to discuss the officer’s analysis of the Company’s overall performance for the year, performance within the officer’s area of responsibility, and any issues or concerns the officer may have regarding the Company’s operations. We believe this is a unique and highly effective tool in the Committee’s oversight of the executive compensation process. In addition, the President and CEO discusses with the Committee his evaluation of each executive officer’s performance, development and potential to take on greater or different responsibilities. The President and CEO also provides compensation recommendations to the Committee for all executive officers (other than himself).

The Committee considers the various factors described in this CD&A, including its interviews with executive officers and the President and CEO’s evaluations of each executive officer’s performance and, in a closed session without the President and CEO present, the Committee sets the President

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

and CEO’s compensation. The Committee then determines whether to approve the compensation recommendations provided by the President and CEO for the other executive officers.

Role of the Compensation Consultant

For 2016, the Committee retained Meridian Compensation Partners, LLC (the “Compensation Consultant”) as its external compensation consultant. The Compensation Consultant evaluated the competitiveness of our program and reviewed the executive compensation program design. The Committee has the final authority to hire and terminate the Compensation Consultant, and the Committee annually evaluates the performance of the Compensation Consultant.

In selecting its consultant, the Committee considers factors that could affect the consultant’s independence, including whether the consultant provides services to the Company other than under its engagement by the Committee and the other factors set forth in the Committee’s charter. Based on this review, the Committee determined that the Compensation Consultant had no conflicts of interest.

Use of Peer Groups

To successfully compete for executive talent, the Committee, working with the Compensation Consultant, annually compares the compensation of the executive officers to the compensation of similarly situated executives at peer companies with business operations focused on the exploration and production of oil and gas. In establishing a peer group, the Committee primarily seeks companies with asset and market values similar to the Company. The Committee also considers enterprise values, calculated as common equity value plus net long-term debt and preferred stock, of the companies. The Committee believes these metrics are appropriate for determining peers because they provide a reasonable point of reference for comparing executives with similar positions and responsibilities. At the time the Committee approved the peer group for 2016, the Company was generally positioned between the 50th and 75th percentiles of the peer group on each of these metrics, which indicates that Devon was larger than most of its peers.

The approved peer group for 2016 consisted of the 14 companies listed below.

Anadarko Petroleum Corporation

Apache Corporation

Chesapeake Energy Corporation

Concho Resources Inc.

ConocoPhillips

Continental Resources, Inc.

EnCana Corporation

EOG Resources, Inc.

Hess Corporation

Marathon Oil Corporation

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

Murphy Oil Corporation

Noble Energy, Inc.

Occidental Petroleum Corporation

Pioneer Natural Resources Company

The Committee’s peer group analysis consists of all components of total direct compensation, including base salary, annual bonus, and long-term equity incentives. The Compensation Consultant collected and summarized compensation data from the proxy statements of the peer group companies and the Compensation Consultant’s proprietary databases. At its January 2017 meetings, the Committee approved the same peer group for 2017 as the prior year.

Tally Sheet Review

The Committee annually reviews tally sheets for executive officers that include all elements of compensation, including potential payments under various termination scenarios. Tally sheets allow the Committee to evaluate compensation elements individually and collectively. Please refer to the tables that follow this CD&A for additional information.

Succession Planning

The Company has a robust succession-planning process to ensure the development of executive talent for the near- and long-term. The succession-planning process and the Company’s progress in developing potential successors to the executive officers are reviewed with the Committee and the Board on an annual basis.

Additional Benefits and Compensation Information

Retirement Benefits

Defined Benefit Plans

Based on their hire date with the Company, named executive officers may be eligible to participate in three defined benefit plans maintained by the Company. Our qualified Defined Benefit Plan provides annual retirement income based on a formula that considers the executive’s final average compensation, Social Security benefits and years of credited service with the Company. Additionally, the same group of named executive officers may participate in either of two nonqualified defined benefit plans, the Supplemental Retirement Income Plan (SRIP) or Benefit Restoration Plan (BRP), that are not subject to certain limitations imposed by the IRS. Such nonqualified plans are typical in the industry.

Defined Contribution Plans

Named executive officers hired after our Defined Benefit Plan was closed to new participants in 2007 are eligible to participate in a qualified 401(k) Plan that provides for a Company match of up to 6% and a Company contribution of up to 8% of their compensation. In lieu of participating in the SRIP or BRP, named executive officers who are not eligible for the Defined Benefit Plan may participate in additional nonqualified defined contribution plans. Under the Supplemental Contribution Restoration

 

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Plans (SCRPs) and the Supplemental Executive Retirement Plan (DC SERP), the Company may make supplemental contributions that would otherwise be subject to Internal Revenue Code limitations based on the compensation of the executives.

Nonqualified Deferred Compensation Plans

Devon maintains a nonqualified Deferred Compensation Plan that allows eligible employees to defer cash compensation beyond the limits placed on the 401(k) Plan by the Internal Revenue Code and permits the Company to contribute a match to the extent that the match available under the qualified 401(k) Plan is limited.

For additional information on the plans and the value of accumulated benefits for the named executive officers under the various plans described in this “Retirement Benefits” section, please refer to the “Pension Benefits” section on page 62 and the “Nonqualified Deferred Compensation” section on page 67.

Other Benefits

The limited perquisites made available to our executives are listed in detail in the “All Other Compensation” table on page 57. Personal use of aircraft by executives on a limited basis is allowed as approved by the President and CEO. The Committee reviews the personal use of aircraft on an annual basis and has noted that the use has been minimal.

Post-Termination or Change-in-Control Benefits

We maintain employment agreements with each of the named executive officers. These agreements provide each named executive officer certain additional compensation if his employment is involuntarily terminated other than for cause or if the named executive officer voluntarily terminates his employment for “good reason,” as those terms are defined in the relevant agreements. Also, in these situations, the applicable named executive officer fully vests in any unvested LTI awards. The agreements also provide certain benefits in the event of a termination within a two-year period following a change in control.

The employment agreements do not include “gross-up” provisions that obligate the Company to pay an additional amount to the named executive officer if his benefits under the employment agreement or any other Company arrangement are subject to the tax imposed on excess parachute payments by Section 4999 of the Internal Revenue Code. Our award agreements for LTI granted to the named executive officers provide that officers who meet certain years-of-service and age criteria are eligible to continue to vest as scheduled in outstanding awards following retirement subject to certain covenants and agreements.

Employment agreements and other arrangements with post-termination and change-in-control benefits are typical in the oil and gas industry and necessary in order to compete for executive talent. Please refer to the “Potential Payments Upon Termination or Change-in-Control” section beginning on page 69 for detail on amounts that could be payable under certain scenarios and additional information on our employment agreements.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

Stock Ownership Guidelines

Ownership of our stock by the executives aligns their interests with the interests of our stockholders. Accordingly, the Board of Directors maintains stock ownership guidelines that require each executive officer who has served in such capacity for at least five years to own shares of common stock at least equal in value to a multiple of his base salary. The guidelines establish the following minimum ownership levels:

 

Officer Title   Share Ownership Expectation as Multiple of Base Salary

President and CEO

  Six times base salary

Chief Operating Officer

  Four times base salary

Executive Vice Presidents

  Three times base salary

The guidelines require an executive officer who has served in such capacity less than five years to maintain ownership of at least one-half of the shares of Devon common stock received through equity-based awards from the Company (net of taxes) until the officer meets his or her ownership requirement.

As of March 31, 2017, the named executive officers employed by the Company held stock in excess of the levels required in the guidelines. The executives have historically maintained share ownership levels well above our guidelines. For purposes of calculating share ownership levels, the Board includes (i) shares owned directly by the officer and his immediate family members who share the same household, (ii) shares owned beneficially by the officer and his immediate family members residing in the same household, and (iii) unvested restricted stock for which any performance conditions have been met.

The Company also has a policy that prohibits our personnel from engaging in short-term or speculative transactions involving our common stock. This policy prohibits trading in our stock on a short-term basis, engaging in short sales, and buying and selling puts and calls. This policy also discourages the practice of purchasing the Company’s stock on margin.

For additional detail on the stock owned by the named executive officers, please refer to the Security Ownership of Management table on page 78.

Compensation Program and Risk-Taking

Our executive compensation program is designed to provide executive officers incentives for the achievement of near-term and long-term objectives, without motivating them to take unnecessary risk. As part of its review of the impact of the Company’s executive compensation programs, on the Company’s risk profile and risk management, the Committee noted the following factors that discourage the Company’s executives from taking unnecessary or excessive risk:

 

   

the Company’s operating strategy and related compensation philosophy;

 

   

the effective balance of our compensation program between cash and equity, near-term and long-term focus, corporate and individual performance, and financial and non-financial performance;

 

   

a multi-faceted approach to performance evaluation and compensation that does not reward an executive for engaging in risky behavior to achieve one objective to the detriment of other objectives; and

 

   

significant executive stock ownership pursuant to our stock ownership guidelines.

 

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Based on this review, the Committee believes that the executive compensation programs do not encourage executives to take unnecessary or excessive risk.

Policy for Recovery of Compensation (Clawback Policy)

The Board has a policy concerning the recovery of bonuses, incentives and equity-based compensation awarded to executive officers under certain circumstances (the “Clawback Policy”). In the event of a restatement of the Company’s financial statements that leads to a revision of one or more performance measures on which a bonus or other incentive compensation was based, the Committee may require reimbursement or forfeiture of all or a portion of any bonus or incentive compensation subject to the Clawback Policy.

Consideration of Tax Implications

In connection with making decisions on executive compensation, the Committee takes into consideration the provisions of Section 162(m) of the Internal Revenue Code, which limits the deductibility by the Company for federal income tax purposes of certain categories of annual compensation in excess of $1 million paid to certain executive officers. It is the Company’s policy to maximize the effectiveness of its compensation programs while also taking into consideration the requirements of Section 162(m). Accordingly, the Company intends to maintain the flexibility to implement executive compensation programs that it deems to be in the best interests of the Company and its stockholders, and it reserves the authority to award nondeductible compensation as it deems appropriate. As part of maintaining flexibility in its compensation programs, the Company has made a practice of obtaining stockholder approvals for the compensation plans that the Committee uses for performance-based compensation awards, including the stockholder approvals requested in this Proxy Statement for Devon’s Annual Incentive Compensation Plan and the 2017 LTIP.

COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Company has reviewed and discussed the preceding Compensation Discussion and Analysis section with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Proxy Statement.

Duane C. Radtke, Chairperson

John. E. Bethancourt

Robert A. Mosbacher, Jr.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

SUMMARY COMPENSATION TABLE

The following table and accompanying footnotes summarize the compensation earned, awarded, paid, or attributed to the named executive officers for the years indicated below. The named executive officers are the President and Chief Executive Officer, the Chief Financial Officer, the three other most highly compensated executive officers of the Company serving as of December 31, 2016, and the former Executive Vice President, Human Resources, who retired on July 31, 2016 pursuant to the Company’s workforce reduction program. This table should be read together with our Compensation Discussion and Analysis (see page 34), which includes information about Company performance for 2016, our compensation philosophy and objectives, the programs and plans that underlie executive officer compensation opportunities, and the Compensation Committee’s process for awarding compensation.

 

Name and
Principal Position
   Year    

Salary

($)1

   

Bonus

($)

   

Stock

Awards

($)2

   

Non-Equity

Incentive
Plan
Compensation

($)3

   

Change in

Pension Value

and

Nonqualified

Deferred
Compensation

Earnings

($)4

   

All Other

Compensation

($)5

   

Total

($)

 

David A. Hager

     2016       1,275,000       -       4,319,289       2,237,625       -       939,444       8,771,358  

President and Chief

Executive Officer

     2015       1,107,692       -       6,402,788       1,549,000       -       817,414       9,876,894  
     2014       895,385       -       4,465,014       1,350,000       -       587,479       7,297,878  

Thomas L. Mitchell

     2016       610,000       -       1,168,777       793,000       -       352,602       2,924,379  

Executive Vice President

and Chief Financial  Officer6

     2015       624,231       -       2,621,844       549,000       -       439,860       4,234,935  
     2014       454,808       363,330 7      3,295,083       825,000       -       132,752       5,070,973  

Tony D. Vaughn

     2016       735,192       -       1,524,479       1,480,000       2,306,986       87,654       6,134,311  

Chief Operating Officer

     2015       732,500       -       2,850,228       644,000       372,345       113,841       4,712,914  
     2014       634,615       -       2,568,424       1,080,000       1,255,414       75,979       5,614,432  

Lyndon C. Taylor

     2016       625,000       -       1,168,777       650,000       809,168       69,402       3,322,347  

Executive Vice President

and General Counsel

     2015       645,192       -       2,621,844       450,000       332,909       87,003       4,136,948  
                

R. Alan Marcum

     2016       550,000       -       914,687       572,000       268,506       63,124       2,368,317  

Executive Vice President,

Administration

                
                

Frank W. Rudolph

     2016       312,981       -       -       -       1,832,502       5,588,890       7,734,373  

Former Executive Vice

President, Human Resources

                
                                                                

 

1

The annual base salary rates for Mr. Mitchell, $610,000; Mr. Taylor, $625,000; Mr. Marcum, $550,000; and Mr. Rudolph, $525,000 were set at the Compensation Committee’s January 2015 meeting and were not changed for 2016. A base salary rate of $1,275,000 became effective for Mr. Hager upon his appointment as President and CEO in August 2015 and was not changed for 2016. At the Compensation Committee’s March 2016 meeting, the Compensation Committee (the “Committee”) increased Mr. Vaughn’s base salary rate from $715,000 to $740,000 in conjunction with Mr. Vaughn’s promotion to Chief Operating Officer. The Company’s bi-weekly pay schedule resulted in an extra pay period in 2015, which accounts for some of the year-over-year differences in salaries for the named executive officers.

 

2 

The dollar amounts reported in this column represent the aggregate grant date fair values of the stock awards determined pursuant to FASB ASC Topic 718, excluding the effect of estimated forfeitures. The assumptions used to value stock awards are discussed in Note 4 - Share-Based Compensation of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. For restricted stock and performance restricted stock, values are based on the closing price of the Company’s common stock on the grant date. In valuing the performance share unit awards, the Company used a Monte Carlo simulation. The grant date fair value of the performance share unit awards was determined based on the vesting at target of the units awarded, which is the performance the Company believed was probable on the grant date. If a maximum, rather than target, number of shares is used to determine the maximum award opportunity for the named executive

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

 

officers for the 2016 performance share unit awards, the grant date value of the awards is as follows: Mr. Hager, $2,971,904; Mr. Mitchell, $804,182; Mr. Vaughn, $1,048,924; Mr. Taylor, $804,182; and Mr. Marcum, $683,354. Additional information on stock awards may be found in the Grants of Plan-Based Award Table on page 58. Please also see page 45 for a description of stock awards granted in early 2017. No option awards have been granted to the named executive officers since 2011.

 

3 

This column reflects performance cash bonuses awarded to the named executive officers.

 

4

The dollar amounts reported in this column reflect the aggregate change in the actuarial present value of each named executive officer’s accumulated benefits under our Defined Benefit Plan and the Supplemental Retirement Income Plan (SRIP) during the applicable year. The amounts shown for each year do not reflect payments made to the executives during the applicable year. None of the named executive officers received above market or preferential earnings on deferred compensation in any of the reported years. Messrs. Hager and Mitchell joined the Company after our Defined Benefit Plan was closed to new participants.

 

5

Details for the amounts shown in this column for 2016 are reflected in the supplemental table immediately below.

 

6 

Mr. Mitchell left the Company on April 19, 2017.

 

7

In 2014, Mr. Mitchell received a cash bonus upon the commencement of his employment with the Company. The amount was intended to replace a portion of the compensation he forfeited by resigning from his prior employer.

The following supplemental table shows the components of “All Other Compensation” for 2016 in the previous table.

 

Name  

Group
Term

Life

Insurance

Premiums

($)

   

401(k) Plan

Employer

Match and
Retirement
Contribution

($)

   

Deferred

Compensation

Plan
Employer

Match

($)

   

Defined
Contribution
Restoration
Plan
Employer
Contribution

($)

   

Defined
Contribution
Supplemental
Executive
Retirement
Plan
Employer
Contribution

($)

   

Personal

Air
Travel

($)1

   

Severance
Benefits

($)

   

Total

($)

 

David A. Hager

    7,524       35,000       153,540       206,820 2      536,560       -       -       939,444  

Thomas L. Mitchell

    4,902       29,150       26,820       71,520 2      220,210       -       -       352,602  

Tony D. Vaughn

    4,902       15,900       66,852       -       -       -       -       87,654  

Lyndon C. Taylor

    4,902       15,900       48,600       -       -       -       -       69,402  

R. Alan Marcum

    2,622       15,900       40,860       -       -       3,742       -       63,124  

Frank W. Rudolph

    2,949       15,900       21,318       -       -       3,742       5,544,981 3      5,588,890  

 

1 

The aggregate incremental cost to the Company for personal use of our aircraft is calculated based on our average variable operating costs. Variable operating costs include fuel, engine reserves, maintenance, weather-monitoring, on-board catering, landing/ramp fees and other miscellaneous variable costs. The total annual variable costs are divided by the annual number of hours our aircraft flew to determine an average variable cost per hour. This average variable cost per hour is then multiplied by the hours flown for personal use to determine the incremental cost. The methodology excludes fixed costs that do not change based on usage, such as pilots’ and other employees’ salaries, purchase costs of the aircraft and non-trip related hangar expenses. The Company does not reimburse executives for the personal tax liability attributable to personal air travel.

 

2

Messrs. Hager and Mitchell joined the Company after the Defined Benefit Plan was closed to new participants. Instead, they are eligible for and receive enhanced employer retirement contributions to the 401(k) plan and certain non-qualified defined contribution arrangements.

 

3 

Mr. Rudolph retired on July 31, 2016 pursuant to the Company’s workforce reduction program. All of the amounts reflected in the column for Mr. Rudolph were provided pursuant to Mr. Rudolph’s employment agreement with the Company and agreements applicable to long-term incentives. The amount is comprised of the following: a lump-sum payment equivalent to three times the sum of his annual salary and the highest bonus paid to him in the three years prior to employment termination, $3,393,000; accelerated vesting of restricted stock, the value of which was $807,616 on Mr. Rudolph’s retirement date; continued entitlement to performance share units, the target value of which was $1,054,318 on Mr. Rudolph’s termination date; a lump-sum payment for his 2016 pro-rated bonus, $245,096; an amount that is equivalent to 36 months of the Company’s portion of COBRA insurance coverage, half of which was delivered through continued coverage and the other half of which was delivered through a lump-sum payment, $42,143; and, the value of Company-provided, post-termination life insurance, $2,808.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

GRANTS OF PLAN-BASED AWARDS

The Grants of Plan-Based Awards table sets forth information concerning performance cash bonuses, performance restricted stock and performance share units granted during 2016 for the named executive officers as described below. The long-term incentive awards reflected below are the only equity-based incentives granted to the named executive officers in the year.

 

          Estimated Future Payouts Under
Non-Equity Incentive Plan Awards1
    Estimated Future Payouts Under
Equity Incentive Plan Awards
   

Grant Date
Fair Value
of Stock
Awards

($)

 
Name   Grant Date    

Threshold

($)

 

Target

($)

   

Maximum

($)

   

Threshold

($)

 

Target

(#)

   

Maximum

(#)

   

David A. Hager

   

3/1/2016

3/1/2016

3/1/2016

 

2 

3 

  -

-

-

   

1,721,250

-

-

 

 

 

   

3,442,500

-

-

 

 

 

  -

-

-

   

-

147,416

147,416

 

 

 

   

-

147,416

294,832

 

 

 

   

-

2,833,336

1,485,953

 

 

 

Thomas L. Mitchell

   

3/1/2016

3/1/2016

3/1/2016

 

2 

3 

  -

-

-

   

610,000

-

-

 

 

 

   

1,220,000

-

-

 

 

 

  -

-

-

   

-

39,890

39,890

 

 

 

   

-

39,890

79,780

 

 

 

   

-

766,686

402,091

 

 

 

Tony D. Vaughn

   

3/1/2016

3/1/2016

3/1/2016

 

2 

3 

  -

-

-

   

740,000

-

-

 

 

 

   

1,480,000

-

-

 

 

 

  -

-

-

   

-

52,030

52,030

 

 

 

   

-

52,030

104,060

 

 

 

   

-

1,000,017

524,462

 

 

 

Lyndon C. Taylor

   

3/1/2016

3/1/2016

3/1/2016

 

2 

3 

  -

-

-

   

500,000

-

-

 

 

 

   

1,000,000

-

-

 

 

 

  -

-

-

   

-

39,890

39,890

 

 

 

   

-

39,890

79,780

 

 

 

   

-

766,686

402,091

 

 

 

R. Alan Marcum

   

3/1/2016

3/1/2016

3/1/2016

 

2 

3 

  -

-

-

   

440,000

-

-

 

 

 

   

880,000

-

-

 

 

 

  -

-

-

   

-

31,218

31,218

 

 

 

   

-

31,218

62,436

 

 

 

   

-

600,010

341,677

 

 

 

Frank W. Rudolph

    3/1/2016 4    -     420,000       840,000     -     -       -       -  

 

1 

The amounts shown in the column reflect a range of possible payouts for the performance cash bonus awards made on the dates indicated. Performance related to these awards was certified by the Compensation Committee following the end of the year and amounts were paid shortly thereafter. The awards were earned and paid at 130% of target levels with the exception of Mr. Vaughn, who earned 200%; actual payouts under these awards are shown in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table. Please refer to “Annual Performance Cash Bonus” on page 42 for more information about our 2016 performance cash bonuses, including how the Compensation Committee establishes bonus targets and performance goals and engages in a scoring process to determine actual payouts.

 

2 

The amounts shown in the rows reflect the possible payout for the performance restricted stock awards made on the dates indicated. All awards were made under the 2015 LTIP. The dollar amounts reported for the rows represent the aggregate grant date fair values of the performance restricted stock awards determined pursuant to FASB ASC Topic 718, excluding the effect of estimated forfeitures. For more information on the general structure of this grant, please see the discussion of “Long-Term Incentives” starting on page 45 of this Proxy Statement. While that discussion specifically covers grants made in February 2017, the terms and conditions of those awards and the awards reflected in this table are similar other than the performance measure. Accrued dividends on the awards are not paid until the Committee certifies the attainment of the performance goal, and thereafter dividends will be paid on a current basis. As established at the time of grant, performance restricted stock for 2016 was only earned if the Company achieved in 2016 either cash flow before balance sheet changes of at least $500 million or production of at least 175 million BOE. In January 2017, the Committee determined that each goal had been achieved. As a result, 25% of the shares granted have vested and 25% will vest on each of the 2nd, 3rd and 4th anniversaries of the grant date.

 

3 

The amounts shown in the rows reflect the range of possible payouts for the performance share unit awards made on the dates indicated. All awards were made under the 2015 LTIP. The dollar amounts reported for the rows represent the aggregate grant date fair values of the performance share unit awards determined pursuant to FASB ASC Topic 718, excluding the effect of estimated forfeitures. The grant date fair value of the performance share unit awards was determined based on the vesting at target of the units awarded, which is the performance the Company believed was probable on the grant date. For more

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

 

information, please see the discussion of “Long-Term Incentives” starting on page 45 of this Proxy Statement. While that discussion specifically covers grants made in February 2017, the terms and conditions of those awards and the awards reflected in this table are substantially the same. Dividends on the awards are not paid until shares vest. As of December 31, 2016, the awards reflected in this table were trending at 70% of target payout.

 

4

Mr. Rudolph was included in the bonus eligibility approvals made at the Compensation Committee’s March 2017 meeting, however, he did not receive a payment under the performance cash bonus program following year-end since his employment terminated prior to December 31, 2016. Instead, under his employment agreement, Mr. Rudolph received a pro-rated cash bonus calculated based on his bonus target.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

The following table shows the number of shares covered by exercisable and unexercisable options and unvested restricted stock, performance restricted stock and performance share awards held by the named executive officers as of December 31, 2016.

 

    Option Awards     Stock Awards  
Name  

Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable1

   

Number of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable

   

Option

Exercise

Price

($)

   

Option

Expiration

Date

   

Number of
Shares or
Units of
Stock

That

Have Not
Vested

(#)

   

Market
Value of
Shares or
Units of
Stock

That

Have Not
Vested

($)2

    Equity Incentive Plan Awards:  
             

Number of

Unearned
Shares, Units
or Other
Rights

That

Have Not

Vested

(#)

   

Market or
Payout Value

of Unearned
Shares, Units
or Other
Rights

That Have

Not Vested

($)2

 

David A. Hager

    45,000               44.69       03/30/2017                                  
    56,800         63.80       12/07/2017          
    56,150         73.43       12/01/2018          
    43,550         65.10       11/30/2019          
            17,050 3      778,674      
            25,125 4      1,147,459      
            23,497 5      1,073,108      
                34,080 6      1,556,434  
                33,480 7      1,529,032  
                147,416 8      6,732,489  
                147,416 9      6,732,489  

Thomas L. Mitchell

            8,526 10      389,382      
            17,050 3      778,674      
            13,440 4      613,805      
                17,900 7      817,493  
                39,890 8      1,821,776  
                39,890 9      1,821,776  

Tony D. Vaughn

    27,300         63.80       12/07/2017          
    25,500         73.43       12/01/2018          
    24,050         65.10       11/30/2019          
            9,810 3      448,023      
            14,610 4      667,239      
                19,600 6      895,132  
                19,460 7      888,738  
                52,030 8      2,376,210  
                52,030 9      2,376,210  

Lyndon C. Taylor

    36,700         63.80       12/07/2017          
    33,700         73.43       12/01/2018          
    26,150         65.10       11/30/2019          
            9,810 3      440,023      
            13,440 4      895,132      
                19,600 6      613,805  
                17,900 7      817,493  
                39,890 8      1,821,776  
                                                      39,890 9      1,821,776  

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

    Option Awards     Stock Awards  
Name  

Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable1

   

Number of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable

   

Option

Exercise

Price

($)

   

Option

Expiration

Date

   

Number of
Shares or
Units of
Stock

That

Have Not
Vested

(#)

   

Market
Value of
Shares or
Units of
Stock

That

Have Not
Vested

($)2

    Equity Incentive Plan Awards:  
             

Number of

Unearned
Shares, Units
or Other
Rights

That

Have Not

Vested

(#)

   

Market or
Payout Value

of Unearned
Shares, Units
or Other
Rights

That Have

Not Vested

($)2

 

R. Alan Marcum

    30,400               63.80       12/07/2017                                  
    33,700         73.43       12/01/2018          
    26,150         65.10       11/30/2019          
            7,680 3      350,746      
            10,530 4      480,905      
                15,340 6      700,578  
                14,020 7      640,293  
                31,218 8      1,425,726  
                31,218 9      1,425,726  

Frank W. Rudolph

    1,567         63.80       12/07/2017          
    33,700         73.43       12/01/2018          
    10,460         65.10       07/30/2019          
                15,340 6      700,578  
                                                      14,020 7      640,293  

 

1

The column reflects options granted on March 31, 2009, December 8, 2009, December 2, 2010 and December 1, 2011.

 

2

Based on a stock price of $45.67, the closing price of our common stock on December 30, 2016, which was the last trading day of the year.

 

3

As established at the time of grant, performance restricted stock for 2014 was only earned if the Company achieved cash flow before balance sheet changes of at least $4 billion in 2014. In January 2015, the Committee determined that the goal had been achieved. As a result, 25% of the shares granted immediately vested and 25% vest on each of the 2nd, 3rd and 4th anniversaries of the grant date.

 

4 

As established at the time of grant, performance restricted stock for 2015 was only earned if the Company achieved cash flow before balance sheet changes of at least $4 billion in 2015. In January 2016, the Committee determined that the goal had been achieved. As a result, 25% of the shares granted immediately vested and 25% vest on each of the 2nd, 3rd and 4th anniversaries of the grant date.

 

5 

In August 2015, Mr. Hager was granted a performance restricted stock award in connection with his appointment as President and Chief Executive Officer of the Company. This grant was only earned if the Company achieved the pre-set cash flow goal described in footnote 4 above. Because the goal was achieved, 25% of the shares granted immediately vested and 25% will vest on each of the 2nd, 3rd and 4th anniversaries of the grant date.

 

6 

For performance share units granted in 2014, the number of shares listed is based on the target level of TSR performance for the Company as compared to a peer group for the three-year period from January 1, 2014 to December 31, 2016. In January 2017, the Committee determined that the Company’s TSR for the period ranked 6th out of 15 when compared to the peer group. Pursuant to the terms of the grant, which are further detailed in the grid set forth on page 42 of our 2014 proxy statement, 100% of each executive’s target shares were determined to be earned and the shares were subsequently released to the executive.

 

7 

For performance share units granted in 2015, the number of shares listed is based on the target level of TSR performance for the Company as compared to a peer group for the three-year period from January 1, 2015 to December 31, 2017. The actual number of shares paid out will be based on the Company’s relative TSR, as determined by the Committee following the performance period pursuant to the grid set forth on page 43 of our 2015 proxy statement.

 

8

For performance share units granted in 2016, the number of shares listed is based on target level of performance for the three-year period from January 1, 2016 to December 31, 2018. The actual number of shares paid out will be based on the Company’s relative TSR, as determined by the Committee following the period pursuant to the grid set forth on page 44 of our 2016 proxy statement.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

9

As established at the time of grant, performance restricted stock for 2016 was only earned if the Company achieved in 2016 either cash flow before balance sheet changes of at least $500 million or production of at least 175 million BOE. In January 2017, the Committee determined that each goal had been achieved. As a result, 25% of the shares granted have vested and 25% will vest on each of the 2nd, 3rd and 4th anniversaries of the grant date.

 

10

The amount shown for Mr. Mitchell represents a restricted stock award that was made on February 28, 2014. The restricted stock vests at the rate of 25% on each of the first four anniversary dates of the original grant date.

OPTION EXERCISES AND STOCK VESTED DURING 2016

The table below shows the number of shares of our common stock acquired during 2016 upon the vesting of stock awards granted to the named executive officers in previous years. During 2016, no stock options were exercised by named executive officers.

 

    Stock Awards  
Name  

Number of

Shares

Acquired on
Vesting (#)

   

Value

Realized on

Vesting

($)1

 

David A. Hager

    66,062       1,715,806  

Thomas L. Mitchell

    17,267       365,174  

Tony D. Vaughn

    31,820       766,383  

Lyndon C. Taylor

    41,087       1,001,011  

R. Alan Marcum

    32,150       783,273  

Frank W. Rudolph

    50,360       1,531,890  

 

1

The dollar amounts shown in this column are determined by multiplying the number of shares of common stock acquired upon vesting by the per share market price of our common stock on the vesting date.

PENSION BENEFITS

We maintain three defined benefit retirement plans in which certain of the named executive officers may participate. Messrs. Mitchell and Hager joined the Company after the defined benefit retirement plans were closed to new participants and therefore do not participate in the plans. The plans consist of the following:

 

   

A tax qualified defined benefit retirement plan and related trust for certain employees (Defined Benefit Plan);

 

   

A nonqualified Benefit Restoration Plan (BRP) that provides benefits that would be provided under the Defined Benefit Plan except for:

 

   

limitations imposed by the Internal Revenue Code, and

 

   

the exclusion of nonqualified deferred compensation in the definition of compensation; and

 

   

A nonqualified Supplemental Retirement Income Plan (SRIP) for a small group of executives that provides benefits similar to those provided by the BRP plus certain additional benefits.

The following table shows the estimated present value, as of December 31, 2016, of accumulated retirement benefits as provided under the Defined Benefit Plan and the SRIP to the named executive

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

officers. All named executive officers, excluding Messrs. Mitchell and Hager, are participants in the SRIP in lieu of the BRP; therefore, BRP benefits are not included in the following table. SRIP benefits vest after five years of service. Participants who are terminated for “cause” lose their SRIP benefits and are instead paid under the BRP. Amounts payable under the SRIP or the BRP are reduced by the amounts payable under the Defined Benefit Plan so there is no duplication of benefits. Retirement benefits are calculated based upon years of service and “final average compensation.” Final average compensation consists of the average of the highest three consecutive years’ compensation from salary and cash bonuses out of the last 10 years. The definition of compensation under the Defined Benefit Plan is the same as the definition under the SRIP and BRP, except that under the Defined Benefit Plan, nonqualified deferred compensation is excluded and the amount of compensation and pension benefits is limited by the Internal Revenue Code. Please refer to our discussion under “Benefit Plans” below for additional details on our defined benefit plans.

 

Name    Plan Name   

Number of Years

Credited Service

(#)

  

Present Value of

Accumulated Benefit

($)1

  

Payments During
Last Fiscal Year

($)

David A. Hager2

   Defined Benefit Plan    -    -    -
   SRIP    -    -    -

Thomas L. Mitchell2

   Defined Benefit Plan    -    -    -
   SRIP    -    -    -

Tony D. Vaughn3

   Defined Benefit Plan    19    2,162,936    -
   SRIP    19    5,527,601    -

Lyndon C. Taylor3,4

   Defined Benefit Plan    11    2,101,326    -
   SRIP    16    4,524,846    -

R. Alan Marcum3

   Defined Benefit Plan    22    1,475,445    -
   SRIP    22    3,230,584    -

Frank W. Rudolph3,4,5

   Defined Benefit Plan    10    2,770,014    64,241
     SRIP    10    1,850,500    -

 

1 

The present value of each named executive officer’s accumulated benefits as of December 31, 2016 under the Defined Benefit Plan is calculated assuming 10% of participants would elect a single life annuity, 50% of participants would elect a lump sum and 40% would elect a 100% joint and survivor annuity. For the SRIP, we assumed 25% of participants would elect a single life annuity and 75% would elect a 100% joint and survivor annuity. We assumed that each named executive officer would begin receiving payments at normal retirement age (age 65) and would be vested in those payments. The present value is calculated using the MRP 2007/MSS2007 mortality table, which is based on the RP-2014 mortality table, and a discount rate of 3.99% for the Defined Benefit Plan and 4.09% for the SRIP. No pre-retirement decrements were used in this calculation.

 

2

Messrs. Mitchell and Hager joined the Company after the Defined Benefit Plan was closed to new participants. As a result, they will not receive a benefit under the plans described in this table.

 

3

Messrs. Vaughn, Taylor and Rudolph are eligible for early retirement under the Defined Benefit Plan and the SRIP. See the following “Defined Benefit Plan—Early Retirement” for a description of the eligibility requirements and benefits payable under our Defined Benefit Plan. Mr. Marcum is eligible for early retirement under the SRIP. See the following “Supplemental Retirement Income Plan” for a description of the eligibility requirements and benefits payable under our SRIP.

 

4

The value of Mr. Taylor’s and Mr. Rudolph’s SRIP benefits includes the effect of additional service and age credits approved by the Compensation Committee. As of December 31, 2016, the additional credits increased the value of Mr. Taylor’s SRIP benefit by $2,056,679 and Mr. Rudolph’s by $610,909. On an infrequent basis, the Committee grants additional service and age credits under specific circumstances. With Messrs. Taylor and Rudolph, the Committee granted credits in recognition that the executives joined Devon mid-career and would likely remain at the Company for the duration of their careers. The credits recognize the value of their prior experience to the Company.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

5

Although Mr. Rudolph left the Company in 2016, he did not receive any payments from the SRIP in 2016 because his annuity commencement was delayed until February 2017 to comply with Internal Revenue Code Section 409A.

BENEFIT PLANS

Defined Benefit Plan

The Defined Benefit Plan is a qualified defined benefit retirement plan which provides benefits based upon employment service with us. Employees hired before October 1, 2007, became eligible to participate in the Defined Benefit Plan when they earned one year of service and attained the age of 21 years. Employees who were hired after September 30, 2007, are not eligible to participate in the Defined Benefit Plan. Each eligible employee who retires is entitled to receive monthly retirement income based upon their final average compensation and years of credited service, and the retirement income is reduced by Social Security benefits payable to the employee. Alternately, an eligible employee may elect a lump-sum payment at the time of retirement equivalent in amount to the present value of the calculated annuity stream. Contributions by employees are neither required nor permitted under the Defined Benefit Plan. Benefits are computed based on straight-life annuity amounts. Benefits under the Defined Benefit Plan are limited for certain highly compensated employees, including the named executive officers, in order to comply with certain requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code.

Normal Retirement

Employees, including the named executive officers, are eligible for normal retirement benefits under the Defined Benefit Plan upon reaching age 65. Normal retirement benefits for the employees participating in the Defined Benefit Plan are equal to 65% of the participant’s final average compensation less any benefits due to the participant under Social Security, multiplied by a fraction, the numerator of which is his or her credited years of service (up to a maximum of 25 years) and the denominator of which is 25.

Early Retirement

Employees, including the named executive officers, are eligible for early retirement benefits under the Defined Benefit Plan after (i) attaining age 55, and (ii) earning at least 10 years of credited service. Early retirement benefits are equal to a percentage of the normal retirement income the participant would otherwise be entitled to if he or she had commenced benefits at age 65 depending on the participant’s age when he or she elects to begin receiving benefits. If an eligible participant commences benefits at age 55, he or she will receive 60% of the benefits he or she would have received had benefits commenced at age 65. The percentage increases by 5% for each year above age 55 (up to age 60) and 3% above age 60 (up to age 65) that an eligible participant delays the commencement of benefits.

Deferred Vested Pension

Participants in the Defined Benefit Plan are fully vested in their accrued benefits after five years of service. If the participant’s employment is terminated after attaining five years of service but before eligibility for early retirement, the participant is entitled to a deferred vested pension based on his or her accrued benefit on the date of termination. An unreduced deferred vested pension is payable at age 65. Alternatively, the participant may elect to receive a reduced benefit as early as

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

age 55. The benefit payable prior to age 65 is a percentage of his or her normal retirement benefit based on his or her age at the time the benefit begins, as shown in the table below:

 

Age at Election to

Receive Deferred

Vested Pension

  Percentage of
Normal Retirement
Income

65

  100.00%

64

  90.35%

63

  81.88%

62

  74.40%

61

  67.79%

60

  61.91%

59

  56.68%

58

  52.00%

57

  47.80%

56

  44.03%

55

  40.63%

If a participant is:

 

   

involuntarily terminated for any reason other than death or “cause,” is between the ages of 50 and 55 and has at least 10 years of credited service, or

 

   

involuntarily terminated for any reason other than “cause” within two years following a change in control and has at least 10 years of credited service regardless of the participant’s age,

then the participant may elect to have his or her benefits under the Defined Benefit Plan paid at any time on or after the age of 55 subject to the same percentage reduction in benefits as discussed in “Early Retirement” above.

Benefit Restoration Plan

The BRP is a nonqualified defined benefit retirement plan, the purpose of which is to restore retirement benefits for certain selected key management and highly compensated employees because their benefits under the Defined Benefit Plan are limited in order to comply with certain requirements of ERISA and the Internal Revenue Code or because their final average compensation is reduced as a result of contributions into our Deferred Compensation Plan. Benefits under the BRP are equal to 65% of the executive’s final average compensation less any benefits due to the executive under Social Security, multiplied by a fraction, the numerator of which is his or her years of credited service (not to exceed 25) and the denominator of which is 25. The BRP benefit is reduced by the benefit that is otherwise payable under the Defined Benefit Plan. An employee must be selected by the Compensation Committee in order to be eligible for participation in the BRP. As noted below in our discussion of the SRIP, an executive will only receive benefits under the BRP if his benefits under the SRIP have been forfeited due to a termination for “cause.” The same early retirement reduction factors that apply under the Defined Benefit Plan are applicable under the BRP. Participants become vested in retirement benefits under the BRP at the same time as the participant becomes vested for retirement benefits under the Defined Benefit Plan.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

Supplemental Retirement Income Plan

The SRIP is another nonqualified defined benefit retirement plan for a small group of key executives, the purpose of which is to provide additional retirement benefits for those executives. An employee must be selected by the Compensation Committee in order to be eligible for participation in the SRIP. Participants in the SRIP become vested in the SRIP benefits after five years of service. If the executive is terminated for “cause” as that term is defined in the executive’s employment agreement, then all benefits under the SRIP are forfeited and the executive would receive benefits under the BRP. If the executive is receiving benefits under the SRIP, the executive is not eligible for benefits under the BRP.

The SRIP provides for retirement income equal to 65% of the executive’s final average compensation less any benefits due to the participant under Social Security, multiplied by a fraction, the numerator of which is the executive’s credited years of service (not to exceed 20) and the denominator of which is 20. For those who become participants after January 24, 2002, which is the case for all of our named executive officers who participate in the SRIP, the SRIP benefit is also reduced by the full benefits otherwise accrued under the Defined Benefit Plan.

The same early retirement reduction factors that apply under the Defined Benefit Plan are applicable under the SRIP. Early retirement benefits are payable under the SRIP after attaining age 55 and earning at least 10 years of service or, if earlier, 20 years of service regardless of age. The early retirement benefit prior to age 55 is the actuarial equivalent of the age 55 early retirement benefit. In the event that a named executive officer is terminated “without cause” or terminates his or her employment for “good reason” as those terms are defined in our employment agreements with the named executive officers, then the executive will be 100% vested in his accrued SRIP benefit. If a change in control event occurs, the executive will be 100% vested and his benefit will be an amount equal to the normal retirement annuity payable immediately, unreduced for early commencement, in a lump sum. Otherwise, the benefit will be paid monthly, pursuant to the annuity option selected by the executive. Additionally, the SRIP provides that if the executive is terminated “without cause” or terminates his employment for “good reason” within 24 months of a change in control event, the executive will be entitled to an additional three years of service credit and age in determining benefits.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

NONQUALIFIED DEFERRED COMPENSATION

The following table shows the contributions, earnings, distributions and balances for 2016 under our nonqualified deferred compensation plan, supplemental contribution restoration plans and supplemental executive retirement plans, to the extent the respective named executive officer participates in such plans. Additional information about the plans is provided following the table.

 

Name  

Executive
Contributions in
Last Fiscal Year

($)1

    Company
Contributions for
Last Fiscal Year
($)2
   

Aggregate
Earnings in Last
Fiscal Year

($)3

    Aggregate
Distributions in
Last Fiscal Year
($)4
  Aggregate
Balance at Last
Fiscal Year End
($)5
 

David A. Hager

Deferred Compensation Plan

 

   

 

642,250

 

 

 

   

 

153,540

 

 

 

   

 

263,215

 

 

 

  -

 

   

 

3,393,488

 

 

 

Supplemental Contribution
Restoration Plans (SCRPs)

 

   

 

-

 

 

 

   

 

206,820

 

 

 

   

 

71,296

 

 

 

  -

 

   

 

1,054,455

 

 

 

Supplemental Executive Retirement Plan (DC SERP)

 

   

 

-

 

 

 

   

 

536,560

 

 

 

   

 

184,966

 

 

 

  -

 

   

 

2,521,754

 

 

 

Thomas L. Mitchell

Deferred Compensation Plan

 

   

 

28,670

 

 

 

   

 

26,820

 

 

 

   

 

12,005

 

 

 

  -

 

   

 

139,445

 

 

 

Supplemental Contribution Restoration Plans (SCRPs)

 

   

 

-

 

 

 

   

 

71,520

 

 

 

   

 

9,656

 

 

 

  -

 

   

 

185,468

 

 

 

Supplemental Executive Retirement Plan (DC SERP)     -       220,210       29,731     -     591,711  

Tony D. Vaughn

Deferred Compensation Plan

    82,751       66,852       21,219     -     1,134,766  

Lyndon C. Taylor

Deferred Compensation Plan

    64,500       48,600       171,235     -     2,147,897  

R. Alan Marcum

Deferred Compensation Plan

    112,200       40,860       207,996     -     2,703,134  

Frank W. Rudolph6

Deferred Compensation Plan

    160,105       21,318       119,924     -     2,107,729  

 

1 

The amounts in this column are already included in, and are not in addition to, the amounts in the “Salary” or “Bonus” columns in the Summary Compensation Table on page 56.

 

2 

The amounts in this column are already included in, and are not in addition to, the amounts in the in the “All Other Compensation” column of the Summary Compensation Table on page 57. Company contributions are made in arrears during the first month following the fiscal quarter during which the contributions were earned. Company contributions earned by the named executive officers during 2016 were deposited in April, July and October 2016 and January 2017.

 

3

Earnings reflect the returns produced by the investments selected by the applicable named executive officer. The investment options available to the named executive offices are a sub-set of the investment options available under the Company’s 401(k) Plan. As of December 31, 2016, investment options consisted of the following (returns for 2016 noted in parentheses): PIMCO Stable Income - Class 1 (1.41%); Neuberger Berman High Income Bond - Institutional Class (14.17%); Vanguard Prime Money Market (0.3%); Global Low Volatility Fund (8.02%); Large Cap Value Fund (14.25%); Large Cap Growth Fund (-0.50%); Small/Mid Cap Value Fund (18.80%); Small/Mid Cap Growth Fund (-0.55%); US Equity Index Fund (12.71%); International Equity Index Fund (5.16%); PIMCO All Asset All Authority (13.73%); American Funds EuroPacific Growth - R6 Shares (1.01%); JP Morgan Core Plus Bond Fund - (4.25%). The Company does not guarantee a level of investment return.

 

4 

In-service distributions are made in accordance with the elections made by the named executive officer at the time of enrollment in the plan.

 

5 

For the referenced plans, the Aggregate Balance reflects the changes in the plan balance for the named executive officers due to contributions (executive and Company), earnings, and distributions. The amounts previously reported in the Summary

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

 

Compensation Table as compensation to the named executive officers are as follows: Mr. Hager - $3,074,032; Mr. Mitchell - $507,617; Mr. Vaughn - $200,792; Mr. Taylor - $176,872.

 

6 

At the time Mr. Rudolph made his annual contribution elections for the plan, he selected as his distribution election a lump-sum payment at retirement. Pursuant to Internal Revenue Code Section 409A, the distribution of his aggregate balance was delayed until February 2017, and no distributions are reflected in the table for him for 2016.

401(k) Plan

The 401(k) Plan is a qualified defined contribution plan that provides for a Company-matching contribution of up to 6% of compensation. For employees who are not accruing benefits in the Defined Benefit Plan, supplemental contributions are made by the Company based on years of benefit service as a percentage of compensation.

Deferred Compensation Plan

The Deferred Compensation Plan is designed to allow participating employees, including the named executive officers, to contribute up to 50% of his or her base salary and up to 100% of his or her bonus and receive a Company match beyond the contribution limits prescribed by the IRS with regard to our 401(k) Plan. The Deferred Compensation Plan provides executives a tax-effective means to defer a portion of their cash compensation at a minimal cost to the Company.

Supplemental Contribution Restoration Plans

The Supplemental Contribution Restoration Plans (SCRPs) are two nonqualified supplemental defined contribution plans. The purpose of the SCRPs is to ensure that participants in the 401(k) Plan, who are eligible to receive the supplemental contribution, receive the full supplemental contribution despite the limitations imposed by the Internal Revenue Code. A contribution will be made by the Company in an amount equal to the difference between the supplemental contribution that the Company would have contributed under the 401(k) Plan in the absence of the Internal Revenue Code limitations and the actual amount contributed.

Supplemental Executive Retirement Plan

The Supplemental Executive Retirement Plan (DC SERP) is a nonqualified supplemental executive retirement plan that provides benefits in lieu of the SRIP to a small group of key executives who are not eligible to participate in the Defined Benefit Plan or the SRIP. Under the DC SERP, an executive is eligible to receive an annual contribution of a specified percentage of compensation. This contribution will be offset by supplemental contributions to the 401(k) Plan and contributions to the SCRPs. An employee must be selected by the Compensation Committee in order to be eligible for participation in the DC SERP. A participant in the DC SERP becomes 50% vested after five years of service and vests at the rate of 10% for each of the following five years. At age 62, a participant will be 100% vested with five years of participation. In the event of a change in control or a named executive officer is terminated “without cause” or terminates his or her employment for “good reason,” as those terms are defined in our employment agreements with the named executive officers, then the executive will be 100% vested in his or her DC SERP account. Additionally, the DC SERP provides that if the executive is terminated “without cause” or terminates his or her employment for “good reason” within 24 months of a change in control event, the executive will be entitled to an additional three years of contributions. For those additional three years of contribution, no contributions under the 401(k) Plan or the SCRPs will exist to apply as an offset because the executive will have terminated employment. A participant will be 100% vested in the event of death or disability. Payment of DC SERP accounts will be in the form of a lump sum payment.

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

We will be obligated to make certain payments to our named executive officers or potentially accelerate the vesting of their equity awards and retirement benefits upon termination of their employment or upon a change in control of the Company pursuant to the following plans or agreements:

 

   

employment agreements entered into with each of the named executive officers;

 

   

the Defined Benefit Plan;

 

   

the 401(k) Plan;

 

   

the BRP, the SRIP, the SCRPs or the DC SERP, depending on the circumstances of the executive officer’s termination;

 

   

the 2009 Long-Term Incentive Plan, as amended and restated (the “2009 LTIP”); and

 

   

the 2015 LTIP.

Please refer to our discussion in the sections immediately above for information about our Defined Benefit Plan, 401(k) Plan, the BRP, the SRIP, the SCRPs and the DC SERP.

Employment agreements with our named executive officers provide the following rights to compensation in the event of employment termination:

Accrued Payments Upon Termination of Employment

Upon termination under the employment agreements, the named executive officer is entitled to receive the accrued amounts earned during his term of employment, including: (i) any earned but unpaid salary through the date of termination; (ii) any accrued but unused vacation pay; (iii) the annual bonus amount only if the named executive officer has been employed the entire year upon which such annual bonus is based; and (iv) amounts he is otherwise entitled to under our employee benefit plans (together, the “Accrued Amounts”).

Rights Upon Termination for Death or Disability

In addition to the Accrued Amounts, if the named executive officer’s employment terminates by reason of death or disability, then the named executive officer is entitled to receive a pro rata share of any bonus for the performance period in which the day of termination occurs (based on the number of days worked in the performance period), payable at the same time it is payable to other participants in the bonus plan.

Rights Upon Termination Without Cause and Constructive Discharge

If the named executive officer’s employment is involuntarily terminated other than for “cause” or the named executive officer terminates for “good reason,” as those terms are defined in the employment agreements, then in addition to the Accrued Amounts, the named executive officer is entitled to the following:

 

   

a lump sum cash payment equal to three times the aggregate annual compensation of the named executive officer. “Aggregate annual compensation” is equal to the sum of:

 

   

the named executive officer’s annual base salary, and

 

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NAMED EXECUTIVE COMPENSATION (cont’d)

 

   

an amount equal to the largest annual bonus paid or payable to the named executive officer for the three consecutive calendar years prior to the date the named executive officer’s termination occurs;

 

   

payment of a pro rata share of any bonus for the performance period in which the day of termination occurs (based on the number of days worked in the performance period);

 

   

the same basic health and welfare benefits that the executive would otherwise be entitled to receive if the named executive officer were our employee for 18 months following termination;

 

   

payment of an amount equal to 18 times the monthly COBRA premium; and

 

   

payment of a reasonable amount for outplacement services commensurate with the named executive officer’s title and position with the Company and other executives similarly situated in other companies in our peer group.

Termination Following a Change in Control

Under the employment agreements, if within 24 months following a “change in control” of the Company, the named executive officer:

 

   

is terminated “without cause” by us; or

 

   

terminates his employment with us for “good reason,” as each of those terms are defined in the employment agreements;

then, in addition to the Accrued Amounts and “Rights Upon Termination Without Cause and Constructive Discharge,” three years of service and age shall be added to the named executive officer’s actual years of service and actual age when determining the named executive officer’s entitlement under our Retiree Medical Benefit Coverage. The credit of additional years of age should not be construed to reduce or eliminate the executive’s right to coverage under the medical plan.

“Change in control” is defined as the date on which one of the following occurs:

 

   

an entity or group acquires 30% or more of our outstanding voting securities;

 

   

the incumbent Board ceases to constitute at least a majority of our Board; or

 

   

a merger, reorganization or consolidation is consummated, after stockholder approval, unless

 

   

substantially all of the stockholders prior to the transaction continue to own more than 50% of the voting power after the transaction;

 

   

no person owns 30% or more of the combined voting securities; and

 

   

the incumbent Board constitutes at least a majority of the Board after the transaction.

 

  70   Commitment Runs Deep


Table of Contents

NAMED EXECUTIVE COMPENSATION (cont’d)

 

Long-Term Incentive Awards

In the award agreements entered into under the 2009 LTIP and 2015 LTIP, the Compensation Committee is authorized to provide for the acceleration of any unvested portions of outstanding awards upon a change in control of the Company or the retirement, disability or termination of the named executive officer for an approved reason. Award agreements provide for automatic vesting upon the death of the named executive officer. Award agreements entered into after 2014 do not provide for the automatic acceleration of unvested portions of outstanding awards in the event of a change in control unless a job loss occurs or the acquiring company is not listed on a national securities exchange. Performance share units that vest on an accelerated basis as a result of a change in control or death will vest at the target award level.

The following tables provide the estimated compensation and present value of benefits potentially payable to each named executive officer upon a change in control of the Company or a termination of employment of the named executive officer. The benefit values shown do not include benefits that are broadly available to substantially all salaried employees. The amounts shown assume that a termination or change in control occurred on December 31, 2016. The actual amounts to be paid can only be determined at the time of an executive’s actual separation from the Company. The footnotes for each of the following tables are presented after the final table. Employment agreements between the Company and each of the named executive officers do not include tax gross-up payment obligations in the event of a change-in-control of the Company.

 

  71   Commitment Runs Deep


Table of Contents

NAMED EXECUTIVE COMPENSATION (cont’d)

 

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL1

David A. Hager

 

Benefits and
Payments

($)

 

Retirement/

Voluntary

Termination

($)

   

Termination

Without Cause

($)

   

Termination

With Cause

($)

 

Disability

($)

   

Death

($)

   

Change in

Control - No
Job Loss

($)13

   

Change in

Control - Job
Loss

($)13

 

Base Salary/Bonus2

    -       10,710     -     -       -       -       10,710  

DC SERP10

    2,587