DEF 14A 1 d687625ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

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Preliminary Proxy Statement

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

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Definitive Proxy Statement

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Definitive Additional Materials

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Soliciting Material Pursuant to §.240.14a-12

CHESAPEAKE ENERGY CORPORATION

 

 

LOGO

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if Other Than The Registrant)

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Proxy Statement

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WELCOME TO THE CHESAPEAKE ANNUAL MEETING      1   
CORPORATE GOVERNANCE      1   
BOARD OF DIRECTORS      1   
VOTING ITEM 1:    Election of Directors      5   
VOTING ITEM 2:    Proposal to Declassify our Board      9   
VOTING ITEM 3:    Proposal to Increase Maximum Size of Board      10   
VOTING ITEM 4:    Proposal to Implement Proxy Access      11   
VOTING ITEM 5:    Proposal to Eliminate Supermajority Voting Requirements      13   
DIRECTOR COMPENSATION      14   
TRANSACTIONS WITH RELATED PERSONS      15   
BENEFICIAL OWNERSHIP      18   
EXECUTIVE COMPENSATION      20   
COMPENSATION DISCUSSION AND ANALYSIS      20   
COMPENSATION COMMITTEE REPORT      37   
EXECUTIVE COMPENSATION TABLES      38   
POST-EMPLOYMENT COMPENSATION      48   
VOTING ITEM 6:     Shareholder Advisory Vote to Approve Named Executive Officer Compensation      55   
EQUITY COMPENSATION MATTERS      55   
VOTING ITEM 7:    Proposal to Adopt 2014 Long Term Incentive Plan      56   
AUDIT MATTERS      62   
AUDIT COMMITTEE REPORT      62   
VOTING ITEM 8:    Ratification of Independent Registered Public Accounting Firm      63   
SHAREHOLDER PROPOSALS      64   
MEETING INFORMATION      65   
EXHIBITS      A-1   


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WELCOME TO THE CHESAPEAKE ANNUAL MEETING

 

Our Board of Directors is soliciting your proxy to vote your shares at our 2014 annual meeting of shareholders. In connection with this solicitation, we are providing you with a Notice of Internet Availability of Proxy Materials and access to these proxy materials, which include this 2014 proxy statement, the proxy card for the meeting and our 2013 annual report. For general information regarding the annual meeting,

including information related to Internet access to materials, voting and attending the annual meeting, see “Meeting Information” on page 65. Unless the context otherwise requires, the terms “we”, “our”, “us”, the “Company” or “Chesapeake” as used in this proxy statement refer to Chesapeake Energy Corporation.

 

 

CORPORATE GOVERNANCE

 

The Company’s Board of Directors has adopted Corporate Governance Principles, which include information regarding the Board’s role and responsibilities, director qualifications and determination of director independence and other guidelines, and charters for each of the Board committees. The Board has also adopted a Code of Business Conduct applicable to all directors, officers and employees of the Company, including our principal executive officer, principal financial officer and principal accounting officer. These documents, along with the Company’s Certificate of Incorporation and Bylaws, provide the framework for the functioning of the Board. The Corporate Governance Principles, as well

as the Code of Business Conduct and all committee charters, are available on the Company’s website at www.chk.com in the Corporate Governance sub-section of the section entitled “About”. Waivers of provisions of the Code of Business Conduct as to any director or executive officer are typically evaluated by the Nominating, Governance and Social Responsibility Committee or the Board and amendments to the Code of Business Conduct must be approved by the Board. We will post required disclosure about any such waiver or amendment on our website within four business days of such approval.

 

 

Board of Directors

 

The Board is elected by the shareholders to oversee their interest in the long-term health and the overall success of the Company’s business and its financial strength. The Board serves as the ultimate decision-making body of the Company, except for those matters reserved to or shared with the shareholders. The Board selects and oversees the members of senior management, who are charged by the Board with conducting the business of the Company.

The Board is led by Archie W. Dunham, its independent, non-executive Chairman, and is comprised of seven other independent members and

the Company’s Chief Executive Officer. The directors are skilled and experienced leaders in business, education, government and public policy. They currently serve or have served as chief executives and members of senior management of Fortune 1000 companies, investment banking firms and private for-profit and nonprofit organizations and are well-equipped to promote the long-term success of the Company and to provide effective oversight of, and advice and counsel to, the CEO and other members of senior management.

 

 

Board Culture and Focus

 

 

The Board has established a boardroom dynamic that results in informed decisions through meaningful and robust discussion, where views are readily challenged based on each director’s diverse background and opinions. The directors are expected to, and do, ask hard questions of management. Each member of the Board is committed to maximizing shareholder value and promoting shareholder interests. The Board’s key areas of focus are on the Company’s strategy and vision, enhancing financial and management oversight, Board accountability and risk management. The Board has demonstrated its focus through the following actions: (i) redevelopment of a corporate strategy focused on financial discipline and profitable and efficient growth from captured resources; (ii) re-submission of proposals to implement leading corporate

governance practices related to Board accountability, including Board declassification, proxy access and removal of supermajority voting provisions (see “Voting Item 2: Proposal to Declassify our Board”, “Voting Item 4: Proposal to Implement Proxy Access” and “Voting Item 5: Proposal to Eliminate Supermajority Voting Requirements”); (iii) development of an executive compensation program that appropriately ties executive pay to Company performance (see “Executive Compensation—Compensation Discussion and Analysis”); (iv) hiring of a Chief Compliance Officer who reports to the Chairman of the Audit Committee; and (v) full Board evaluation of significant Company risks at each regular meeting, including commodity price and environmental, health and safety risks (see “—Board Role in Risk Oversight”).

 

 

CORPORATE GOVERNANCE     1


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Board Leadership Structure and Oversight

 

 

The Company separated the Chairman and CEO roles in 2012 and the Board appointed Mr. Dunham as its independent, non-executive Chairman. The Chairman presides at all meetings of the Board, as well as executive sessions of non-employee directors and, in consultation with the CEO, non-employee directors and management, establishes the agenda for each Board meeting. The Board has also delegated certain matters to its three committees, each of which is chaired by an independent director. The Board believes that this leadership

structure provides an effective governance framework for the Company at this time.

The chart below details the purpose of each level of hierarchy in the Company’s leadership structure and provides additional detail on composition, meetings and 2013 activities of the Board. More detail with regard to the composition, meetings and 2013 activities of each of the committees can be found below under “—Board Committees”.

 

 

LOGO

 

In 2013, the Board also formed a Finance Subcommittee of the Audit Committee. The purpose of the Finance Subcommittee is to provide assistance to the Board in overseeing the financing strategy, financial policies and financial condition of the Company. In 2013, the Finance Subcommittee worked closely with management to develop the Company’s 2014 budget, assisted with the enhancement of the Company’s policies and procedures related to its commodity hedging program and evaluated with management certain opportunities to reduce the Company’s leverage and financial complexity. The Finance Subcommittee is chaired by Vincent J. Intrieri and also consists of Louis A. Raspino, R. Brad Martin, Frederic M. Poses and Thomas L. Ryan as voting members and Domenic J. Dell’Osso, the Company’s Chief Financial Officer, as a non-voting member.

Outside of formal Board and committee meetings, management frequently discusses matters with directors on an informal basis. Non-employee directors meet without management at each regularly scheduled Board meeting. Mr. Dunham presides over meetings of the non-employee directors.

Each director attended, either in person or by telephone conference, at least 75% of the Board and committee meetings held while serving as a director or committee member in 2013. The Company expects all serving directors to attend annual meetings of shareholders. All directors serving at the time of the 2013 annual meeting attended the meeting.

 

 

2     CHESAPEAKE ENERGY CORPORATION


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Board Committees

 

The Board currently has three standing committees: an Audit Committee, a Compensation Committee and a Nominating, Governance and Social Responsibility Committee, or Nominating Committee. Each committee has a charter which can be found on our website at www.chk.com in the Corporate Governance sub-section of the section entitled “About”. A biographical overview of the members of our committees can be found under “—Director Nominees” beginning on page 6.

 

 AUDIT

 COMMITTEE

 

Members: 3

Independent: 3

Audit Committee Financial Experts: 3

2013 Meetings: 4 in person, 6 telephonic

 

  LOGO

 Chairman:

 Louis A. Raspino

 Members:

 Vincent J. Intrieri

 Thomas L. Ryan

 

Responsibilities:

   Oversee the integrity of the Company’s financial statements and financial disclosure

   Oversee the Company’s compliance with legal and regulatory requirements

   Oversee the Company’s internal audit function

   Oversee the Company’s Chief Compliance Officer

   Appoint and oversee the independent audit firm

   Oversee the Company’s enterprise risk management program

   Oversee the employee and vendor hotline for anonymous reporting of questionable activity

 

Significant 2013 Events:

   Established a Finance Subcommittee to provide assistance to the Board in overseeing the financing strategy, financial policies and financial condition of the Company

   Oversaw implementation of Chief Compliance Officer role, which reports directly to the Audit Committee

   Oversaw management of high volume of legal matters and regulatory inquiries

   

 COMPENSATION

 COMMITTEE

 

Members: 3

Independent: 3

2013 Meetings: 5 in person, 1 telephonic

 

  LOGO

 Chairman:

 Merrill A. (“Pete”) Miller, Jr.

 Members:

 Bob G. Alexander

 R. Brad Martin

 

Responsibilities:

   Establish compensation policies that effectively attract, retain and motivate executive officers

   Establish goals and objectives relevant to CEO compensation, evaluate CEO performance and set CEO compensation levels

   Evaluate and recommend to the Board compensation of directors

   Evaluate and approve compensation of named executive officers

   Oversee and administer the Company’s compensation plans

   Establish and monitor compliance with stock ownership guidelines

 

Significant 2013 Events:

   Negotiated new CEO target compensation slightly below the median of our peer group

   Implemented a new Annual Incentive Plan and based annual incentive opportunities on the Company’s performance relative to eleven pre-established, objective operational and financial goals

   Held named executive officer base salaries and target annual incentive opportunities substantially flat for 2013 and reduced target long-term incentive opportunities by an average of over 10% compared to 2012 levels

   

 NOMINATING

 COMMITTEE

 

Members: 4

Independent: 4

2013 Meetings: 5 in person, 1 telephonic

 

  LOGO

 Chairman:

 R. Brad Martin

 Members:

 Archie W. Dunham

 Vincent J. Intrieri

 Frederic M. Poses

 

Responsibilities:

   Establish criteria for Board and committee membership and selection of new directors

   Evaluate and recommend nominees for Board service

   Periodically assess and advise the Board on sufficiency of the size and diversity of the Board

   Oversee compliance with, and periodically evaluate, the Company’s Corporate Governance Principles

   Evaluate and make recommendations to the Board on corporate governance matters

   Monitor the Company’s charitable contributions, political spending and lobbying activities

   Oversee policies, programs and practices with regard to corporate social responsibility

 

Significant 2013 Events:

   Successfully recruited two highly-regarded directors, Louis A. Raspino and Thomas L. Ryan, to the Board

   Oversaw shareholder engagement program whereby the Company engaged with shareholders representing more than 50% of its outstanding common stock on various topics

   Evaluated and recommended realignment of Committee membership

   Oversaw publication of the Company’s second corporate responsibility report

 

CORPORATE GOVERNANCE     3


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Board Independence

 

 

The Board, through its Nominating Committee, evaluates the independence of each director in accordance with the NYSE corporate governance standards. The Committee has considered transactions and relationships between the Company (and/or any of its executive officers) and each director or any member of his or her immediate family. Based on this review, the Committee affirmatively determined that all currently serving directors, other than the CEO, are independent.

In assessing director independence, the Committee considered the business the Company conducted in 2011, 2012 and 2013 with the companies below that had affiliations with our directors. The Committee determined that all transactions and relationships it considered during its review were not material transactions or relationships with the Company and did not impair the independence of any of the independent directors.

 

 

Director   Organization   Relationship   Transactions   Size for Each of Last Three Years
Mr. Dunham   Union Pacific Corporation   Director   Sales to CHK   <1% of UP revenues
Mr. Miller   National Oilwell Varco, Inc.   Executive Chairman and former CEO  

Purchases from CHK

Sales to CHK

 

<1% of NOV revenues

<1% of NOV revenues

Mr. Martin   FedEx Corporation   Director   Sales to CHK   <1% of FDX revenues
  Pilot Travel Centers LLC   Member of Board of Managers   Sales to CHK   <1% of Pilot revenues

Board Role in Risk Oversight

 

 

The Board has primary responsibility for risk oversight. The Board believes it is appropriate for the full Board to determine the Company’s risk profile and risk tolerance for significant risks, such as risks related to commodity price fluctuations and environmental, health and safety matters. This allows the full Board to analyze the Company’s material risks and influence the Company’s business strategies in light of such risks. Certain matters related to risks inherent in their respective areas of oversight are delegated to the various Board committees, with each committee reporting to the Board at each regular Board meeting. The Audit Committee, in addition to overseeing the integrity of our financial statements and compliance with legal and regulatory requirements and risks related thereto, is primarily responsible for overseeing the Company’s enterprise risk management process, which oversight includes meetings with management, internal audit and independent auditors that focus on risks facing the Company, as well as monitoring the employee and vendor hotline for anonymous reporting of questionable activity. The Compensation Committee oversees risks related to our compensation programs and management retention and development. The Nominating Committee oversees risks related to Board composition and the

Company’s leadership structure and corporate governance, reputational and social responsibility risks. A number of other processes at the Board level support our risk management efforts, including Board reviews of our long-term strategic plans, capital budget and certain capital projects, hedging policy and strategy, succession planning, significant acquisitions and divestitures and capital markets transactions, together with oversight of management in carrying out their risk management responsibilities. In 2013, the Board requested that the Finance Subcommittee review Company policies and procedures related to the Company’s commodity hedging program, although the Board retained decision-making authority for any changes to such policies and procedures.

Fostering a culture of risk management is a Company priority. Management evaluates the enterprise risk process across the Company on a regular basis to ensure consistency of risk consideration in making business decisions. Internal risk committees, comprised of senior management and subject matter experts, have been formed and are meeting regularly to review and assess the Company’s risk management processes and discuss significant risk exposures.

 

 

Communications to the Board

 

Shareholders and other interested parties may communicate with the Board, either individually or as a group, through one of the processes outlined on the Company’s website at www.chk.com in the Corporate Governance sub-section of the section entitled “About”.

 

4     CHESAPEAKE ENERGY CORPORATION


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Director Criteria, Qualifications and Experience

 

 

The Nominating Committee periodically assesses the skills and experience needed for the Board to properly oversee the business and affairs of the Company. The Committee then compares those skills to the skills of the current directors and potential director candidates. The Committee conducts targeted efforts to identify and recruit individuals who have the qualifications identified through this process. The Committee looks for its current and potential directors collectively to have a diverse mix of skills, qualifications and experience, some of which are described below:

 

  business leadership

 

  government/public policy

  corporate governance

 

  international

  energy exploration and production

 

  legal

  energy services

 

  risk management

  financial expertise

 

  technology

The Nominating Committee seeks a mix of directors with the qualities that will achieve the ultimate goal of a well-rounded, diverse Board that thinks critically yet functions effectively by reaching informed decisions. Pursuant to its charter, the Committee ensures that diverse candidates are included in all director searches, taking into account race, gender, age, culture, thought, leadership and geography. The Committee and the Board believe that a boardroom with a wide array of talents and

perspectives leads to innovation, critical thinking and enhanced discussion. Additionally, the Committee expects each of the Company’s directors to have proven leadership, sound judgment, integrity and a commitment to the success of the Company.

In evaluating director candidates and considering incumbent directors for nomination to the Board, the Nominating Committee considers a variety of factors. These include each nominee’s independence, financial literacy, personal and professional accomplishments and experience in light of the needs of the Company. For incumbent directors, the factors also include past performance on the Board and contributions to their respective committees. Along with each director’s biography, we have included below an assessment of the skills and experience of such director. The Committee has used third-party consultants to assist in identifying potential director nominees. The Committee considers and, in the past, has nominated appropriate candidates recommended by shareholders.

Bob A. Alexander will retire at the 2014 annual meeting. John J. Lipinski was nominated to the Board on March 7, 2014, to fill the resulting vacancy. Potential candidates were solicited from significant shareholders and directors. The Board considered several candidates who were evaluated based on the established criteria for persons to be nominated. The Board believes Mr. Lipinski meets the established criteria and is well qualified for election to the Board. Mr. Lipinski is a new nominee for election to the Board this year. His nomination was recommended by the Nominating Committee and approved by the Board.

 

 

Voting Item 1:

Election of Directors

 

Pursuant to provisions of the Company’s Certificate of Incorporation and Bylaws, the Board has fixed the maximum number of directors at nine, subject to the rights of the holders of our preferred stock to nominate and elect two additional directors in circumstances that are not anticipated to apply. Our Certificate of Incorporation and Bylaws currently provide for three classes of directors serving staggered three-year terms, each to hold office until a successor is elected and qualified or until the director’s earlier resignation or removal. Our Board is recommending that shareholders approve the declassification of our Board. See “Voting Item 2: Proposal to Declassify our Board”. The outcome of that vote will determine whether we declassify the Board and provide for annual elections of directors beginning with the 2015 annual meeting or continue to have a classified Board.

The terms of Vincent J. Intrieri, Robert D. Lawler and Frederic M. Poses, each a member of Class II, expire at the meeting. In addition, due to the Company’s mandatory retirement policy, Bob A. Alexander’s term will end at the 2014 annual meeting, and the Board is proposing the election of John J. Lipinski to fill the vacancy created by Mr. Alexander’s retirement. The Board has nominated each of Messrs. Intrieri, Lawler, Lipinski and Poses to serve for a one-year term if shareholders approve declassification of the Board or, alternatively, for a three-year term expiring in 2017 with respect to Messrs. Intrieri, Lawler and Poses and for a two-year term expiring in 2016 with respect to Mr. Lipinski if shareholders do not approve declassification of the Board.

The directors currently serving in Class III and Class I have indicated their support for the elimination of the Company’s classified board structure and have agreed to allow shareholders to vote on their continued service on the Board. The Class III directors consist of Archie W. Dunham, R.

Brad Martin and Louis A. Raspino, whose terms expire in 2015. Any director serving in Class III who receives a majority of votes cast in favor of his continued service on the Board will continue to serve as a director for the remainder of his term, or one year. The Class I directors consist of Merrill A. Miller, Jr. and Thomas L. Ryan, whose terms expire in 2016. If declassification is approved by shareholders, any director serving in Class I who receives a majority of votes cast in favor of his continued service on the Board will serve for an additional year and his term will expire at the 2015 annual meeting, in accordance with the proposed amendment to our Certificate of Incorporation. If declassification is not approved by shareholders, any director serving in Class I who receives a majority of votes cast in favor of his continued service on the Board will serve the remainder of his term, or until 2016.

Whether or not declassification of our Board is approved by shareholders, the Company’s Bylaws provide that any incumbent director, which includes all nominees, who does not receive a majority of votes cast in favor of his election, or a Majority Against Vote, will, following the certification of the shareholder vote by the inspector of elections, promptly comply with the resignation procedures established under the Company’s Corporate Governance Principles. The Class III and Class I directors have agreed that they will comply with these procedures if their continued service on the Board is not approved by a majority of the votes cast with respect to such director.

It is the intention of the persons named in the enclosed form of proxy to vote such proxies for the election of the nominees. The Board expects that all of the nominees will be available for election but, if any of the nominees is not available, proxies received will be voted for substitute nominees to be designated by the Board or, if no such designation is made, proxies will be voted for a lesser number of nominees.

 

 

CORPORATE GOVERNANCE     5


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Director Nominees

 

Vincent J. Intrieri

 

 

LOGO

Independent Director Nominee

Age: 57

Director since: 2012

Board Committee: Audit, Nominating

Other current public directorships: CVR Energy, Inc., CVR Refining, LP, Forest Laboratories, Inc. and Navistar International Corporation

Vincent J. Intrieri has been a member of our Board of Directors since June 2012. Mr. Intrieri has been employed by Icahn related entities since October 1998 in various investment related capacities. Since January 2008, Mr. Intrieri has served as Senior Managing Director of Icahn Capital LP, the entity through which Carl C. Icahn manages private investment funds. In addition, since November 2004, Mr. Intrieri has been a Senior Managing Director of Icahn Onshore LP, the general partner of Icahn Partners LP, and Icahn Offshore LP, the general partner of Icahn Partners Master Fund LP, Icahn Partners Master Fund II LP and Icahn Partners Master Fund III LP, entities through which Mr. Icahn invests in securities. Mr. Intrieri has been a director of Forest Laboratories, Inc. (NYSE:FRX), a supplier of pharmaceutical products, since June 2013; CVR Refining GP, LLC, the general partner of CVR Refining, LP (NYSE:CVRR), an independent downstream energy limited partnership, since January 2013; Navistar International Corporation (NYSE:NAV), a truck and engine manufacturer, since October 2012; and CVR Energy, Inc. (NYSE:CVI), a diversified holding company primarily engaged in the petroleum refining and nitrogen fertilizer manufacturing industries, since May 2012. Mr. Intrieri was previously a director of Federal–Mogul Corporation (NYSE:FDML), a supplier of automotive powertrain and safety components, from December 2007 to June 2013; a director of Icahn Enterprises G.P. Inc., the general partner of Icahn Enterprises L.P. (NASDAQ:IEP), a diversified holding company engaged in a variety of businesses, including investment, automotive, energy, gaming, railcar, food packaging, metals, real estate and home fashion, from July 2006 to September 2012, and was Senior Vice President of Icahn Enterprises G.P. Inc. from October 2011 to September 2012; a director of Dynegy Inc. (NYSE:DYN), a company primarily engaged in the production and sale of electric energy, capacity and ancillary services, from March 2011 to September 2012; Chairman of the Board and a director of PSC Metals Inc., a metal recycling company, from December 2007 to April 2012; a director of Motorola Solutions, Inc. (NYSE:MSI), a provider of communication products and services, from January 2011 to March 2012; a director of XO Holdings, a competitive provider of telecom services, from February 2006 to August 2011; a director of National Energy Group, Inc., a company that was engaged in the business of managing the exploration, production and operations of natural gas and oil properties, from December 2006 to June 2011; a director of American Railcar Industries, Inc. (NASDAQ:AEII), a railcar manufacturing company, from August 2005 until March 2011, and was a Senior Vice President, the Treasurer and the Secretary of American Railcar Industries from March 2005 to December 2005; a director of WestPoint Home LLC, a home textiles manufacturer, from November 2005 to March 2011; Chairman of the Board and a director of Viskase Companies, Inc., a meat casing company, from April 2003 to March 2011; a director of WCI Communities, Inc., a homebuilding company, from August 2008 to September 2009; a director of Lear Corporation (NYSE:LEA), a global supplier of automotive seating and electrical power management systems and components, from November 2006 to November 2008; and President and Chief Executive Officer of Philip Services Corporation, an industrial services company, from April 2005 to September 2008. CVR Refining, CVR Energy, Federal–Mogul, Icahn Enterprises, PSC Metals, XO Holdings, National Energy Group, American Railcar Industries, WestPoint Home, Viskase Companies and Philip Services each are or previously were indirectly controlled by Carl C. Icahn. Mr. Icahn also has or previously had a non–controlling interest in Forest Laboratories, Navistar, Chesapeake, Dynegy, Motorola Solutions, WCI Communities and Lear through the ownership of securities. Mr. Intrieri was a certified public accountant. The Board believes Mr. Intrieri’s vast executive experience and service on multiple public company boards qualifies him to serve on the Board.

Robert D. (“Doug”) Lawler

 

 

LOGO

Director Nominee

Age: 47

Director since: 2013

Board Committees: None

Other current public directorships: None

Robert D. (“Doug”) Lawler has been a member of our Board of Directors and served as President and Chief Executive Officer since June 2013. Before joining Chesapeake, Mr. Lawler served in multiple engineering and leadership positions at Anadarko Petroleum Corporation. His positions at Anadarko included Senior Vice President, International and Deepwater Operations and member of Anadarko’s Executive Committee from July 2012 to May 2013; Vice President, International Operations from December 2011 to July 2012; Vice President, Operations for the Southern and Appalachia Region from March 2009 to July 2012; and Vice President, Corporate Planning from August 2008 to March 2009. Mr. Lawler began his career with Kerr-McGee Corporation in 1988 and joined Anadarko following its acquisition of Kerr-McGee in 2006. With over 25 years experience in the oil and gas industry, including serving as Chief Executive Officer of the Company and in various leadership positions at Anadarko, the Board believes Mr. Lawler is well qualified to serve on the Board.

 

6     CHESAPEAKE ENERGY CORPORATION


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John J. (“Jack”) Lipinski

 

 

LOGO

Independent Director Nominee

Age: 63

Nominated: March 2014

Board Committees: None

Other current public directorships: CVR Energy, Inc., CVR Partners, LP and CVR Refining, LP

John J. (“Jack”) Lipinski has served as Chief Executive Officer, President and a member of the Board of Directors of CVR Energy, Inc. (NYSE:CVI) since September 2006 and served as Chairman of the Board of CVI from October 2007 until May 2012. In addition, Mr. Lipinski has served as Executive Chairman of CVR GP, LLC, the general partner of CVR Partners, LP (NYSE:UAN), since June 2011 and has been a director of CVR GP, LLC since October 2007. He is currently serving as Chief Executive Officer and President of CVR GP, LLC until May 2014 and previously served in such role from October 2007 to June 2011. In addition, Mr. Lipinski has served as the Chief Executive Officer, President, and a member of the Board of the general partner of CVR Refining, LP (NYSE:CVRR) since its inception in September 2012. Mr. Lipinski has over 40 years of experience in the petroleum refining and nitrogen fertilizer industries. With more than 40 years’ experience in the energy industry, including serving as Chief Executive Officer and a director of the CVR entities, the Board believes Mr. Lipinski is well qualified to serve on the Board.

Frederic M. Poses

 

 

LOGO

Independent Director Nominee

Age: 71

Director since: 2012

Board Committee: Nominating

Other current public directorships: TE Connectivity Ltd.

Frederic M. Poses has been a member of our Board of Directors since June 2012. Mr. Poses is the Chief Executive Officer of Ascend Performance Materials, a private company. Previously, he was Chairman and Chief Executive Officer of Trane Inc. (formerly American Standard Companies, Inc.) from 2000 until its acquisition by Ingersoll-Rand plc (NYSE:IR) in 2008. He previously spent 30 years at AlliedSignal, Inc. and predecessor companies from 1969 to 1999, most recently as President and Chief Operating Officer. He currently serves as lead independent director of the Board of Directors of TE Connectivity Ltd. (NYSE:TEL). He is a former director of Raytheon Company (NYSE:RTN), Centex Corporation (now a part of PulteGroup, Inc. (NYSE:PHM)) and WABCO Holdings Inc. (NYSE:WBC). The Board believes Mr. Poses’ experience as Chief Executive Officer of publicly traded and private companies and service on multiple public company boards qualifies him to serve on the Board.

Archie W. Dunham

 

 

LOGO

Independent Director Nominee

Age: 75

Director since: 2012

Board Committee: Nominating

Other current public directorships: Union Pacific Corporation and Louisiana-Pacific Corporation

Archie W. Dunham has been the non-executive Chairman of our Board of Directors since June 2012 and served as a member of the Company’s three-person Office of the Chairman from March 2013 to June 2013. Mr. Dunham served as Chairman of ConocoPhillips (NYSE:COP) from 2002 until his retirement in 2004. Prior to that, he served as Chairman, President and Chief Executive Officer of Conoco Inc. from 1999 to 2002, after being elected President and Chief Executive Officer in 1996. Mr. Dunham currently serves on the Board of Directors of Union Pacific Corporation (NYSE:UNP) and Louisiana-Pacific Corporation (NYSE:LPX). Mr. Dunham was a director of Phelps Dodge Corporation from 1998 to 2007 and Pride International, Inc. from 2005 until May 2011. Mr. Dunham is currently a member of DeutscheBank’s Americas Advisory Board and is the past Chairman of the National Association of Manufacturers, the United States Energy Association and the National Petroleum Council. The Board believes Mr. Dunham’s experience as Chief Executive Officer of Conoco Inc. and Chairman of ConocoPhillips, in addition to his service on multiple public company boards, qualifies him to serve on the Board.

R. Brad Martin

 

 

LOGO

Independent Director Nominee

Age: 62

Director since: 2012

Board Committees: Nominating (Chair), Compensation

Other current public directorships: FedEx Corporation and First Horizon National Corporation

R. Brad Martin has been a member of our Board of Directors since June 2012. Mr. Martin is the Chairman of RBM Venture Company, a private investment company, and has been interim president of the University of Memphis since July 2013. He was Chairman and Chief Executive Officer of Saks Incorporated (NYSE:SKS) from 1989 to 2006, and remained Chairman until his retirement in 2007. Mr. Martin currently serves as a director of FedEx Corporation (NYSE:FDX) and First Horizon National Corporation (NYSE:FHN). He was previously a director of Dillard’s Inc. (NYSE:DDS), Caesars Entertainment Corporation (NASDAQ:CZR) (formerly Harrah’s Entertainment, Inc.), lululemon athletica inc. (NASDAQ:LULU), Gaylord Entertainment Company (now Ryman Hospitality Properties, Inc. (NYSE:RHP)) and Ruby Tuesday, Inc. (NYSE:RT). The Board believes Mr. Martin’s experience as Chief Executive Officer of a publicly traded company for nearly 20 years and service on multiple public company boards qualifies him to serve on the Board.

 

CORPORATE GOVERNANCE     7


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Louis A. Raspino

 

 

LOGO

Independent Director Nominee

Age: 61

Director since: 2013

Board Committee: Audit (Chair)

Other current public directorships: Dresser-Rand Group, Inc. and Forum Energy Technologies

Louis A. Raspino has been a member of our Board of Directors since March 2013. Mr. Raspino was President and Chief Executive Officer of Pride International Inc., an international provider of contract drilling and related services to oil and natural gas companies, from 2005 until the sale of the company in May 2011. He was the Executive Vice President and Chief Financial Officer of Pride International Inc. from 2003 until 2005. Before joining Pride International in 2003, he was Senior Vice President and Chief Financial Officer of Grant Prideco, Inc., a manufacturer of drilling and completion products supplying the energy industry, from 2001 until 2003. Previously, he was Vice President of Finance for Halliburton Company (NYSE:HAL), Senior Vice President and Chief Financial Officer of The Louisiana Land & Exploration Company and began his career with Ernst & Young. He has been a director of Dresser-Rand Group, Inc. (NYSE:DRC) since 2005 and a director of Forum Energy Technologies, Inc. (NYSE:FET) since 2012. Mr. Raspino is a certified public accountant. The Board believes Mr. Raspino’s over 35 years experience in the oil and gas industry, including serving as Chief Executive Officer of Pride International, Inc., Chief Financial Officer of three public companies and 20 years’ experience in the exploration and production industry, and service on multiple public company boards qualifies him to serve on the Board.

Merrill A. (“Pete”) Miller, Jr.

 

 

LOGO

Independent Director Nominee

Age: 63

Director since: 2007

Board Committee: Compensation (Chair)

Other current public directorships: National Oilwell Varco, Inc.

Merrill A. (“Pete”) Miller, Jr. has been a member of our Board of Directors since 2007 and was our Lead Independent Director from March 2010 to June 2012. Mr. Miller is Executive Chairman of National Oilwell Varco, Inc. (NYSE:NOV), a supplier of oilfield services, equipment and components to the worldwide oil and natural gas industry, and previously served as Chairman and Chief Executive Officer of NOV. Mr. Miller joined NOV in 1996 as Vice President of Marketing, Drilling Systems and was promoted in 1997 to President of the company’s products and technology group. He was named President and Chief Operating Officer in 2000, elected President and Chief Executive Officer in 2001 and also elected Chairman of the Board in 2002. Mr. Miller served as President of Anadarko Drilling Company from 1995 to 1996. Prior to his service at Anadarko, Mr. Miller spent fifteen years at Helmerich & Payne International Drilling Company (NYSE:HP) in Tulsa, Oklahoma, serving in various senior management positions, including Vice President, U.S. Operations. Mr. Miller serves on the Board of Directors for the Offshore Energy Center, Petroleum Equipment Suppliers Association and Spindletop International, and is a member of the National Petroleum Council. The Board believes Mr. Miller’s more than 30 years of management and executive experience in the energy industry and service in multiple leadership positions for NOV and other companies qualifies him to serve on the Board.

Thomas L. Ryan

 

 

LOGO

Independent Director Nominee

Age: 48

Director since: 2013

Board Committee: Audit

Other current public directorships: Service Corporation International and Weingarten Realty Investors

Also a member of the Board of Texas Industries, Inc. until its merger with a subsidiary of Martin Marietta Materials, Inc.

Thomas L. Ryan has been a member of our Board of Directors since May 2013. Mr. Ryan has been Chief Executive Officer of Service Corporation International (NYSE:SCI), a provider of deathcare products and services, since 2005 and has served as President of SCI since 2002. From 2002 to 2005, Mr. Ryan was Chief Operating Officer of SCI, and from 2000 to 2002 he was Chief Executive Officer of SCI European operations. From the time he joined SCI in 1996 to 2000, Mr. Ryan served in a variety of financial management roles. Before joining SCI, Mr. Ryan was a certified public accountant with Coopers & Lybrand LLP for eight years. Mr. Ryan is a member of the Board of Trust Managers of Weingarten Realty Investors (NYSE:WRI) and serves as a director of SCI and Texas Industries, Inc. (NYSE:TXI), a supplier of cement, aggregate and consumer product building materials. Mr. Ryan will cease to be a director of TXI upon its merger with a subsidiary of Martin Marietta Materials, Inc. which is expected to be completed in the second quarter of 2014. The Board believes Mr. Ryan’s experience as Chief Executive Officer of SCI, extensive financial and accounting expertise and service on multiple public company boards qualifies him to serve on the Board.

The Board of Directors recommends a vote “FOR” each of the nominees

for election to the Board of Directors

 

8     CHESAPEAKE ENERGY CORPORATION


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Voting Item 2: Proposal to Declassify our Board

 

We are asking shareholders to approve an amendment to our Certificate of Incorporation to effect the declassification of our Board of Directors. Currently, our Certificate provides that our Board is divided into three classes, with members of each class holding office for staggered three-year terms. One class of directors, representing approximately one-third of our directors, stands for election at each annual meeting of shareholders.

Following our 2012 annual meeting, our Board performed a comprehensive review of the Company’s corporate governance practices, led by our

Nominating Committee, which included the solicitation of shareholder input in this area. Our Board considered the issue of board declassification in connection with the review and proposed declassification of the Board at the 2013 annual meeting of shareholders. Although the proposal did not receive the requisite shareholder approval at the 2013 annual meeting of shareholders, the Board believes that the significant support it did receive warrants proposing Board declassification at the 2014 annual meeting. As such, at its meeting on April 14, 2014, the Board approved an amendment to the Certificate to declassify the Board, subject to shareholder approval.

 

 

Proposed Amendment

A summary of the proposed amendment to the Certificate is set forth below. The description of the proposed amendment to the Certificate is qualified in its entirety by reference to the text of the proposed amendment, which is attached as Exhibit A to this proxy statement.

Amendment to Certificate

 

 

We are asking shareholders to approve an amendment to our Certificate that would eliminate the three-year classified terms of our directors and provide instead for the annual election of all directors elected at our 2015 annual meeting for one-year terms expiring at the next succeeding annual meeting, subject to a director’s earlier death, resignation, retirement, disqualification or removal from office. Further, in connection with the proposed declassification of the Board, we are also proposing to amend our Certificate so that a director elected or appointed by the Board to fill any vacancy on our Board will hold office for a term expiring at the annual meeting of shareholders following such appointment. If the proposed amendment to the Certificate is approved as set forth in this

Voting Item, all directors would be elected by shareholder vote at the 2015 annual meeting and would be elected for one-year terms to expire at the annual shareholders meeting in 2016. In addition, following the effectiveness of the amendment to the Certificate, any directors elected or appointed to fill any vacancies on the Board would be appointed for terms expiring at the annual meeting of shareholders following such appointment. The proposed amendment will thus have the effect of shortening the existing terms of certain directors whose terms extend beyond the 2015 annual meeting. See “Voting Item 1: Election of Directors” for a description of the terms of each class of our directors.

 

 

Conforming Amendment to Bylaws

 

 

In connection with the amendment to our Certificate to declassify the Board, our Board has approved a conforming amendment to our Amended and Restated Bylaws which will become effective immediately following the effectiveness of the counterpart amendment to our Certificate without further action by the shareholders; provided, however, that the amendment to the Bylaws is conditioned upon shareholder approval of the proposed amendment to the Certificate. In addition to the conforming changes made in accordance with the amendment to the Certificate described above, our Board has approved changes to the Bylaws to provide that, from and after the effectiveness

of the declassification of the Board, a majority of shareholders may remove any director or the entire Board of Directors with or without cause. Under Oklahoma law, shareholders may remove directors of corporations with classified boards only for cause, while directors of corporations without classified boards may be removed with or without cause. Accordingly, the Board believes that it is appropriate to amend the Bylaws to confirm that, in accordance with Oklahoma law, from and after the effectiveness of the declassification, shareholders may remove a director with or without cause.

 

 

Effectiveness and Vote Required

 

If the proposed amendment to our Certificate to declassify the Board is approved, it will become effective upon the filing of such amendment with the Oklahoma Secretary of State, and the conforming changes to the Bylaws will become effective immediately following the effectiveness of the amendment to the Certificate. If the proposed amendment is not approved, the Board will continue to be divided into three classes of

directors elected for three-year terms, and the shareholders will continue to be able to remove directors only for cause pursuant to the Bylaws. The affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the issued and outstanding common stock of the Company is required to approve the amendment to our Certificate to declassify the Board.

 

 

The Board of Directors recommends a vote “FOR” amending

our Certificate to declassify our Board

 

CORPORATE GOVERNANCE     9


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Voting Item 3:

Proposal to Increase the Maximum Size

    

of our Board

 

We are asking shareholders to approve an amendment to our Certificate of Incorporation to increase the maximum number of directors that may constitute our Board. The Board believes an increase in its size will provide the opportunity, consistent with our Corporate Governance Principles and the considerations mandated by the Nominating Committee’s charter, to continue to build a board with diverse talents and perspectives, as well as demonstrated experience and expertise. The Board believes an increase in its size will serve to enhance the culture of

innovation, critical thinking and thoughtful discussion in the boardroom. An increase in the Board’s size will also provide an additional resource to allow for appropriate staffing of the Board’s committees and provide flexibility to add more committees if the Board determines such an addition would enhance its governance structure. The Board, at its meeting on April 14, 2014, approved an amendment to the Certificate to increase the maximum size of the Board to ten, subject to shareholder approval.

 

 

Proposed Amendment

A summary of the proposed amendment to the Certificate is set forth below. The description of the proposed Certificate amendment set forth herein is qualified in its entirety by reference to the text of the proposed amendment, which is attached as Exhibit B to this proxy statement.

Amendment to Certificate

 

We are asking shareholders to approve an increase in the maximum number of directors that may constitute the Board. Currently, our Certificate provides that the number of directors that constitute the whole Board may not be less than three nor more than nine. We are asking shareholders to increase the maximum number of directors that may constitute the Board to ten.

Conforming Amendment to Bylaws

 

In connection with the amendment to our Certificate to increase the maximum size of the Board, our Board has approved a conforming amendment to our Bylaws, which will become effective immediately following the effectiveness of the counterpart amendment to our Certificate without further action by the shareholders; provided, however, that the amendment to the Bylaws is conditioned upon shareholder approval of the proposed amendment to the Certificate.

Effectiveness and Vote Required

 

If the proposed amendment to our Certificate to increase the maximum size of the Board is approved, it will become effective upon the filing of such amendment with the Oklahoma Secretary of State, and the conforming changes to the Bylaws will become effective immediately following the effectiveness of the amendment to the Certificate. If the proposed amendment is not approved, the number of directors that may

constitute the Board will remain at not less than three or more than nine. The affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the issued and outstanding common stock of the Company is required to approve the amendment to our Certificate to increase the number of directors that may constitute the Board.

 

 

The Board of Directors recommends a vote “FOR” amending

our Certificate to increase the maximum size of our Board

 

10     CHESAPEAKE ENERGY CORPORATION


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Voting Item 4:

Proposal to Implement Proxy Access

 

We are asking shareholders to approve an amendment to our Bylaws to permit shareholder-nominated director candidates in our proxy materials. At our 2012 annual meeting, a similar shareholder-submitted proposal received the support of a majority of shareholders who cast votes at the meeting. Because it relates to the fundamental right of shareholders to elect directors, the Board submitted a proposal to implement proxy access at the 2013 annual meeting of shareholders.

Although the proposal to implement proxy access did not receive the requisite shareholder approval at the 2013 annual meeting of shareholders, the Board believes that the significant support it did receive warrants proposing proxy access at the 2014 annual meeting. As such, at its meeting on April 14, 2014, the Board determined to submit this proposal to amend the Bylaws to implement proxy access.     

 

 

Proposed Amendment

A summary of the proposed amendment to the Bylaws is set forth below. The description of the proposed Bylaw amendment is qualified in its entirety by reference to the text of the proposed amendment, which is attached as Exhibit C to this proxy statement.

Shareholder Eligibility to Nominate

 

The proposed amendment to the Bylaws would permit any shareholder, or group of shareholders, owning 3% or more of our outstanding common stock continuously for at least the previous three years, to include a specified number of director nominees in the Company’s proxy statement for its annual meeting of shareholders.

Number of Shareholder-Nominated Candidates

 

 

The maximum number of shareholder-nominated candidates would be equal to 25% of the number of directors serving on the Board at the time the notice is required to be submitted to the Company. If the 25% calculation does not result in a whole number, the maximum number of shareholder-nominated candidates would be the closest whole number below 25%. Based on our current Board size of nine directors, the maximum number of shareholder-nominated candidates that we would be required to include in our proxy materials for an annual meeting is two. The number of permitted candidates would include nominees submitted

under the proxy access procedures that are either later withdrawn or that the Board subsequently determines to include in that year’s proxy materials as Board-nominated candidates. If the number of shareholder-nominated candidates exceeds 25%, each nominating shareholder would select one nominee for inclusion in the Company’s proxy materials until the maximum number is reached. The order of selection would be determined by the amount of shares of Company common stock (largest to smallest) held by each nominating shareholder or group of shareholders.

 

 

Nominating Procedure

 

In order to provide adequate time to assess shareholder-nominated candidates, requests to include director nominees in the Company’s proxy materials must be received no later than the close of business on the 120th day, and no earlier than the close of business on the 150th day, prior to the first anniversary of the preceding year’s annual meeting.

Information Required; Representations and Undertakings

 

 

Each shareholder seeking to include a director nominee in the Company’s proxy materials would be required to provide certain information and make certain representations and undertakings at the time of nomination, including:

 

 

Proof that the nominating shareholder or group of shareholders has held the required number of shares for the requisite period;

 

 

The shareholder’s notice on Schedule 14N required to be filed with the SEC;

 

 

The written consent of the shareholder nominee to being named in the proxy statement as a nominee and to serving as a director if elected;

 

 

CORPORATE GOVERNANCE     11


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Representations and undertakings regarding the shareholder’s intent and compliance with applicable laws, including the lack of an intent to change or influence control of the Company and an undertaking to assume liability stemming from the information that the shareholder provides to the Company; and

 

 

Representations regarding the shareholder nominee’s intent and compliance with the Company’s policies and procedures.

 

In addition, each shareholder nominee would be required to submit completed and signed questionnaires required of the Company’s directors and officers and provide such additional information as necessary to permit the Board to determine if the shareholder nominee is independent under the listing standards of the principal U.S. exchange upon which the common stock of the Company is listed, any applicable rules of the SEC, or any publicly disclosed standards used by the Board in determining and disclosing the independence of the Company’s directors.

 

 

Calculation of Ownership

 

In order to ensure that the interests of shareholders seeking to include director nominees in the Company’s proxy materials are aligned with those of other shareholders, such shareholder would be considered to own only the shares for which the shareholder possesses the full voting and investment rights and the full economic interest (including the opportunity for profit and risk of loss). Under this provision, borrowed or hedged shares would not count as owned shares, but shares that are held in the name of a nominee or other intermediary may count as owned shares provided the shareholder has retained full economic and voting rights over the shares.

Independence of Shareholder Nominees

 

A shareholder nominee would not be eligible for inclusion if the Board determines that he or she is not independent under the listing standards of the principal U.S. exchange upon which the common stock of the Company is listed, any applicable rules of the SEC, or any publicly disclosed standards used by the Board in determining and disclosing the independence of the Company’s directors.

Supporting Statement

 

Shareholders would be permitted to include in the proxy statement a 500-word statement in support of their nominees; provided, however, that the Company may omit such statement from its proxy materials if it believes, in good faith, that the statement would be materially false or misleading, omits a material fact, or would violate any applicable law or regulation.

Re-Nomination of Shareholder Nominees

 

Shareholder nominees that are included in the Company’s proxy materials but subsequently withdraw from, or become ineligible or unavailable for, election at the annual meeting, or that have not received at least 25% of the votes cast in favor of the nominee at the annual meeting would be ineligible to be a nominee for the next two annual meetings. In addition, the Company would not be required to include shareholder-nominated candidates in the proxy materials for any annual meeting for which any shareholder has already nominated a director for election pursuant to the advance notice provisions of the Bylaws.

Qualifications of Shareholder Nominees

 

If the proposed Bylaw amendment to implement proxy access is approved, the Board intends to amend the Company’s Corporate Governance Principles to provide that any director or director nominee would not be qualified to be a director of the Company if he or she: (1) has been an officer or director of a competitor, as defined in Section 8 of the Clayton Antitrust Act of 1914, within the past three years; or (2) is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses) or has been convicted in a criminal proceeding within the past ten years.

Effectiveness and Vote Required

If the proposed amendment to the Bylaws to implement proxy access is approved, it will become effective immediately and proxy access will be available for the next shareholder meeting at which directors are to be elected. The affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the issued and outstanding common stock of the Company is required to approve the amendment to our Bylaws to implement proxy access.

The Board of Directors recommends a vote “FOR” amending

our Bylaws to implement proxy access

 

12     CHESAPEAKE ENERGY CORPORATION


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Voting Item 5: Proposal to Eliminate Supermajority
     Voting Requirements

 

We are asking shareholders to approve an amendment to our Certificate of Incorporation to eliminate supermajority voting requirements. At our 2012 annual meeting, a shareholder-submitted proposal urging the Company to take all steps necessary to remove the supermajority vote requirement received the support of a majority of shareholders who cast votes at our meeting. Our Board considered this proposal and proposed the elimination of supermajority voting requirements at the 2013 annual meeting of

shareholders. Although the proposal did not receive the requisite shareholder approval at the 2013 annual meeting of shareholders, the Board believes that the significant support it did receive warrants proposing the elimination of supermajority voting requirements at the 2014 annual meeting. As such, at its meeting on April 14, 2014, the Board approved an amendment to the Certificate to eliminate supermajority voting and implement a majority voting standard, subject to shareholder approval.

 

 

Proposed Amendment

A summary of the proposed amendment to the Certificate is set forth below. The description of the proposed Certificate amendment is qualified in its entirety by reference to the text of the proposed amendment, which is attached as Exhibit D to this proxy statement.

Amendment to Certificate

 

 

The Certificate currently requires the affirmative vote of sixty-six and two-thirds percent (66 2/3%) of the outstanding stock entitled to vote for shareholders to approve the following actions:

 

 

To change the number of directors that constitute the Company’s Board of Directors;

 

 

To amend, repeal or adopt any provision inconsistent with the following provisions contained in the Certificate:

 

   

Article V limiting director liability for breach of fiduciary duty;

 

   

Article VI relating to certain business combinations between the Company and Interested Shareholders, as such term is defined by the Oklahoma General Corporation Act;

 

   

Article VII relating to the management of the affairs of the Company by the Board, including the number of directors, the Company’s classified board structure and shareholder election thereof and the manner in which director vacancies may be filled;

 

   

Article VIII relating to indemnity to be provided by the Company to directors, officers, employees and agents of the Company;

 

   

Article IX relating to amending the Certificate or the Bylaws, applicability of the Oklahoma Control Shares Act and shareholder actions by written consent; and

 

 

To amend, repeal, alter or rescind the Bylaws.

The proposed amendment would reduce the voting requirements for these actions to require a vote of a majority of the outstanding shares entitled to vote in each circumstance described above. The Oklahoma General Corporation Act requires that certain business combinations between the Company and Interested Shareholders receive the affirmative vote of no less than 66 2/3% of the votes cast by holders, excluding the votes of the Interested Shareholders. Therefore, this provision of our Certificate will not be impacted by this Voting Item.

 

 

Conforming Amendment to Bylaws

 

 

In connection with the amendment to our Certificate to eliminate supermajority voting requirements, our Board has approved a conforming amendment to our Bylaws which will become effective immediately following the effectiveness of the counterpart amendment to our Certificate without further action by the shareholders; provided, however, that the amendment to the Bylaws is conditioned upon shareholder approval of the proposed amendment to the Certificate. The Bylaws

currently require the affirmative vote of sixty-six and two-thirds percent (66 2/3%) of the outstanding common stock entitled to vote for shareholders to approve a change in the number of directors that constitute the Board. If the Certificate amendment described in this Voting Item is approved, the Bylaws will be amended to reflect the majority voting standard.

 

 

Effectiveness and Vote Required

 

If the proposed amendment to our Certificate to eliminate supermajority voting requirements is approved, it will become effective upon the filing of such amendment with the Oklahoma Secretary of State, and the conforming amendment to the Bylaws will become effective immediately following the effectiveness of the amendment to the Certificate. If the proposed

amendment is not approved, the supermajority provisions described herein will remain in effect. The affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the issued and outstanding common stock of the Company is required to approve the amendment to our Certificate to remove the supermajority provisions described herein.

 

 

The Board of Directors recommends a vote “FOR” amending our

Certificate to eliminate supermajority voting requirements

 

CORPORATE GOVERNANCE     13


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Director Compensation

 

Our non-employee director compensation program consists of an annual cash retainer, a value-based equity grant for all non-employee directors and additional value-based equity grants for the Chairman of the Board and the Chairman of each Board committee. Details of our non-employee director compensation program are as follows:

 

 

An annual retainer of $100,000, payable in equal quarterly installments;

 

 

Quarterly grants of restricted stock units with an aggregate annual value of $250,000;

 

 

An annual grant of additional restricted stock units for the independent, non-executive Chairman of the Board with a value of $250,000 (increased to $1,000,000 for 2013 due to Mr. Dunham’s significant service to the Company during the CEO transition period and for his efforts in the CEO search);

 

 

An annual grant of additional restricted stock units for the Audit Committee Chairman with a value of $25,000; and

 

 

An annual grant of additional restricted stock units for other committee chairmen with a value of $15,000.

The Company began issuing restricted stock units in lieu of restricted stock in June 2013. Restricted stock unit grants to non-employee directors vest 25% immediately upon award and 75% ratably over the three years following the date of award. Grants of restricted stock units have been made pursuant to our Amended and Restated Long Term Incentive Plan, or 2005 LTIP, and we expect future grants will be made pursuant to our 2014 Long Term Incentive Plan if approved by shareholders (see page 56, “Voting Item 7: Proposal to Adopt 2014 Long Term Incentive Plan”). In 2013, quarterly equity awards were made on the dates of the regularly scheduled meetings of the Board on March 7, June 13, September 19 and December 13, 2013. For 2014, quarterly

equity awards will be made along with retainer payments on the first day of each quarter to facilitate administration of director compensation. Directors are also reimbursed for travel and other expenses directly related to their service as directors.

Each new non-employee director receives an initial stock award upon appointment to the Board of up to 10,000 unrestricted shares pursuant to our 2003 Stock Award Plan for Non-Employee Directors. These awards have provided the Company with a valuable tool to ensure that the Board can recruit talented directors to serve on the Board and ensure that such directors’ interests are immediately aligned with shareholders. In 2013, our two new non-employee directors, Louis A. Raspino and Thomas L. Ryan, received 10,000 shares each under the 2003 Stock Award Plan.

In April 2013, the Compensation Committee approved a special grant of restricted stock to Mr. Dunham with a value of $250,000 in recognition of the significant time he devoted to the Company, including as a member of the Office of the Chairman. The grant vests 25% immediately and 75% ratably over the three years following the date of award.

Directors are eligible to defer any or all of their annual cash retainers through a deferred compensation plan of the Company on a tax-deferred basis. Messrs. Intrieri and Ryan have elected to defer their annual cash retainers into Company stock through the Chesapeake Deferred Compensation Plan for Non-Employee Directors. Deferrals into the plan are not matched or subsidized by the Company, nor are they eligible for above-market or preferential earnings. The Company has established a stock ownership guideline for non-employee directors to hold at least 15,000 shares of the Company’s common stock at all times while serving as a director. Newly appointed directors are generally given three years from the date of appointment to comply with this guideline. Failure to comply with this guideline or potential deferrals of the guideline due to hardship are addressed on a case-by-case basis by the Board. There were no failures or deferrals in 2013.

 

 

Director Compensation Table for 2013

 

Name    Fees Earned or
Paid in Cash(a)
     Stock Awards(b)      Option Awards(c)      All Other
Compensation
     Total  
            

Bob G. Alexander

   $ 100,000       $ 250,046       $       $       $ 350,046   

Archie W. Dunham

     100,000         1,500,073                                 1,600,073   

Vincent J. Intrieri

     100,000         250,046                         350,046   

R. Brad Martin

     100,000         265,056                         365,056   

Merrill A. (“Pete”) Miller, Jr.

     100,000         265,056                         365,056   

Frederic M. Poses

     100,000         250,046                         350,046   

Louis A. Raspino

     83,333         440,178                         523,511   

Thomas L. Ryan

     65,935         373,506                         439,441   

V. Burns Hargis(d)

     25,000         45,849                         70,849   

Louis A. Simpson(d)

     50,000         62,508                         112,508   
            
  (a)

Reflects annual retainer for all directors. Messrs. Intrieri and Ryan have elected to defer their annual cash retainers into Company stock through the Chesapeake Deferred Compensation Plan for Non-Employee Directors.

 

  (b)

Reflects the aggregate grant date fair value of 2013 restricted stock and restricted stock unit awards determined pursuant to FASB ASC Topic 718. The assumptions used by the Company in calculating these amounts are incorporated by reference to Note 9 to the consolidated financial statements in the Company’s Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on February 27, 2014. On March 7, 2013, June 13, 2013, September 19, 2013 and December 13, 2013, respectively, each serving non-employee director, other than Mr. Raspino

 

14     CHESAPEAKE ENERGY CORPORATION


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with respect to his March award and Mr. Ryan with respect to his June award, received a regular quarterly award of 2,998, 2,977, 2,324 and 2,315 restricted stock units, or shares of restricted stock in the case of the March awards, with a grant date fair value of $62,508, $62,517, $62,515 and $62,505. For their service on the Board in the first quarter of 2013, Messrs. Hargis and Raspino received prorated regular quarterly awards of 2,199 and 1,000 shares of restricted stock, respectively, with a grant date fair value of $45,849 and $20,850. For his service on the Board in the second quarter of 2013, Mr. Ryan received a prorated regular quarterly award of 1,985 restricted stock units with a grant date fair value of $41,685.

 

  

For their additional responsibilities on the Board, on September 19, 2013 Messrs. Martin, Miller and Raspino received 558, 558 and 929 additional restricted stock units, respectively, with a grant date fair value of $15,010, $15,010 and $24,990, respectively, due to their service as committee chairmen. On April 30, 2013, Mr. Dunham received a special grant of 12,795 shares of restricted stock with a grant date fair value of $250,014 in recognition of the significant time he devoted to the Company, including his service as a member of the Office of the Chairman. On July 1, 2013, for his service as independent, non-executive Chairman, Mr. Dunham was also granted 48,147 restricted stock units with a grant date fair value of $1,000,013, which was increased from his annual grant of $250,000 due to his significant service to the Company during the CEO transition period and for his efforts in the Company’s CEO search. On June 14, 2013, Messrs. Raspino and Ryan received a new non-employee director grant of 10,000 shares of common stock with a grant date fair value of $206,800.

 

  

As of December 31, 2013, the aggregate number of shares of unvested restricted stock or unvested restricted stock units, as applicable, held by each of the serving non-employee directors was as follows: Messrs. Alexander, Intrieri and Poses, 13,435; Mr. Dunham, 79,835; Mr. Martin, 13,853; Mr. Miller, 18,312; Mr. Raspino, 7,157; and Mr. Ryan, 4,967.

 

(c)

The Company granted no stock options to non-employee directors in 2013.

 

(d)

Messrs. Hargis and Simpson resigned from the Board effective March 7, 2013 and May 3, 2013, respectively. In accordance with their restricted stock award agreements, previously awarded restricted stock became fully vested upon their departures.

Transactions with Related Persons

 

The Company has adopted a written related party transaction policy with respect to any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including any indebtedness or guarantee of indebtedness) in which (1) the aggregate amount involved will or may be expected to exceed $120,000, (2) the Company is a participant and (3) any of its currently serving directors and executive officers, or those serving as such at any time since the beginning of the last fiscal year, or greater than 5% shareholders, or any of the immediate family members of the foregoing persons, has or will have a direct or indirect material interest. The Audit Committee reviews and approves all interested transactions, as defined above, subject to certain enumerated exceptions that the Audit Committee has

determined do not present a “direct or indirect material interest” on behalf of the related party, consistent with the rules and regulations of the SEC. Such transactions are subject to the Company’s existing Code of Business Conduct. Certain transactions with former executive officers and directors that fall within the enumerated exceptions will be reviewed by the Audit Committee. The Audit Committee approves or ratifies only those transactions that it determines in good faith are in, or are not inconsistent with, the best interests of the Company and its shareholders. All transactions described below that do not fall within the enumerated exceptions described in the policy have been reviewed or approved by the Audit Committee.

 

 

SandRidge Energy, Inc.

 

 

David C. Lawler, who is the Executive Vice President and Chief Operating Officer of SandRidge Energy, Inc., is the brother of Robert D. Lawler, the Company’s CEO. The Company engages in transactions with SandRidge

in the ordinary course of business and no such transaction has been determined to be a related party transaction under the Company’s related party transaction policy.

 

 

Employment of Family Members

 

 

Isaac Jacobson, son of Douglas J. Jacobson, Executive Vice President–Acquisitions and Divestitures, was an employee of the Company in 2013. Mr. Jacobson’s total cash and equity compensation for 2013 was $154,679. Andrew Kapchinske, son of John M. Kapchinske, Senior Vice President–Exploration and Subsurface Technology, has been an employee of the Company since September 2007. Mr. Kapchinske’s total cash and equity compensation for 2013 was $188,284. The Company is a

significant employer in Oklahoma City. We seek to fill positions with qualified employees, whether or not they are related to our executive officers or directors. We compensate employees who have such relationships within what we believe to be the current market rate for their position and provide benefits consistent with our policies that apply to similarly situated employees. Compensation arrangements for family members of related parties are approved by the Compensation Committee.

 

Transactions with Former Chief Executive Officer

 

Oklahoma City Thunder

 

In 2011, Chesapeake entered into a license and naming rights agreement with The Professional Basketball Club, LLC, or the PBC, for an

arena in downtown Oklahoma City. PBC is the owner of the Oklahoma City Thunder, or the Thunder, basketball team, a National Basketball

 

 

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Association, or NBA, franchise and the arena’s primary tenant. Aubrey K. McClendon, the Company’s former CEO, has a 19.2% equity interest in PBC. Under the terms of the agreement, Chesapeake has committed to pay annual fees ranging from approximately $2.9 million, the amount paid for the 2011-2012 season, escalating ratably to approximately $4.2 million payable in 2023 for the arena naming rights and other associated benefits. The arena naming rights provide Chesapeake with enhanced public awareness through recognition locally, nationally and internationally. For the 2012-2013 and 2013-2014 seasons, Chesapeake paid fees of approximately $2.6 million and $3.2 million, respectively. The fee for the 2012-2013 season reflected a reduction of $480,000 as a result of the NBA lockout at the beginning of the 2011 season. Mr. McClendon made annual charitable contributions for the benefit of Oklahoma schools equal to his percentage ownership of the Thunder (19.2%) times the fees paid by the Company under the naming rights agreement for the first two seasons covered by the agreement.

In 2011, the Company also entered into a 12-year sponsorship agreement, committing to pay an average annual fee of approximately

$3.0 million for advertising, use of an arena suite and other benefits. For the 2012-2013 and 2013-2014 seasons, the Company paid fees of approximately $2.4 million and $2.5 million, respectively, pursuant to the sponsorship agreement. Chesapeake has been a founding sponsor of the Thunder since 2008.

For the 2012-2013 season, the Company reduced its regular season commitment for additional game tickets to a net amount of approximately $1.6 million, which gives effect to a refund of $1.2 million from PBC and $678,000 received by the Company for the sale of approximately 15% of its tickets to Company management, including the sale of season tickets to Mr. McClendon for approximately $140,000, and to Access Midstream Partners, L.P., in each case at the same price the Company paid to the PBC. The Company also paid approximately $328,000 for sponsorship, advertising and tickets for 2013 home playoff games. For the 2013-2014 season, the Company paid approximately $994,000 for additional tickets for regular season games and has committed to purchase a limited number of tickets and certain sponsorship benefits for any 2014 home playoff games, the total amount for which will depend on the number of home playoff games played by the Thunder.

 

 

Founder Well Participation Program

 

The Founder Well Participation Program, or FWPP, permits Mr. McClendon, the Company’s co-founder, to participate and invest as a working interest owner in new program wells drilled by the Company. In 2005, the FWPP was documented as a formal plan containing substantially the same terms as prior agreements with the Company’s two co-founders that had been in place since the Company’s initial public offering in 1993. Shareholders approved the FWPP on June 10, 2005 for a term ending on December 31, 2015. The participation of co-founder Tom L. Ward terminated following his separation from the Company in 2006. In April 2012, the Board and Mr. McClendon agreed to the early termination of the FWPP on June 30, 2014, 18 months before the end of its original expiration date. Mr. McClendon’s right to participate in new program wells drilled by the Company under the FWPP continues through the expiration of the FWPP on June 30, 2014 despite his separation from the Company on April 1, 2013. See “—Separation Arrangements” below for additional information on the terms of his separation.

The Compensation Committee of the Board of Directors administers and interprets the FWPP. Under the FWPP, Mr. McClendon has had the right to participate in either all or none of the wells spudded by or on behalf of the Company during each calendar year. Mr. McClendon has elected to participate in the FWPP through the expiration of the FWPP on June 30, 2014 at the maximum 2.5% working interest permitted, the same participation percentage he has elected every year since 2004. Mr. McClendon has participated in the FWPP through entities in which all equity interests are owned solely by Mr. McClendon and his immediate family members, as permitted by the terms of the FWPP subject to approval by the Compensation Committee. Prior to his separation, Mr. McClendon was required to pay all joint interest billings immediately on receipt of the Company’s invoice and to advance to the Company any

amounts which the Company is required to prepay to third-party operators with respect to Mr. McClendon’s working interest to be assigned under the FWPP. Following his separation, Mr. McClendon pays joint interest billings from the Company in accordance with terms afforded to the Company’s significant joint venture partners and as set forth in applicable joint operating agreements.

The FWPP provides that the amount paid by Mr. McClendon for acreage assigned in connection with his participation in the FWPP is to be recomputed as of the first day of each calendar year and is equal to a fully-costed average per acre amount computed as follows: (i) direct costs capitalized in the appropriate accounting pool in accordance with the Company’s accounting procedures (including all capitalized interest, leasehold payments, acquisition costs, landman charges and seismic charges) divided by (ii) the acreage in the applicable pool at the time of computation. The annual computation has allowed the Company to give effect to the acreage and costs of newly acquired acreage, acreage sold by the Company and acreage that has expired. All other costs are billed in accordance with the Company’s accounting procedures applicable to third-party participants pursuant to any joint operating agreement or exploration agreement relating to a particular well, and such amounts paid by Mr. McClendon in connection with his participation in a well are on no better terms than the terms agreed to by unaffiliated third-party participants in connection with the participation in such well or similar wells operated by the Company.

The following table sets forth the revenue received from, and well costs paid to, the Company with respect to Mr. McClendon’s FWPP interests during the first quarter of 2014 and each of the three years in the period ended December 31, 2013:

 

 

     First Quarter                    
  

 

 

 
      2014     2013     2012     2011  
Natural gas and oil revenues    $     77,868,495      $     287,465,640      $     198,859,938      $     184,270,948   
Lease operating expenditures      (20,410,893     (62,191,013     (54,181,910     (42,457,253
Net cash flow      57,457,601        225,274,627        144,678,028        141,813,695   
Capital expenditures      (50,337,117     (269,242,032     (434,263,113     (457,151,007
Net after capital expenditures    $     7,120,484      $     (43,967,404   $     (289,585,085   $ (315,337,312
   

 

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The foregoing information has been derived solely from the Company’s records. Accordingly, it excludes revenues and expenses for some FWPP interests that are not operated by the Company, and it may include revenue and expenses for producing FWPP interests conveyed to others. For example, the foregoing amounts include revenue attributable to volumetric production payments (VPPs) owed to third parties under transactions that Mr. McClendon has entered into from time to time. Mr. McClendon pays the related lease operating expenses and disburses revenue to the VPP owners.

Mr. McClendon has advised us that the present value of the future net revenue (pretax) of the estimated proved developed producing reserves attributable to his FWPP interests at December 31, 2013, discounted at 10% per year and based on prices and costs under existing conditions at such date as prescribed by the SEC’s reserves reporting rules, was approximately $583 million. As indicated in the Company’s 2013 Form 10-K filed on February 27, 2014 and other filings that include estimates of the Company’s proved natural gas and oil reserves, any computation of proved producing reserves is an estimate, subject to a number of variables and not a reflection of fair market value. A portion of the leasehold owned by Mr. McClendon with respect to the FWPP consists of interests that are not categorized as proved developed producing reserves. The Company’s reservoir engineering staff provides data and analysis to Mr. McClendon’s affiliates with respect to reserves associated with FWPP interests using the engineering prepared for the Company’s

interest in the same wells. In 2013, Mr. McClendon reimbursed the Company approximately $580,000 to cover the estimated cost of such services.

Mr. McClendon’s FWPP interests are his personal assets and are separate and distinct from the Company’s interest in its oil and gas properties and other assets. The FWPP does not restrict sales, other dispositions or financing transactions involving FWPP interests acquired from the Company. The Company has not extended loans to Mr. McClendon for participation in the FWPP or any other purposes, the Company has no obligation to repay loans Mr. McClendon may obtain from third parties, and no Company interests in any assets are exposed to such loans or the mortgages securing them. From time to time, Mr. McClendon through affiliates has sold FWPP interests separately and concurrently with sales by the Company of its interests in the same properties. In any concurrent sales, the proceeds related to the properties have been allocated between Mr. McClendon’s affiliates and the Company based on their respective ownership interests. From January 1, 2013 through March 31, 2014, Mr. McClendon’s affiliates realized approximately $4.7 million from such concurrent sales, and they paid $8,151 of deal costs. As described below, the terms of Mr. McClendon’s separation provide the Company a “drag” right and Mr. McClendon a “tag” right with respect to FWPP interests in connection with sales by the Company of its joint interests in an area or play.

 

 

Separation Arrangements

 

On April 1, 2013, Mr. McClendon ceased serving as President and CEO of the Company and resigned as a director of its Board. On April 18, 2013, the Company and Mr. McClendon entered into a Founder Separation and Services Agreement, which was effective as of January 29, 2013. See “Executive Compensation—Post-Employment Compensation—Named Executive Officer Separations—Aubrey K. McClendon” on page 50 for a discussion of the Founder Separation and Services Agreement.

Pursuant to the Founder Separation and Services Agreement, on April 18, 2013, the Company, Mr. McClendon and certain affiliates of Mr. McClendon, or the Founder Affiliates, entered into a Founder Joint Operating Services Agreement, or FJOSA, effective as of January 29, 2013, relating to the jointly developed oil and gas wells, increased density locations, leases and acreage jointly owned by the Company and the respective Founder Affiliates, or the Joint Interests. The FJOSA is intended to enable the parties to maintain and continue their previously developed methods and practices for access to and sharing of information essential for the efficient administration of their respective interests in the Joint Interests and to provide a framework for the continued efficient administration thereof. The Company developed certain search software to allow Mr. McClendon and the Founder Affiliates to access Joint Interest data for which Mr. McClendon paid the Company $75,000 for its cost. The Company will continue to provide reserve reports on Joint Interests through no later than December 31, 2016, and the Founder Affiliates are required to reimburse the Company for the costs of such services. Through June 30, 2014, the Company will provide Mr. McClendon and the Founder Affiliates data, licenses and services related to Joint Interests, as well as certain transition services. The Company will provide land services through December 31, 2016 or so long as is required under applicable joint operating or other agreements. In addition, the Company has agreed to continue to provide certain routine monthly services. Routine services relating to the preparation of schedules and exhibits to mortgages will be billed to the applicable

Founder Affiliates at a monthly rate of $50,000 as part of the monthly joint interest billings beginning July 1, 2014, subject to termination or reduction in services as well as an annual adjustment. The Company recoups its costs of providing other routine services set forth in the FJOSA through standard overhead billings pursuant to the terms of any applicable joint operating agreements with the Founder Affiliates. The Company provides a monthly credit of $50,000 in the aggregate to reduce the marketing fees billed by the Company or its affiliates under the existing marketing fee arrangements between the Founder Affiliates and the Company or its affiliates beginning April 1, 2013, provided that the credit may not reduce the marketing fees below zero in any month. The FJOSA provides that overhead rates charged by the Company to a Founder Affiliate for Joint Interests will be the applicable rate paid by the Company’s significant joint venture partners, except that in the Barnett Shale play and in other areas where there is no such joint venture agreement, the Company’s standard overhead rate applies and will be on no better terms than those agreed to by unaffiliated third-party participants. The FJOSA also provides that if the Company agrees to sell all or a portion of the Company’s Joint Interests in an area or play, the Company or the applicable Founder Affiliate may elect to include the applicable Founder Affiliates’ Joint Interests in the sale transaction (in the same proportion as those being sold by the Company in the sale transaction), with the applicable Founder Affiliates to receive their respective portion of the sale proceeds from any such sale transaction. A portion of any third-party legal, accounting, advisory or other professional fees incurred by the Company in connection with a transaction is to be deducted from sale proceeds paid to a Founder Affiliate based on its proportionate share.

Copies of the Founder Separation and Services Agreement and FJOSA are filed as Exhibits 10.1 and 10.2, respectively, to the Company’s Current Report on Form 8-K filed on April 19, 2013.

 

Rescission of Map Sale

 

On July 26, 2013, the Company and Mr. McClendon rescinded the December 2008 sale of an antique map collection pursuant to the terms of a settlement agreement terminating pending shareholder litigation that was approved by the District Court of Oklahoma County, Oklahoma on

January 30, 2012 and affirmed on appeal. The Company returned the subject maps to Mr. McClendon, and Mr. McClendon paid the Company $12.1 million plus interest.

 

 

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Sale of Suite at AT&T Stadium

 

Effective September 23, 2013, in an effort to reduce costs, the Company transferred its rights to a suite at AT&T Stadium (formerly, Dallas Cowboys Stadium) in Arlington, Texas to an affiliate of Mr. McClendon. Pursuant to the agreement, Mr. McClendon’s affiliate reimbursed the 2013 annual lease fee of $500,000, prorated for the number of football

games remaining in the season at the time of the transaction, and assumed the Company’s remaining annual lease obligations of $7.5 million. The Company has no further obligations under the suite lease agreement.

 

 

Drilling Contracts

 

In October 2013 following a request for proposal process, a subsidiary of the Company and American Energy–Utica, LLC, or AEU, entered into agreements whereby the Company would provide land drilling services to AEU in the Utica Shale. Mr. McClendon is an investor in AEU and AEU is managed by a subsidiary of American Energy Partners, LP, which is an affiliate of Mr. McClendon. On October 16, 2013, the Company and AEU

entered into a drilling contract for a term of six months with an operating dayrate of $23,500. On October 31, 2013, the Company and AEU entered into separate drilling contracts in respect of six other drilling rigs for terms of two years with operating dayrates of $26,000 each. The transactions were negotiated on an arms-length basis based on prevailing market rates for similar services in the area.

 

 

Beneficial Ownership

 

The table below sets forth (i) the name and address and beneficial ownership of each person known by management to own beneficially more than 5% of our outstanding common stock, and (ii) the beneficial ownership of common stock of our nominees, directors and named

executive officers and all directors and executive officers of the Company as a group. Unless otherwise noted, information is given as of April 14, 2014, the record date, and the persons named below have sole voting and/or investment power with respect to such shares.

 

 

     Common Stock  
Beneficial Owner   

Outstanding

Shares

    

Share

Equivalents

      

Total

Ownership

   

Percent of

Class

 

Southeastern Asset Management, Inc.

6410 Poplar Ave., Suite 900

Memphis, TN 38119

     68,676,612         4,513,189           73,189,801 (a)      10.9%   

Carl C. Icahn

c/o Icahn Associates Corp.

767 Fifth Avenue, 47th Floor

New York, NY 10153

     66,450,000                   66,450,000 (b)      9.9%   

Capital World Investors

333 South Hope Street

Los Angeles, CA 90071

     38,340,000         2,855,808           41,195,808 (c)      6.1%   
Robert D. (“Doug”) Lawler      356,465 (d)                 356,465        *   
Domenic J. (“Nick”) Dell’Osso, Jr.      240,265 (d)(e)       64,754 (f)         305,019        *   
Douglas J. Jacobson      711,120 (d)(e)       59,122 (f)         770,242        *   
M. Christopher Doyle                               *   
Mikell J. (“Jason”) Pigott      215                   215        *   
Bob G. Alexander      18,560 (d)                 18,560        *   
Archie W. Dunham      1,043,089 (d)                 1,043,089        *   
Vincent J. Intrieri      24,897 (d)(g)                 24,897        *   
John J. (“Jack”) Lipinski      30,000                   30,000        *   
R. Brad Martin      148,450 (d)(h)                 148,450        *   
Merrill A. (“Pete”) Miller, Jr.      166,957 (d)                 166,957        *   
Frederic M. Poses      687,842 (d)                 687,842        *   
Louis A. Raspino      65,067 (d)                 65,067        *   
Thomas L. Ryan      51,375 (g)                 51,375        *   
Aubrey K. McClendon      2,795,140 (d)(i)(j)                 2,795,140        *   
Steven C. Dixon      1,046,644 (i)(k)       417,011 (f)         1,463,655        *   
Jeffrey A. Fisher      288,002 (i)       277,450 (f)         565,452        *   
All directors and executive officers as a group      4,391,530 (l)       222,417           4,613,947        *   
  *

Less than 1%.

 

  (a)

This information is as of December 31, 2013, as reported in a Schedule 13G/A filed jointly by Southeastern Asset Management, Inc. and O. Mason Hawkins on February 10, 2014. The Schedule 13G/A includes 4,513,189 shares of common stock underlying convertible preferred shares. The

 

18     CHESAPEAKE ENERGY CORPORATION


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Schedule 13G/A reports (i) sole power to vote or to direct the vote of 41,209,685 shares; (ii) shared power to vote or direct the vote of 22,509,124 shares with Longleaf Partners Fund and Longleaf Partners Global Fund; (iii) no power to vote 9,470,992 shares; (iv) sole power to dispose or to direct the disposition of 50,680,677 shares; and (v) shared power to dispose or to direct the disposition of 22,509,124 shares with Longleaf Partners Fund and Longleaf Partners Global Fund.

 

(b)

This information is as of August 16, 2013, as reported in a Schedule 13D/A filed jointly by High River Limited Partnership, Hopper Investments LLC, Barberry Corp., Icahn Partners Master Fund LP, Icahn Partners Master Fund II LP, Icahn Partners Master Fund III LP, Icahn Offshore LP, Icahn Partners LP, Icahn Onshore LP, Icahn Capital LP, IPH GP LLC, Icahn Enterprises Holdings L.P., Icahn Enterprises G.P. Inc., Beckton Corp. and Carl C. Icahn. The principal business address of each of (i) High River, Hopper, Barberry, Icahn Offshore, Icahn Partners, Icahn Onshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP and Beckton is White Plains Plaza, 445 Hamilton Avenue Suite 1210, White Plains, NY 10601, (ii) Icahn Master, Icahn Master II and Icahn Master III is c/o Walkers SPV Limited, P.O. Box 908GT, 87 Mary Street, George Town, Grand Cayman, Cayman Islands, and (iii) Mr. Icahn is c/o Icahn Associates Corp., 767 Fifth Avenue, 47th Floor, New York, NY 10153.

 

    

According to the filing, High River has sole voting power and sole dispositive power with regard to 13,290,002 shares. Each of Hopper, Barberry and Mr. Icahn has shared voting power and shared dispositive power with regard to such shares. Icahn Master has sole voting power and sole dispositive power with regard to 21,601,307 shares. Each of Icahn Offshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP, Beckton and Mr. Icahn has shared voting power and shared dispositive power with regard to such shares. Icahn Master II has sole voting power and sole dispositive power with regard to 7,712,372 shares. Each of Icahn Offshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP, Beckton and Mr. Icahn has shared voting power and shared dispositive power with regard to such shares. Icahn Master III has sole voting power and sole dispositive power with regard to 3,395,407 shares. Each of Icahn Offshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP, Beckton and Mr. Icahn has shared voting power and shared dispositive power with regard to such shares. Icahn Partners has sole voting power and sole dispositive power with regard to 20,450,912 shares. Each of Icahn Onshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP, Beckton and Mr. Icahn has shared voting power and shared dispositive power with regard to such shares.

 

    

According to the filing, each of Hopper, Barberry and Mr. Icahn, by virtue of their relationships to High River, may be deemed to indirectly beneficially own the shares which High River directly beneficially owns. Each of Hopper, Barberry and Mr. Icahn disclaims beneficial ownership of such shares for all other purposes. Each of Icahn Offshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP, Beckton and Mr. Icahn, by virtue of their relationships to each of Icahn Master, Icahn Master II and Icahn Master III, may be deemed to indirectly beneficially own the shares which each of Icahn Master, Icahn Master II and Icahn Master III directly beneficially owns. Each of Icahn Offshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP, Beckton and Mr. Icahn disclaims beneficial ownership of such shares for all other purposes. Each of Icahn Onshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP, Beckton and Mr. Icahn, by virtue of their relationships to Icahn Partners, may be deemed to indirectly beneficially own the shares which Icahn Partners directly beneficially owns. Each of Icahn Onshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP, Beckton and Mr. Icahn disclaims beneficial ownership of such shares for all other purposes.

 

(c)

This information is as of December 31, 2013, as reported in a Schedule 13G filed by Capital World Investors on February 13, 2014. The Schedule 13G includes 2,855,808 shares of common stock underlying convertible preferred shares.

 

(d)

Includes unvested shares of restricted stock granted after January 1, 2013 with respect to which executive officers and directors have voting power.

 

(e)

Includes vested shares of common stock held in the Company’s 401(k) plan (Mr. Dell’Osso, 4,596 shares; and Mr. Jacobson, 19,859 shares) and vested shares of common stock held in the Chesapeake Energy Corporation Deferred Compensation Plan (Mr. Dell’Osso, 7,733 shares; and Mr. Jacobson, 36,281 shares).

 

(f)

Represents shares of common stock which can be acquired through the exercise of stock options on the record date or within 60 days thereafter.

 

(g)

Includes 6,587 and 4,037 shares of common stock purchased on behalf of Messrs. Intrieri and Ryan, respectively, in the Chesapeake Energy Corporation Deferred Compensation Plan for Non-Employee Directors.

 

(h)

Includes 35,000 shares held by the R. Brad Martin Family Foundation, over which Mr. Martin has voting control.

 

(i)

Provided by Messrs. McClendon, Dixon and Fisher as of their respective separation dates.

 

(j)

Includes (i) 13,671 shares held by Chesapeake Investments, an Oklahoma limited partnership of which Mr. McClendon is sole general partner; and (ii) 1,095 shares held by Mr. McClendon’s son who shares the same household.

 

(k)

Includes 149,878 shares held by Mr. Dixon in trusts and 52,965 shares held by the Faretheewell Foundation, over which Mr. Dixon has voting control.

 

(l)

Does not include shares held by Mesrs. McClendon, Dixon or Fisher as they are no longer executive officers.

Section 16(a)     Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, requires our directors and executive officers and persons who beneficially own more than 10% of the Company’s common stock to file reports of ownership and subsequent changes with the SEC. Based only on a review of copies of such reports and written representations delivered to the Company by such persons, only Steven C. Dixon filed a late report under Section 16(a) during 2013. Mr. Dixon filed one late report which related to four gifts which were not timely reported.

 

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

In this section, we describe the material components of our executive compensation program for the Company’s named executive officers listed below, whose compensation is set forth in the Summary Compensation Table and other compensation tables contained in this proxy statement.

 

 
Current Officers    

Robert D. (“Doug”) Lawler

    President and Chief Executive Officer, or CEO

Domenic J. (“Nick”) Dell’Osso, Jr.

    Executive Vice President and Chief Financial Officer, or CFO

Douglas J. Jacobson

    Executive Vice President–Acquisitions and Divestitures

M. Christopher Doyle

    Senior Vice President, Operations–Northern Division

Mikell J. (“Jason”) Pigott

    Senior Vice President, Operations–Southern Division
Departed Officers    

Aubrey K. McClendon

    Former President and Chief Executive Officer

Steven C. Dixon

    Former Acting Chief Executive Officer, or Acting CEO, Executive Vice President–Operations and Geosciences and Chief Operating Officer

Jeffrey A. Fisher

      Former Executive Vice President–Production

We present our Compensation Discussion and Analysis in the following sections:

 

1.   Compensation Highlights. In this section, we summarize the Company’s 2013 executive compensation story, discuss the response of the Compensation Committee of our Board to the 2013 shareholder advisory vote on named executive officer compensation and highlight aspects of our executive compensation program.

  

p. 20

 

2.   Executive Compensation Program. In this section, we describe the Company’s executive compensation philosophy and the material components of our executive compensation program.

  

 

p. 22

 

3.   2013 Named Executive Officer Compensation. In this section, we detail the Company’s 2013 named executive officer compensation and explain how and why the Compensation Committee arrived at specific compensation decisions. We also provide details with regard to compensatory arrangements related to the separations of Messrs. McClendon, Dixon and Fisher from the Company.

  

 

p. 23

 

4.   Other Executive Compensation Matters. In this section, we provide a brief overview of policies related to minimum stock ownership, prohibition of margining and derivative or speculative transactions involving Company stock and executive compensation clawbacks. We also review the relationship between our compensation program and risk and accounting and tax treatment of compensation.

  

 

p. 34

 

5.   Actions Related to 2014 Executive Compensation. In this section, we provide an overview of certain Compensation Committee executive compensation decisions for 2014.

  

 

p. 36

Compensation Highlights

 

2013 Executive Compensation Story

 

2013 was a transitional and transformational year at Chesapeake. In January 2013, the Company announced that Mr. McClendon would step down as President, CEO and a director of the Company effective April 1, 2013. The announcement and the transition period that followed the announcement presented complex executive compensation decisions for the Board and Compensation Committee. These decisions generally fell

into two categories: (i) decisions related to Mr. McClendon’s separation and (ii) decisions designed to attract and retain the right personnel to drive future performance. The Board and Committee’s navigation of these decisions ensured a smooth CEO transition, preservation of shareholder value through successful execution of the Company’s strategic plan and the attraction and retention of high-performing executives.

 

 

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Decisions Related to Mr. McClendon’s Separation

The following summarizes the timing and context of decisions related to Mr. McClendon’s separation from the Company:

 

 

The Board believed that preserving continuity in the existing management team during the CEO transition period was essential to continuing to operate the business effectively. The Board recognized that any unplanned departures of senior management during the CEO transition could jeopardize the successful execution of the Company’s business strategy. To prevent unplanned departures and minimize the potential disruption that could be created by senior management turnover, the Compensation Committee approved retention stock option awards the day of the announcement of Mr. McClendon’s separation to offer long-term equity incentives to select members of senior management in exchange for their continued operational execution and support of the business transformation. Because of uncertainties existing at the time, the retention awards had longer vesting schedules than the annual equity grants, and provided for accelerated vesting in the event of involuntary termination. Given Mr. Jacobson’s focus on the Company’s asset sales program, which was a key component of the Company’s 2013 strategic plan, the Committee determined at the time that it would consider awarding him a performance bonus in lieu of retention stock options when and if the Company completed its joint venture with Sinopec International Petroleum and Exploration Corporation. This joint venture was a vital piece of the Company’s asset sales program led by Mr. Jacobson. The retention awards and performance bonus served to retain key management personnel during the CEO transition period, which facilitated the successful execution of the Company’s business strategy during this critical period, including the successful completion of the Sinopec joint venture.

 

 

On April 18, the Company entered into a separation agreement with Mr. McClendon that provided he would receive all of the rights, benefits and obligations owed to him for a termination without cause under his employment agreement. See “Post-Employment Compensation—Named Executive Officer Separations—Aubrey K. McClendon” on page 50. The Board believed that it was in the best interests of shareholders to negotiate terms of Mr. McClendon’s separation that would facilitate an orderly transition of the CEO position, maintain alignment of Mr. McClendon’s interests with those of the Company for an appropriate period of time and preserve the Company’s competitive position. To achieve this, the separation agreement provided for continued vesting of certain equity awards and included non-compete, non-solicitation and no-hire provisions.

 

 

Following Mr. McClendon’s departure, the Board established a three-person Office of the Chairman, consisting of Messrs. Dunham, Dixon and Dell’Osso, to provide oversight of strategic, operational and financial matters while the Board continued its search for a CEO. In addition to serving as Executive Vice President—Operations and Geosciences and Chief Operating Officer, Mr. Dixon was appointed Acting CEO during this transition period. The Board approved an increase in Mr. Dixon’s base salary and bonus target in connection with this appointment in recognition of his increased responsibilities.

Decisions Designed to Attract and Retain the Right Personnel to Drive Future Performance

The following summarizes the timing and context of decisions related to compensation of our named executive officers which were intended to align with best practices and promote shareholder value:

 

 

Adhering to its compensation philosophy, in January 2013 the Compensation Committee set annual named executive officer compensation that was intended to more closely align with the market median. To do so, the Committee (i) generally maintained base salaries and target annual incentive opportunities at 2012 levels; and (ii) reduced average target long-term incentive awards by approximately 10% from 2012 target levels. The 2013 annual incentive program was based on challenging, objective metrics and the 2013 long-term incentive program consisted of a mix of 25% stock options, 25% restricted stock and 50% performance share units, or PSUs, with a circuit breaker capping PSU payouts at 100% if the Company’s absolute TSR is negative for a performance period.

 

 

Mr. Lawler was recruited as the Company’s President and CEO in May 2013. The Board faced significant competition in the market for chief executives given that several companies in our industry had CEO vacancies at the time. In order to ensure that the Company successfully attracted and retained Mr. Lawler in a competitive environment, the Committee designed a compensation package that included a signing bonus and one-time equity awards to compensate Mr. Lawler for equity and pension benefits forfeited from his previous employer. The equity awards when granted vest over periods ending from 2018 to 2023 and the signing bonus and equity awards are subject to forfeiture in specified circumstances, which serve to retain as well as compensate Mr. Lawler. To adhere to the Committee’s compensation philosophy, Mr. Lawler’s employment agreement provided for total target annual compensation that ranked slightly below the median of our compensation peer group according to benchmarking data provided by Frederic W. Cook & Co., Inc., or F.W. Cook, the Committee’s independent compensation consultant, and which, on an annualized basis, was approximately 15% lower than the annualized total target compensation of the Company’s former CEO.

 

 

Mr. Lawler joined the Company in June 2013 and immediately began his evaluation of the Company’s business operations and organizational structure. After considerable review and discussion with the Board, it was determined in August 2013 that it was in the best interests of the Company to restructure the organization, which resulted in the elimination of the positions held by Messrs. Dixon and Fisher. The departures of Messrs. Dixon and Fisher were considered terminations without cause under their employment agreements and they received termination compensation and benefits accordingly.

 

 

Messrs. Doyle and Pigott were recruited as the Company’s Senior Vice Presidents of Operations to lead our two operational divisions in August 2013. In order to successfully attract and retain Messrs. Doyle and Pigott, the Compensation Committee approved a signing bonus and one-time equity award for each to compensate for equity and pension benefits forfeited from their previous employer. The equity awards vest over a period ending in 2019 and the signing bonus and equity awards are subject to forfeiture in specified circumstances, which serve to retain as well as compensate Messrs. Doyle and Pigott. To adhere to the Committee’s compensation philosophy, the employment agreements for Messrs. Doyle and Pigott provided for total target annual compensation that ranged between the 25th percentile and the median of benchmarking data provided by F.W. Cook.

 

 

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Response to 2013 Shareholder Advisory Vote on Named Executive Officer Compensation

At our 2013 annual meeting, approximately 84% of shares cast voted in favor of our named executive officer compensation. This was a marked difference from 2012 when we received only 20% support, which led the Compensation Committee to engage in a comprehensive review of the Company’s executive compensation program with the assistance of F.W. Cook. The goal of this review was to ensure that the Company’s compensation programs appropriately tie executive pay to Company performance. The 2013 vote told us that most shareholders agree that the Company’s redesigned executive compensation program better aligns with shareholder objectives and is responsive to shareholder concerns voiced over the past two years. This was also confirmed through discussions that took place before and after the 2013 annual meeting with shareholders representing nearly half of the Company’s outstanding shares.

The Compensation Committee continues to evaluate the executive compensation program in order to execute the Company’s compensation philosophy (see “—Executive Compensation Program—Philosophy and Objectives of our Executive Compensation Program” below). In 2013, the Compensation Committee made the decisions outlined above under “2013 Executive Compensation Story—Decisions Designed to Attract and Retain the Right Personnel to Drive Future Performance” with regard to the ongoing executive compensation program.

The Compensation Committee has continued to refine the Company’s executive compensation program through the implementation of the following changes for 2014:

 

 

Modified the 2014 annual incentive program to focus on the key metrics that the Compensation Committee believes will drive the Company’s 2014 performance, including the addition of a cash cost management multiplier to tie compensation to cost reduction.

 

 

Modified the 2014 performance share unit, or PSU, award performance goals to focus solely on total shareholder return, or TSR, which the Compensation Committee believes will complement the operational unit metrics in the annual incentive plan while focusing our executive officers on long-term shareholder return.

 

 

Reduced 2014 target total direct compensation for current named executive officers by approximately 15% from annualized 2013 target levels, which had been reduced from 2012 levels.

 

 

Proposed the 2014 Long Term Incentive Plan that provides for “double trigger” equity acceleration upon a change of control.

At the 2014 annual meeting, we will again hold an advisory vote on named executive officer compensation (see “Voting Item 6: Shareholder Advisory Vote to Approve Named Executive Officer Compensation” on page 55), in accordance with the shareholders’ advisory vote in 2011 in favor of annual advisory votes on executive compensation. The Compensation Committee will consider the results from this year’s and future advisory votes on executive compensation.

 

 

Compensation Program Attributes

Our executive compensation program has the following attributes:

 

Compensation Program Attributes    Description
 

Compensation philosophy

   Formal compensation philosophy emphasizes pay for performance and targets peer median compensation levels

Representative peer group

   The Compensation Committee worked with its independent compensation consultant to develop an appropriately-sized peer group that satisfies other important peer group criteria, such as comparable size and relevance to the Company’s industry

Objective annual incentive program with pre-determined performance measures

   Annual incentive compensation based on achievement of pre-determined objective operational (including key safety goals) and financial performance goals

Objective long-term performance measures

   50% of long-term compensation is subject to achievement of objective pre-determined performance goals tied to the creation of long-term shareholder value

Incentive plans intended to qualify for Section 162(m) tax deductibility

   Annual Incentive Plan, stock option and PSU awards are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code

Minimal perquisites

   Named executive officers receive minimal, competitively-benchmarked perquisites

No cash payments on death and disability

   New employment agreements with our named executive officers eliminated lump sum payments of 52 weeks of base salary in the event of death and 26 weeks of base salary in the event of disability

Double trigger upon change of control

   New employment agreements with our named executive officers eliminated “single-trigger” change of control cash payments and proposed 2014 Long Term Incentive Plan that provides for “double-trigger” equity acceleration upon change of control

No tax gross-ups for executive officers

   No tax gross-ups for executive officers

Minimum stock ownership guidelines

   Enhanced minimum stock ownership guidelines for all named executive officers

Margining and speculative transactions prohibited

   Full prohibition on margining, derivative or speculative transactions, such as hedges, pledges and margin accounts, by executive officers

Clawback policy

   Compensation recovery policy recaptures unearned incentive payments in the event of material noncompliance with any financial reporting requirement under the law that leads to an accounting restatement
 

 

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Executive Compensation Program

 

Philosophy and Objectives of our Executive Compensation Program

 

To guide compensation decisions, the Compensation Committee adopted a formal compensation philosophy in 2012. The philosophy reflects the Compensation Committee’s intent to generally set all elements of target compensation (e.g., base salary, target annual incentive award opportunity and target long-term incentive award opportunity) at the median of similarly situated executives among the Company’s peer group or other relevant industry benchmarks. The competitive positioning of target compensation levels for individuals may vary above or below the median based on executive-specific factors such as tenure, experience, proficiency in role or criticality to the organization. The Compensation Committee’s objective is to have a program that:

 

 

Attracts and retains high performing executives;

 

 

Pays for performance and thus has a meaningful portion of pay tied to business performance;

 

 

Aligns compensation with shareholder interests while rewarding long-term value creation;

 

 

Discourages excessive risk by rewarding both short-term and long-term performance;

 

 

Reinforces high ethical conduct, environmental awareness and safety; and

 

 

Maintains flexibility to better respond to the dynamic and cyclical energy industry.

Unlike target compensation levels, which are set by the Compensation Committee near the beginning of the year, actual compensation is a function of the Company’s operational, financial and stock price performance, as reflected through annual incentive payouts, performance share payouts and the value of all other long-term incentive awards at vesting. Actual compensation is intended to vary above or below target levels commensurate with Company performance.

 

 

Elements of our Executive Compensation Program

The purpose and key characteristics of each element of our 2013 executive compensation program are summarized below:

 

Element   Purpose   Key Characteristics
 

Base salary

 

Reflects each executive officer’s level of responsibility, leadership, tenure, qualifications and contribution to the success and profitability of the Company and the competitive marketplace for executive talent specific to our industry

 

  Fixed compensation that is reviewed annually and adjusted if and when appropriate

 

Annual incentive award

 

 

Motivates executive officers to achieve our short-term business objectives that drive long-term performance while providing flexibility to respond to opportunities and changing market conditions

 

 

 

Variable performance-based annual cash award based on corporate performance compared to pre-established performance goals

 

Individual performance bonus

 

 

Reflects extraordinary performance of specified executive officers in instances where performance is based on select individual criteria or is well in excess of what is expected of the executive

 

 

Cash payment that is awarded in rare circumstances where performance warrants an additional bonus in excess of the annual incentive award; three named executives received individual performance bonuses for 2013

 

 

PSU award

 

 

Motivates executive officers to achieve our long-term business objectives by tying incentives to our financial and key operational metrics over the performance period while continuing to reinforce the link between the interests of our executive officers and our shareholders

 

 

 

Variable performance-based long-term award; the ultimate number of units earned is based on the achievement of relative total shareholder return and production and proved reserve growth performance goals

 

Restricted stock award

 

 

Motivates executive officers to achieve our business objectives by tying incentives to the performance of our common stock over the long term; reinforces the link between the interests of our executive officers and our shareholders; motivates our executive officers to remain with the Company by mitigating swings in incentive values during periods of high commodity price volatility

 

 

 

Long-term restricted stock (or restricted stock unit beginning in July 2013) award with a ratable vesting period over three years; the ultimate value realized varies with our common stock price

 

Stock option award

 

 

Motivates executive officers to achieve our business objectives by tying incentives to the appreciation of our common stock over the long term; reinforces the link between the interests of our executive officers and our shareholders

 

 

 

Long-term option award with an exercise price equal to the fair market value on the date of grant and a ratable vesting period over three years; the ultimate value realized, if any, depends on the appreciation of our common stock price

 

 

Other compensation

 

 

Provides benefits that promote employee health and work-life balance, which assists in attracting and retaining our executive officers

 

 

 

Indirect compensation element consisting of health and welfare plans and minimal perquisites

 

EXECUTIVE COMPENSATION     23


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2013 Named Executive Officer Compensation

 

2013 Process for Determining Executive Compensation

Role of the Compensation Committee

 

The Committee has overall responsibility for approving and evaluating the director and executive officer compensation plans, policies and programs of the Company. In determining compensation, the Compensation Committee makes an overall assessment of the performance of the named executive officer team and the role and relative contribution of each of its members on an annual basis. In 2013, the Compensation Committee’s approach consisted of both subjective consideration of each

named executive officer’s performance and overall role in the organization and objective consideration of the Company’s performance relative to predetermined metrics as more fully described beginning on page 26 under “—2013 Named Executive Officer Compensation Elements”. In its assessment of the performance of each named executive officer in 2013, the Compensation Committee considered the following:

 

 

Individual Performance    Company Performance    Intangibles
 

   Named executive officer’s contributions to the development and execution of the Company’s business plans and strategies

   Performance of the named executive officer’s department or functional unit

   Level of responsibility

   Tenure with the Company

  

    Financial and operational performance of the Company, including progress made with respect to predetermined metrics more fully described below

  

   Leadership ability

   Demonstrated commitment to the Company

   Motivational skills

   Attitude

   Work ethic

 

Role of the Compensation Consultant

 

Pursuant to its charter, the Compensation Committee may retain a compensation consultant, and shall be directly responsible for the appointment, compensation and oversight of the work of any compensation consultant that it retains. The Compensation Committee has retained F.W. Cook as its independent compensation consultant to provide an objective analysis of, and counsel on, the Company’s executive compensation program. In addition, Pay Governance LLC provided consulting services to management in 2013 related to the Company’s executive compensation programs, policies and processes.

In 2013, F.W. Cook attended all Compensation Committee meetings. F.W. Cook provided the Committee with market analyses and advised the Committee on market trends and regulatory and governance developments and how they may impact our executive compensation programs. They also advised the Committee with regard to the design and structure of our executive compensation programs to ensure appropriate linkage between pay and performance, setting the pay for our CEO, and compensation for other executive officers in consultation with the CEO. From time to time Pay Governance may provide information and recommendations to the Committee with respect to executive compensation. F.W. Cook typically

participates in these meetings and performs an independent, objective analysis of market and other data provided by Pay Governance and generally counsels the Committee as to the advice obtained from Pay Governance.

The Compensation Committee evaluated whether conflicts of interest were created by the retention of any of the advisors providing compensation consulting services in 2013 and evaluated their independence pursuant to the standards set forth in the New York Stock Exchange Listed Company Manual. As a result of this assessment, the Compensation Committee concluded that (i) no conflicts of interest exist with respect to F.W. Cook or Pay Governance; and (ii) Pay Governance is not independent from management given the reporting relationship with management, the responsibility of management for the oversight of Pay Governance’s work product and the services provided. The Compensation Committee concluded that any potential conflict posed by the Compensation Committee’s receipt of information and advice from Pay Governance was sufficiently mitigated by the direct involvement of its independent compensation consultant, F.W. Cook, and the Compensation Committee’s own examination and assessment of the objectivity of Pay Governance’s advice.

 

 

Benchmarking

 

The Compensation Committee uses benchmarking to compare the competitiveness of the named executive officers’ total direct compensation, consisting of base salary, annual incentive compensation and the value of long-term incentive awards, relative to our compensation peer group companies. For 2013, our compensation peer group consisted of eleven exploration and production peer companies (expanded from 5 companies in 2012) which are similar to the Company in size, scope and nature of business operations, and with whom we compete for talent, including:

 

  Anadarko Petroleum Corporation

 

  Marathon Oil Corporation

   Apache Corporation

 

   Murphy Oil Corporation

   Continental Resources, Inc.

 

   Noble Energy, Inc.

   Devon Energy Corporation

 

   Occidental Petroleum Corporation

  EOG Resources, Inc.

 

   SandRidge Energy, Inc.

  Hess Corporation

   

Our compensation peer group contains companies in our industry that are both larger and smaller in size and scope. With the exception of Hess and Murphy Oil, all of the peer companies are independent exploration and production companies. We considered companies that compete in our industry, but are significantly larger than we are, and companies that compete in unrelated industries within the energy sector such as the mining or coal industries but did not include such companies in our compensation peer group. We compete with the companies in our compensation peer group for talent, and the Compensation Committee believes the selected companies were the most appropriate for use in benchmarking 2013 executive compensation. The differences and similarities between us and the companies in our industry peer group are taken into consideration when referencing benchmarks for named executive officer compensation decisions.

The benchmarking analysis indicated that target total direct compensation for our former CEO was between the median and seventy-fifth percentile and each of the other named executive officers was above the seventy-

 

 

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fifth percentile of benchmark data as compared to our peers. These results informed the Compensation Committee’s decisions with respect to setting 2013 executive compensation, including establishing the targets for the 2013 annual incentive plan award and PSU component of the Company’s long-term incentive program for named executive officers. As discussed above under “—Executive Compensation Program—Philosophy and Objectives of Our Executive Compensation Program”, the Compensation Committee intends to generally set all elements of target compensation at the median of similarly situated executives among the Company’s compensation peer group and may also consider other

relevant industry benchmarks in making compensation decisions. The results of the benchmarking suggested higher competitive positioning of target long-term incentive grants. This data point became one factor in the Compensation Committee’s determination to reduce the long-term incentive by 10% in 2013 as detailed below under “—2013 Named Executive Officer Compensation Elements—Long-Term Incentive Compensation”. It was also a factor in continuing reductions in target long-term incentive compensation for 2014 as detailed below under “—Actions Related to 2014 Executive Compensation”.

 

 

Chief Executive Officer and Management Role in Executive Compensation Process

 

The Company’s CEO has an active role in executive compensation, and typically makes recommendations to and participates in discussions with the Compensation Committee in order to provide information regarding the compensation of the other named executive officers. Following such recommendations, the Committee discusses the compensation of each named executive officer and approves the final named executive officer compensation amounts, subject to such modifications as it deems appropriate. The Committee discusses the compensation of the CEO in executive session with its independent compensation consultant and approves his final compensation amounts. Following such approvals, the Compensation Committee provides a report of its executive compensation decisions to the full Board of Directors for discussion and

ratification. The CEO, not being a member of the Compensation Committee, does not vote at Compensation Committee meetings, and he does not participate in the Board’s vote on the acceptance and approval of the Compensation Committee’s recommendations or reports with respect to his compensation.

In addition to the participation of our CEO, other members of senior management typically provide the CEO and Compensation Committee and its advisors with detailed analyses and recommendations regarding each element of named executive officer compensation to facilitate the Compensation Committee’s annual review of named executive officer compensation.

 

 

2013 Corporate Performance Highlights

 

Chesapeake performed well in 2013. The Company ended 2013 as the second-largest producer of natural gas and the 11th largest producer of oil and natural gas liquids in the U.S. The Company delivered TSR of 66%, outperforming our compensation peer group. The TSR performance is a result of a sharp focus on executing our business strategy of financial discipline and profitable and efficient growth from captured resources, which led to strong operating and financial results. The Company once again delivered excellent year-over-year production growth of 11%, as adjusted for asset sales and purchases, and continued to grow liquids production to 25% of total production, all while employing half the capital than in 2012. The Company also focused on its costs in 2013, reducing

per unit production and G&A expenses by 15%. These efficiency gains allowed the Company to deliver strong year-over-year adjusted EBITDA growth of 34%. Lastly, the Company executed its strategic 2013 asset sales program, selling $4.4 billion in noncore assets. To focus management on executing our 2013 strategic plan, these and other important metrics were used as performance goals under our 2013 annual incentive program. See “—2013 Named Executive Officer Compensation Elements—Performance-Based Annual Incentives—2013 Annual Incentive Program” below on page 26 for more information with regard to the metrics used in our 2013 annual incentive program.

 

 

LOGO

 

EXECUTIVE COMPENSATION     25


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2013 Named Executive Officer Compensation Elements

 

In December 2011, the Compensation Committee adopted substantial changes to executive compensation which were reflected in our 2012 executive compensation program. For 2013, after considering the analyses and recommendations of F.W. Cook, the Company’s performance in 2012 and the competitive market, the Compensation Committee set base salaries, incentive compensation opportunities and performance measures for 2013.

As shown below, our 2013 program continued to utilize base salary, cash awards under our annual incentive plan, restricted stock awards and PSUs under our 2005 LTIP. However, in 2013 we began granting stock options to our named executive officers as part of their long-term incentive compensation. In addition, in June 2013 we began granting restricted stock units in lieu of shares of restricted stock.

 

 

LOGO

Base Salary

 

Base salaries reflect each named executive officer’s level of responsibility, leadership, tenure and contribution to the success and profitability of the Company and the competitive marketplace for executive talent specific to our industry. In early 2013, the Compensation Committee maintained base salaries for the then-serving named executive officers at 2012 levels, except for Mr. Dixon, whose compensation was increased in connection with his appointment as Acting CEO effective April 1, 2013. For Messrs. Lawler, Doyle and Pigott, who were hired during 2013, the

Compensation Committee considered compensation levels for chief executive officers of peer group companies with respect to Mr. Lawler, and peer group executives with similar titles with respect to Messrs. Doyle and Pigott, in determining their base salaries. See “—2013 Named Executive Officer Compensation Decisions—2013 CEO Compensation” and “—2013 Named Executive Officer Compensation Decisions—2013 Other Current Named Executive Officer Compensation” below for more information.

 

 

Performance-Based Annual Incentives

 

2013 Annual Incentive Program. The annual incentive component of our executive compensation program is intended to motivate and reward named executive officers for achieving our short-term business objectives that we believe drive the overall performance of the Company over the long term. In January 2013, the Compensation Committee and the Board approved the Chesapeake Energy Corporation 2013 Annual Incentive Plan, a cash-based incentive plan utilizing pre-established performance goals. The plan was subject to shareholder approval at our 2013 annual meeting of shareholders and was overwhelmingly approved. For 2013, the Compensation Committee focused heavily on implementing an annual incentive program with a formulaic approach to awarding annual

incentives based on an evaluation of the Company’s performance relative to eleven pre-established, objective operational and financial goals detailed below under “—Performance Goals and Calculation of Payout Factor”. The Committee felt that the number of goals was appropriate for 2013 as the Board’s objective was to ensure that management was focused on certain specific goals that were important to the Company in 2013, such as growth in production and proved reserves, asset sales, leasehold cost control and overhead reduction, while continuing to motivate management to focus on broader financial and operational metrics.

 

 

Calculating Annual Incentive Awards. The following formula was used to calculate the maximum payment that could be awarded to a named executive officer under the 2013 annual incentive program:

Base Salary            X             Target Percentage of Base Salary            X            Payout Factor (0 -  200%)

 

The Compensation Committee used the base salary in effect on the last day of 2013 in calculating the annual incentive payments. The Compensation Committee established the target percentage of base salary payable under the annual incentive program at 150% for the CEO, 125% for EVPs and 100% for SVPs (other than Messrs. Doyle and Pigott whose targets were set at 80%) to provide an annual incentive opportunity that is competitive with our peers. Following

the end of 2013, the Compensation Committee determined the payout factor based on the Company’s achievement of pre-established threshold, target and maximum performance levels and the corresponding payout opportunities of 50%, 100% and 200% of the target percentage of base salary (using linear interpolation for performance levels falling between threshold and target and between target and maximum) with no payment for performance not achieving

 

 

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the minimum 50% threshold performance level, as discussed below. The following chart shows the range of annual incentive award opportunities expressed as a percentage of salary for the named

executive officers by title, based on the target percentage of base salary multiplied by the above-listed threshold, target and maximum payout opportunities.

 

 

Executive Level    Threshold      Target      Maximum  
   
CEO      75%         150%         300%   
EVP      62.5%         125%         250%   
SVP (other than Doyle and Pigott)      50%         100%         200%   
SVP (Doyle and Pigott)      40%         80%         160%   

 

Final annual incentive program payouts for Messrs. Lawler, Doyle and Pigott were prorated in accordance with their employment agreements for the number of days that they were employed by the Company in 2013; provided, however, the annual incentive program payout for Messrs. Lawler, Doyle and Pigott were required to be at least $800,000, $400,000 and $200,000, respectively, to account for forfeited bonus amounts from their prior employer. See “—2013 Named Executive Officer Compensation Decisions—2013 CEO Compensation” and “—2013 Named Executive Officer Compensation Decisions—2013 Other Current Named Executive Officer Compensation” below for more information. Mr. McClendon did not receive an annual incentive award in 2013. Pursuant to the terms of the Annual Incentive Plan, the other named executive officers who separated from the Company in 2013 forfeited their annual incentive awards and therefore received no payouts under the 2013 annual incentive program.

 

Performance Goals and Calculation of Payout Factor. For the 2013 annual incentive program, the Compensation Committee established the performance goals detailed in the table below, which it believed appropriately reflected factors that would positively impact shareholder value during 2013. The targets were drawn from the Company’s forecast, which is developed in consultation with the Board. The performance assumptions that underlie the forecast are the subject of considerable discussion during this process. Certain 2013 performance goal targets were lower than actual 2012 performance given that the Company cut its annual capital expenditure budget in half for 2013. The table below also details the Company’s level of achievement with respect to each performance goal and the final payout factor to be applied to each named executive officer’s target annual incentive award opportunity calculated using linear interpolation as described above.

 

 

A   B     C     D     E = D/C     F (a function of E)     G = F x B  
   
Goal   Weighting     Performance
Target
   

Actual

Performance

    Achievement
Level
    Individual
Payout Factor
    Weighted
Payout Factor
 
   
Financial            
Adjusted EBITDA     7.5   $   4.536 billion      $ 5.016 billion        111     200     15.0
Long-term debt reduction     7.5   $ 9.5 billion      $   12.049 billion        79     0     0
Adjusted net income     7.5   $ 681 million      $ 896 million        132     200     15.0
Drilling and completion costs     7.5   $ 6.0 billion      $ 5.466 billion        110     200     15.0
Leasehold costs     7.5   $ 400 million      $ 205 million        195     200     15.0
Non-employee overhead reduction     7.5   $ 60 million      $ 156 million        260     200     15.0
Operational            
Production (bcfe)     15.0     1,426 bcfe        1,513 bcfe (a)      106     200     30.0

Proved reserves

organically added (tcfe)

    15.0     3.0 tcfe        3.14 tcfe (b)      105     158     23.7
Asset sales     15.0   $ 5.0 billion      $ 4.397 billion        88     70     10.5
Operational – Safety            

Improvement in Total

Recordable Incident

Rate (expressed as a reduction)

    5.0     10     23     230     200     10.0

Improvement in Lost

Time Incident Rate

(expressed as a reduction)

    5.0     10     24     240     200     10.0
   
TOTAL WEIGHTED PAYOUT FACTOR:                                             159.2

 

  (a)

The production target is measured against full-year Company performance and adjusted for production gains/losses associated with asset sales and purchases.

 

  (b)

The proved reserves growth target is an organic growth goal and represents extensions, discoveries and other additions of proved reserves for the year ended December 31, 2013.

Please see Exhibit E for an explanation of the non-GAAP financial measures used in the table above.

 

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Summary of Targets and Payments for 2013. The annual incentive analysis under the 2013 annual incentive program yielded above-target payouts for all executives given the Company’s strong performance in 2013. The following table shows how the formula was applied and the actual amounts awarded under the 2013 annual incentive program.

 

Name   

Base

Salary(a)

     Target
Annual
Incentive(b)
    Target Value
of Annual
Incentive
    

Potential Payments at

Grant Date

     Payout
Factor
   

2013

Actual

Award

 
   
Robert D. (“Doug”) Lawler(c)    $   1,250,000         150   $ 1,017,123       $   800,000 – 2,034,246         159.2   $   1,619,260   
Domenic J. (“Nick”) Dell’Osso, Jr.      725,000         125        906,250         0 – 1,812,500         159.2        1,442,750   
Douglas J. Jacobson      800,000         125        1,000,000         0 – 2,000,000         159.2        1,592,000   
M. Christopher Doyle(c)      550,000         80        400,000         400,000         159.2        400,000   
Mikell J. (“Jason”) Pigott(c)      500,000         80        200,000         200,000 – 306,849         159.2        244,252   
   
(a)   

As of December 31, 2013.

(b)   

Reflected as a percentage of base salary.

(c)   

Amounts prorated based on 2013 start dates pursuant to the named executive officers’ employment agreements. 2013 annual incentive program payouts for Messrs. Lawler, Doyle and Pigott were required to be at least $800,000, $400,000 and $200,000, respectively, in accordance with their respective employment agreements to account for forfeited bonus amounts from their prior employment.

The Compensation Committee has continued to refine the annual incentive program applicable to our named executive officers for 2014 as discussed in more detail under “—Actions Related to 2014 Executive Compensation” on page 36 below.

Individual Performance Bonus. The Compensation Committee may, in its judgment, award cash bonuses to executive officers in instances where performance is based on select individual criteria or is well in excess of what is expected of the officer, and warrants an additional bonus in excess of the annual incentive award payable under the Annual Incentive Plan. These awards are typically limited in amount and only granted in extraordinary circumstances. In 2013, in recognition of their contributions to the Company’s financial and operational performance, Messrs. Jacobson, Doyle and Pigott each received individual performance bonus awards. The bonus awards are described in detail in “—2013 Named Executive Officer Compensation Decisions—2013 Other Current Named Executive Officer Compensation” below.

Long-Term Incentive Compensation

 

Long-term incentive compensation aligns the interests of the named executive officers with our shareholders. Total target compensation is weighted heavily toward long-term incentive compensation, consistent with our goal of shareholder value creation. In 2012, the Compensation Committee and the Board approved significant modifications to our long-term incentive compensation program, incorporating PSU awards under the 2005 LTIP into the mix of long-term incentive compensation. For 2013, the Compensation Committee determined to grant long-term incentive awards, half of which consisted of PSUs and, except in the case of Mr. Lawler, half of which was equally divided between restricted stock (or restricted stock units) and stock options. This approach is intended to motivate our named executive officers to achieve our business objectives by tying incentives to the achievement of our key financial and operational performance objectives and continuing to reinforce the link between the interests of our named executive officers and our shareholders.

For named executive officers serving in January 2013, the Compensation Committee reduced the target 2013 long-term incentive opportunity by an average of over 10% compared to the 2012 long-term incentive opportunity, based on the results of the compensation peer group benchmark analysis conducted by F.W. Cook in late 2012. See “—2013 Process for Determining Executive Compensation—Benchmarking” above. Pursuant to the terms of their agreements, the named executive officers who separated in 2013 were eligible for pro rata and/or continued vesting of these awards. See “Post-Employment Compensation—Named Executive Officer Separations” on page 50 for more information. Mr. Lawler’s target annual long-term incentive compensation was more than 20% lower than Mr. McClendon’s target annual long-term incentive compensation and consisted of half PSUs and half stock options. See “—2013 Named Executive Officer Compensation Decisions—2013 CEO Compensation” below for a discussion of Mr. Lawler’s employment agreement and 2013 compensation.

2013 Restricted Stock (or Restricted Stock Units) and Stock Option Awards. Long-term incentive awards for named executive officers in 2013, other than Mr. Lawler, consisted of approximately 25% restricted stock or restricted stock units (the value of which was based on the closing price of the Company’s common stock on the grant date) and approximately 25% stock options (the value of which was determined using Black-Scholes option pricing on the grant date), each of which vest over a three-year period, which was reduced from four years based on a competitive analysis performed by F.W. Cook and to align with vesting periods of PSUs. Since 2004, the Company has provided long-term incentive compensation in the form of restricted stock granted under the 2005 LTIP. The Compensation Committee continues to believe that restricted stock grants to named executive officers play an important role in accomplishing the objectives of the executive compensation program, in particular, retention and alignment with shareholder interest. In June 2013, the Compensation Committee approved the granting of restricted stock units in lieu of shares of restricted stock, which consist of units representing the right to acquire shares of common stock on the vesting date. Holders of unvested restricted stock have full voting rights with regard to such stock and holders of unvested restricted stock and restricted stock units are entitled to receive dividends and dividend equivalents, respectively, on such stock and units. For 2013, the Compensation Committee added time-vested stock options as an element of long-term incentive compensation to further tie compensation to Company performance, given that stock options only have value if the Company’s stock price increases after the date of grant. The exercise price of the stock options is equal to the closing price of the Company’s common stock on the grant date.

2013 PSU Awards. Long-term incentive awards for named executive officers in 2013 consisted of approximately 50% cash-settled PSUs (the value of which was determined in part based on the closing price of the

 

 

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Company’s common stock and in part by a Monte Carlo simulation, each on the grant date). The target PSUs vest ratably over the three-year period beginning on January 29, 2013; however, the final number and value of the PSUs paid to a named executive officer depend on the Company’s performance relative to objective performance goals during the three-year performance period ending on December 31, 2015. The Compensation

Committee established the performance goals in early 2013 based on performance measures enumerated in the 2005 LTIP and, if met, each PSU awarded entitles a named executive officer to a cash payment based on the price per share of the Company’s common stock. No dividend equivalents are paid on PSUs.

 

 

2013 Named Executive Officer PSU Grants. For 2013, the Compensation Committee granted three-year performance period PSUs in the following amounts:

 

Name    Total Target
PSUs
     Grant Date Fair
Value of Award(a)
 
   
Robert D. (“Doug”) Lawler      210,337       $ 5,250,012   
Domenic J. (“Nick”) Dell’Osso      138,290         2,875,049   
Douglas J. Jacobson      126,265         2,625,049   
M. Christopher Doyle      24,073         850,018   
Mikell J. (“Jason”) Pigott      24,073         850,018   
Aubrey K. McClendon(b)(c)      324,680         6,750,097   
Steven C. Dixon(c)      162,340         3,375,049   
Jeffrey A. Fisher(c)      78,165         1,625,050   
   
  (a)

Grant date value of PSU awards determined pursuant to FASB ASC Topic 718. The assumptions used by the Company in calculating these amounts are provided in footnote (b) to the “Summary Compensation Table” on page 38. Such amounts represent approximately half of each named executive officer’s long-term incentive award.

 

  (b)

On January 29, 2013, the Company announced that Mr. McClendon would step down as President, CEO and a director of the Company effective April 1, 2013. The Committee granted Mr. McClendon long-term incentive awards in an effort to promote an orderly CEO transition and also maintain Mr. McClendon’s alignment with the Company’s interests.

 

  (c)

Messrs. McClendon, Dixon and Fisher separated from the Company in 2013. PSU grants made to Messrs. Dixon and Fisher in 2013 were subject to pro rata accelerated vesting at target performance. Mr. McClendon’s 2013 PSUs were subject to continued vesting pursuant to his separation agreement. Because he had met the age- and service-related retirement qualifications, Mr. Dixon’s 2013 PSUs that remained unvested after prorated vesting were subject to continued vesting. All PSU awards will be subject to adjustment based upon actual performance at the end of the performance period. For more information on the treatment of 2013 awards made to Messrs. McClendon, Dixon and Fisher, see “Post-Employment Compensation—Named Executive Officer Separations” on page 50.

 

2013 PSU Performance Goals. The final number of PSUs awarded to named executive officers is determined at the end of the three-year performance period based on the Company’s performance against objective performance goals. The 2013 PSU performance goals consist of relative TSR, relative proved reserves growth and relative production growth goals measured over the three-year performance period as shown in the table below. The Committee chose all relative performance metrics for 2013 PSUs in order to motivate named executive officers to drive differential performance for the Company’s shareholders. The performance goals correlate to the

Company’s performance over the applicable performance period with modifiers expressed as a percentage, resulting in a combined range of 0 to 250% (subject to the maximum modifier described below). The Company’s performance respecting these goals will be measured against the Company’s 2013 compensation peer group consisting of Anadarko Petroleum Corporation, Apache Corporation, Continental Resources, Inc., Devon Energy Corporation, EOG Resources, Inc., Hess Corporation, Marathon Oil Corporation, Murphy Oil Corporation, Noble Energy, Inc., Occidental Petroleum Corporation and SandRidge Energy, Inc.

 

 

3-Year Modifiers    <25th     25th     50th     75th     100th  
           
Relative TSR over 3 Years      0.0     25.0     50.0     75.0     125.0
Relative Proved Reserves Growth over 3 Years      0.0     12.5     25.0     37.5     62.5
Relative Production Growth over 3 Years      0.0     12.5     25.0     37.5     62.5
   

 

The final PSU modifier, which is the sum of relative total shareholder return, relative proved reserves growth and relative production growth modifiers described above, is subject to a 200% maximum that caps the award even if the aggregate modifier would be greater than 200%, a reduction of the maximum modifier of 250% used for 2012 awards. In

addition, 2013 PSUs are subject to an absolute total shareholder return “circuit breaker” that caps payouts at 100% when absolute total shareholder return is negative over the performance period. The circuit breaker does not apply if the Company’s performance results in an aggregate modifier of less than 100%.

 

 

 

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2013 PSU Payouts. The ultimate cash payout earned by a named executive officer will be determined by multiplying the number of units, as modified above, by the average closing price per share of our common stock as reported on the New York Stock Exchange for the 20 trading

days including and immediately preceding the last day of the three-year performance period. Cash awards under the PSU program are calculated as of the end of the performance period and delivered as follows:

 

 

FINAL NUMBER OF PSUs EARNED

      

FINAL VALUE OF PSUs

 

LOGO

 

We believe the 2013 PSU awards granted by the Compensation Committee appropriately reflect our compensation philosophy by establishing a clear connection between the compensation of our named executive officers and the achievement of performance goals that are important for long-term value creation. The Compensation Committee determined that incorporating relative TSR performance measures with an absolute TSR circuit breaker correctly balanced accountability to shareholders for absolute TSR with the need for compensation incentives that reward named executive officers for outstanding

achievement relative to our peers even when low commodity prices weigh on our stock price. Similarly, the Compensation Committee determined that, for the 2013 PSU awards, the operational performance goals balanced two of the most important factors that drive long-term value creation for our shareholders, production growth and proved reserves growth.

All 2013 PSU awards are intended to comply with Section 162(m) of the Internal Revenue Code, or the Code.

 

 

2012 Two-Year PSU Results. In 2012, the Compensation Committee granted a transitional award of one-, two- and three-year performance period PSUs to then-serving named executive officers in the following amounts:

 

Name    Total Target
PSUs
     Target 1-Year
PSUs
     Target 2-Year
PSUs
     Target 3-Year
PSUs
 
   
Domenic J. (“Nick”) Dell’Osso      105,935         13,242         23,173         69,520   
Douglas J. Jacobson      122,885         15,361         26,881         80,643   
Aubrey K. McClendon      296,615         37,077         64,885         194,653   
Steven C. Dixon      156,780         19,598         34,296         102,886   
Jeffrey A. Fisher      65,681         8,210         14,368         43,103   
   

In January 2014, the Compensation Committee certified the Company’s performance with respect to the 2012 two-year PSU awards, which had a two-year performance period that ended December 31, 2013. The Compensation Committee determined the final number of two-year PSUs awarded to named executive officers based on the TSR and Operational Modifier matrices below, which correlate to the Company’s performance over the two-year performance period.

 

LOGO

 

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The following table lists the actual number of PSUs earned by, and corresponding payment to, the named executive officers who received 2012 two-year PSU awards:

 

   Name    Target Two-Year
PSUs
    

Final

Modifier(a)

     Final Two-Year
PSU Award
     Two-Year PSU
Cash  Payment(b)
 
   

Domenic J. (“Nick”) Dell’Osso, Jr.

     23,173         143.9%         33,346       $ 899,557    

Douglas J. Jacobson

     26,881         143.9         38,682         1,043,498    

Aubrey K. McClendon

     64,885         143.9         93,370         2,518,783    

Steven C. Dixon

     34,296         143.9         49,352         1,331,343    

Jeffrey A. Fisher

     14,368         143.9         20,676         557,754    
   
  (a)

The final modifier applicable to the two-year PSUs equals the sum of the two-year TSR modifier and the two-year operational modifier, which were 68.9% and 75%, respectively.

 

  (b)

Based on the 20-day average closing price of the Company’s common stock ending on December 31, 2013, or $26.98 per share.

 

Results for the one-year performance period PSUs granted in 2012 were measured at the end of 2012 and certified and paid in 2013. Results for the three-year performance period PSUs granted in 2012 will be measured at the end of 2014 and certified and paid in early 2015. All 2012 PSU awards are intended to comply with Section 162(m) of the Code.

Retention Awards. On January 29, 2013, the Compensation Committee approved retention awards in the form of time-vested stock options for Messrs. Dixon, Dell’Osso and Fisher of 360,000, 300,000 and 250,000 stock options, respectively. This grant was intended to promote stability and continuity during the Company’s search for a new CEO and period of transition. These stock option awards have an exercise price equal to the closing price of the Company’s common stock on the grant date and vest one-third on each of the third, fourth and fifth anniversaries of the grant date. The retention options are subject to accelerated vesting upon disability, death or if the executive is terminated (other than for cause) during the vesting period or voluntarily resigns for good reason; however, the options will be forfeited if the executive voluntarily terminates employment, other than for good reason, including by means of retirement or resignation. Messrs. Dixon and Fisher were eligible for accelerated vesting of these awards upon their separation in 2013 due to involuntary termination of employment without cause. See “Post-Employment Compensation—Named Executive Officer Separations” on page 50 for more information.

Other Compensation Arrangements

We also provide compensation in the form of benefits and perquisites to the named executive officers, including health and welfare insurance benefits, matching contributions of common stock under the Company’s 401(k) plan and nonqualified deferred compensation plan (up to 15% of an employee’s annual base salary and cash bonus compensation) and financial planning services. The named executive officers also receive

benefits for which there is no incremental cost to the Company, such as tickets to certain sporting and cultural events. The foregoing benefits and perquisites are provided to all employees or large groups of senior-level employees. From time to time, a named executive officer’s spouse will accompany the named executive officer on business trips using the fractionally-owned Company aircraft. See “Executive Compensation Tables—All Other Compensation Table” below for more information.

The Company’s executive security procedures, which prescribe the level of personal security to be provided to the CEO and other executive officers, are based on business-related security concerns and are an integral part of the Company’s overall risk management and security program. These procedures have been assessed by an independent security consulting firm and deemed necessary and appropriate for the protection of the named executive officers. The security services and equipment provided to the Company’s executive officers may be viewed as conveying personal benefits to the executives and, as a result, the value of such services and equipment is required to be reported in the “Executive Compensation Tables—Summary Compensation Table” below. In 2013, only Messrs. Lawler and McClendon received such services.

As part of its review of executive compensation in 2012, the Compensation Committee undertook a comprehensive review of executive officer perquisites in order to ensure that the Company’s practices were in line with its peers. The review resulted in the elimination of the personal use of fractionally owned Company aircraft by all executive officers, other than Mr. McClendon, effective September 30, 2012. In addition, we provided certain perquisites, subject to certain reimbursements, exclusively to Mr. McClendon for the portion of time that he served as our CEO in 2013 that are detailed below under “Executive Compensation Tables—All Other Compensation Table”. The Company includes the above benefits and perquisites as taxable income to the executive on Form W-2 after each fiscal year, in accordance with Internal Revenue Service, or IRS, guidelines. The Company does not provide tax gross-up payments for these amounts.

 

 

2013 Named Executive Officer Compensation Decisions

 

The Compensation Committee takes a comprehensive approach in determining the mix and level of named executive officer compensation by making an overall assessment of the performance of the named executive officer team and the role and relative contribution of each member of that team. Each named executive officer’s target 2013 compensation was based on a comprehensive review of his individual performance as described below and, in the case of Messrs. Lawler, Doyle and Pigott who joined the Company in 2013, based on benchmarking data and negotiations related to securing their employment

with the Company. In addition, each named executive officer serving as such on January 1, 2013, except for Mr. McClendon, entered into a new employment agreement with the Company, providing for base salary, cash bonus, equity compensation and certain other benefits. Mr. Lawler entered into an employment agreement effective June 17, 2013 and Messrs. Doyle and Pigott entered into employment agreements effective August 14, 2013. For more information on the employment agreements, see “Executive Compensation Tables—Employment Agreements” on page 41.

 

 

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2013 CEO Compensation

 

Robert D. (“Doug”) Lawler

Effective June 17, 2013, Robert D. Lawler became the Company’s President and CEO. During 2013, competition for chief executive officers was fierce in our industry given that several exploration and production companies had CEO vacancies and were competing for talent. The Board determined that Mr. Lawler, then an executive with a competitor company, was the prime candidate for our CEO position and began negotiations to secure his services. With the assistance of F.W. Cook, in negotiating the appropriate compensation for Mr. Lawler, the Compensation Committee considered the compensation arrangements of CEOs of our compensation peer group companies and the amount of equity compensation and pension benefits that Mr. Lawler would forfeit following his departure from his previous employer. Based on this analysis and as a result of these negotiations, the Compensation Committee approved total target annual compensation for Mr. Lawler that ranked slightly below the median of our compensation peer group according to benchmarking data provided by F.W. Cook, including an initial base salary of $1,250,000, a target annual incentive award of 150% (prorated for 2013 for the amount of time employed with the Company in 2013 but guaranteed to be at least $800,000 for 2013 to account for his forfeited bonus from his prior employer) and grants of long-term incentive compensation with an aggregate grant date value of $10,500,000, half in the form of PSUs and half in the form of stock options, with similar terms and conditions to awards made to other executive officers in 2013. In addition, in recognition of equity and pension benefits forfeited by Mr. Lawler upon his accepting a position with the Company, Mr. Lawler

received (i) a cash signing bonus of $2,000,000 immediately following his start date; (ii) a grant of restricted stock with an aggregate grant date fair value of $2,500,000 that vests on the second, third and fourth anniversaries of the date of grant; (iii) a grant of restricted stock with an aggregate grant date fair value of $5,000,000 that vests on the third, fourth and fifth anniversaries of the date of grant; and (iv) entitlement to an additional grant of restricted stock with an aggregate grant date fair value of $5,000,000, to be made on June 17, 2018, that would vest on the third, fourth and fifth anniversaries of the date of grant. The cash signing bonus was subject to repayment if Mr. Lawler was terminated for cause or he terminated without good reason prior to March 31, 2014. The right to future equity awards is subject to Mr. Lawler’s continued employment The Committee believed that the additional awards were essential to ensure that the Company attracted an outstanding talent to the Company while ensuring that much of Mr. Lawler’s compensation was retentive yet subject to forfeiture under appropriate circumstances.

The annual incentive payment of $1,619,260 made to Mr. Lawler for 2013 was based on the achievement of pre-established performance targets, prorated for the amount of time he was employed in 2013. The Board and Committee believe that Mr. Lawler performed exceptionally in executing the Company’s business strategy in 2013, and no adjustments were made to Mr. Lawler’s payouts for individual performance. For specific details regarding Mr. Lawler’s 2013 compensation, see “Executive Compensation Tables—Summary Compensation Table” on page 38 of this proxy statement.

 

 

2013 Other Current Named Executive Officer Compensation

 

Domenic J. (“Nick”) Dell’Osso

In setting Mr. Dell’Osso’s 2013 compensation, the Compensation Committee considered, among other things, Mr. Dell’Osso’s impact on the execution of the Company’s strategic and financial plan, the quality of the Company’s financial reporting and the negotiation and the execution of various asset sale and financing transactions by Mr. Dell’Osso’s team, all in light of the Company’s overall performance. Mr. Dell’Osso has continually demonstrated exemplary individual performance; however, due to the Company’s financial performance and the results of the Company’s benchmarking survey conducted in late 2012, his 2013 base salary and target annual incentive opportunity were maintained at 2012 levels of $725,000 and 125%, respectively, and his target long-term incentive compensation was $5,750,000, essentially flat with 2012 levels. As described above under “—2013 Named Executive Officer Compensation Elements—Long-Term Incentive Compensation—Retention Awards”, Mr. Dell’Osso received 300,000 retention stock options in an effort to promote stability and continuity during the Company’s search for a new CEO and period of transition.

For 2013, Mr. Dell’Osso received payments of $1,442,750 and $889,557, respectively, under the 2013 annual incentive and 2012 PSU programs. Payments made to Mr. Dell’Osso pursuant to the annual incentive and PSU programs in 2013 were based on the achievement of pre-established performance targets. In evaluating Mr. Dell’Osso’s 2013 individual performance, the Committee considered the aforementioned factors and also Mr. Dell’Osso’s essential role in the Company’s transformation in 2013, including serving as a member of the Office of the Chairman from April 1, 2013 to June 17, 2013. The Committee believes that Mr. Dell’Osso performed exceptionally in 2013, and no adjustments were made to Mr. Dell’Osso’s payouts for individual performance. For specific details regarding Mr. Dell’Osso’s 2013

compensation, see “Executive Compensation Tables—Summary Compensation Table” on page 38 of this proxy statement.

Douglas J. Jacobson

In setting Mr. Jacobson’s 2013 compensation, the Compensation Committee considered, among other things, his contributions to the execution of the Company’s asset sale program, and the resulting impact of the foregoing on the Company’s overall performance. Despite Mr. Jacobson’s exemplary performance, due to the Company’s financial performance and the results of the Company’s benchmarking survey conducted in late 2012, Mr. Jacobson’s 2013 base salary and target annual incentive opportunity were maintained at 2012 levels of $800,000 and 125%, respectively. Mr. Jacobson’s 2013 target long-term incentive compensation was decreased by approximately 15% from 2012 levels to $5,250,000 in order to further align Mr. Jacobson with benchmarking data. In lieu of a grant of retention stock options and given Mr. Jacobson’s focus on the Company’s asset sale program, the Compensation Committee awarded Mr. Jacobson a one-time individual performance bonus of $1.5 million upon the closing of, and in consideration of his efforts with regard to, the Company’s Mississippi Lime joint venture transaction with Sinopec International Petroleum Exploration and Production Corporation. The transaction was completed on June 28, 2013 and provided for the sale of a 50% undivided interest in approximately 850,000 net acres in northern Oklahoma for total consideration of $1.02 billion.

For 2013, Mr. Jacobson received payments of $1,592,000 and $1,043,498, respectively, under the 2013 annual incentive and 2012 PSU programs. Payments made to Mr. Jacobson pursuant to the annual incentive and PSU programs in 2013 were based on the achievement

 

 

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of pre-established performance targets. In evaluating Mr. Jacobson’s performance in 2013, the Committee considered Mr. Jacobson’s impact on the Company’s asset sale program. The Committee believes Mr. Jacobson performed exceptionally in executing on the asset sale program in 2013, and no adjustments were made to Mr. Jacobson’s payouts for individual performance. For specific details regarding Mr. Jacobson’s 2013 compensation, see “Executive Compensation Tables—Summary Compensation Table” on page 38 of this proxy statement.

M. Christopher Doyle

Mr. Doyle joined the Company from a competitor company on August 14, 2013. With the assistance of F.W. Cook and input from Mr. Lawler, in negotiating appropriate compensation for Mr. Doyle, the Compensation Committee considered the compensation arrangements of similarly situated executives of our compensation peer group companies and the amount of equity compensation and pension benefits that Mr. Doyle would forfeit following his departure from his previous employer. Based on this analysis and as a result of these negotiations, the Compensation Committee approved total target annual compensation for Mr. Doyle that ranged between the 25th percentile and the median of benchmarking data provided by F.W. Cook, including an initial base salary of $550,000, a target annual incentive award of 80% (prorated for 2013 for the amount of time employed with the Company in 2013 but guaranteed to be at least $400,000 for 2013 to account for his forfeited bonus from his prior employer) and grants of long-term incentive compensation with an aggregate grant date value of $1,700,000, half in the form of PSUs and half equally divided between restricted stock units and stock options, with similar terms and conditions to awards made to other executive officers in 2013. In addition, in recognition of equity and pension benefits forfeited by Mr. Doyle upon his accepting a position with the Company, Mr. Doyle received (i) a cash signing bonus of $500,000 immediately following his start date; and (ii) an additional grant of restricted stock units with an aggregate grant date fair value of $3,300,000 that vests on the third, fourth and fifth anniversaries of the date of grant, subject to continued employment. The cash signing bonus is subject to repayment if Mr. Doyle is terminated for cause or he terminates without good reason prior to August 14, 2015. The Committee believed that the additional awards were essential to ensure that the Company attracted an outstanding talent to the Company while ensuring that much of Mr. Doyle’s compensation was retentive yet subject to forfeiture under appropriate circumstances.

The annual incentive payment of $400,000 made to Mr. Doyle for 2013 was based on the achievement of pre-established performance targets, prorated for the amount of time he was employed in 2013, and adjusted based on the contractual minimum payment in his employment agreement. In evaluating Mr. Doyle’s 2013 individual performance, the Committee considered Mr. Doyle’s essential role in the Company’s transformation and reorganization in 2013. Mr. Doyle led major initiatives at the Company, including initiatives to ensure that the Company is drilling its best wells, reducing costs and increasing efficiencies, which we believe will benefit the Company and its shareholders for years to come, in addition to ensuring operational execution in the Northern Division. In light of his performance and positive impact on the Company’s

operations, the Compensation Committee awarded Mr. Doyle a one-time individual performance bonus of $100,000 for 2013. For specific details regarding Mr. Doyle’s 2013 compensation, see “Executive Compensation Tables—Summary Compensation Table” on page 38 of this proxy statement.

Mikell J. (“Jason”) Pigott

Mr. Pigott joined the Company from a competitor company on August 14, 2013. With the assistance of F.W. Cook and input from Mr. Lawler, in negotiating appropriate compensation for Mr. Pigott, the Compensation Committee considered the compensation arrangements of similarly situated executives of our compensation peer group companies and the amount of equity compensation and pension benefits that Mr. Pigott would forfeit following his departure from his previous employer. Based on this analysis and as a result of these negotiations, the Compensation Committee approved total target annual compensation for Mr. Pigott that ranged between the 25th percentile and the median of benchmarking data provided by F.W. Cook, including an initial base salary of $500,000, a target annual incentive award of 80% (prorated for 2013 for the amount of time employed with the Company in 2013 but guaranteed to be at least $200,000 for 2013 to account for his forfeited bonus from his prior employer) and grants of long-term incentive compensation with an aggregate grant date value of $1,700,000, half in the form of PSUs and half equally divided between restricted stock units and stock options, with similar terms and conditions to awards made to other executive officers in 2013. In addition, in recognition of equity and pension benefits forfeited by Mr. Pigott upon his accepting a position with the Company, Mr. Pigott received (i) a cash signing bonus of $500,000 immediately following his start date; and (ii) an additional grant of restricted stock units with an aggregate grant date fair value of $3,300,000 that vests on the third, fourth and fifth anniversaries of the date of grant, subject to continued employment. The cash signing bonus is subject to repayment if Mr. Pigott is terminated for cause or he terminates without good reason prior to August 14, 2015. The Committee believed that the additional awards were essential to ensure that the Company attracted an outstanding talent to the Company while ensuring that much of Mr. Pigott’s compensation was retentive yet subject to forfeiture under appropriate circumstances.

The annual incentive payment of $244,252 made to Mr. Pigott for 2013 was based on the achievement of pre-established performance targets, prorated for the amount of time he was employed in 2013. In evaluating Mr. Pigott’s 2013 individual performance, the Committee considered Mr. Pigott’s essential role in the Company’s transformation and reorganization in 2013. Mr. Pigott led major initiatives at the Company, including initiatives to ensure that the Company is drilling its best wells, reducing costs and increasing efficiencies, which we believe will benefit the Company and its shareholders for years to come, in addition to ensuring operational execution in the Southern Division. In light of his performance and positive impact on the Company’s operations, the Compensation Committee awarded Mr. Pigott a one-time individual performance bonus of $55,748 for 2013. For specific details regarding Mr. Pigott’s 2013 compensation, see “Executive Compensation Tables—Summary Compensation Table” on page 38 of this proxy statement.

 

 

2013 Departed Named Executive Officer Compensation and Severance

 

Aubrey K. McClendon

On January 29, 2013, the Company announced that Mr. McClendon would step down as President, CEO and a director of the Company effective April 1, 2013. Mr. McClendon continued to receive his base salary through his departure on April 1. On April 18, 2013, the Company and Mr. McClendon entered into a Founder Separation and Services Agree-

ment which was effective as of January 29, 2013 and which covered severance compensation and long-term incentive compensation granted to Mr. McClendon on January 29, 2013. See “Post-Employment Compensation—Named Executive Officer Separations—Aubrey K. McClendon” on page 50 for a discussion of the Founder Separation and Services Agreement.

 

 

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Steven C. Dixon

In January 2013, the Compensation Committee reduced Mr. Dixon’s total target compensation by more than 10% based on the Company’s financial performance and the results of the Company’s benchmarking survey conducted in late 2012. To do so, the Committee held Mr. Dixon’s base salary and annual incentive award opportunity flat at $860,000 and 125%, respectively, and reduced his target long-term incentive compensation by approximately 15% to bring Mr. Dixon’s target long-term incentive opportunity more in line with peers. As described above under “—2013 Named Executive Officer Compensation Elements—Long-Term Incentive Compensation—Retention Awards”, Mr. Dixon received 360,000 retention stock options in an effort to promote stability and continuity during the Company’s search for a new CEO and period of transition. Upon Mr. Dixon’s appointment as Acting CEO effective April 1, 2013, his base salary was increased from $860,000 to $975,000 and his 2013 annual incentive target opportunity was increased from 125% to 150% of base salary. Effective September 24, 2013, the Company terminated Mr. Dixon’s employment without cause as defined in his employment agreement. See “Post-Employment Compensation—Named Executive Officer Separations—Other Departed Named Executive Officers” on page 51 for a discussion of severance payments made to Mr. Dixon pursuant to his employment agreement.

Jeffrey A. Fisher

In January 2013, the Compensation Committee slightly reduced Mr. Fisher’s total target compensation based on the Company’s financial performance and the results of the Company’s benchmarking survey conducted in late 2012. To do so, the Committee held Mr. Fisher’s base salary and annual incentive award opportunity flat at $860,000 and 125%, respectively, and reduced his target long-term incentive compensation by approximately 3%. As described above under “—2013 Named Executive Officer Compensation Elements—Long-Term Incentive Compensation—Retention Awards”, Mr. Fisher received 250,000 retention stock options in an effort to promote stability and continuity during the Company’s search for a new CEO and period of transition. Effective September 24, 2013, the Company terminated Mr. Fisher’s employment without cause as defined in his employment agreement. See “Post-Employment Compensation—Named Executive Officer Separations—Other Departed Named Executive Officers” on page 51 for a discussion of severance payments made to Mr. Fisher pursuant to his employment agreement.

 

 

Employment Agreements and Termination Arrangements

 

We maintain employment agreements with the named executive officers, the material terms of which are described throughout this proxy statement and in detail below under “Executive Compensation Tables—Employment Agreements” on page 41. The Compensation Committee periodically reviews the terms of the agreements, generally focusing on the permitted activities allowed for the named executive officers and the competitiveness, value and adequacy of the severance arrangements.

The terms of our equity compensation and nonqualified deferred compensation plans also govern the payments and benefits named executive officers are entitled to upon the occurrence of specified termination events. Please refer to “Post-Employment Compensation” beginning on page 48 for additional details of the employment agreements and termination arrangements for the named executive officers.

 

 

Other Executive Compensation Matters

 

Minimum Stock Ownership Guidelines

 

The Compensation Committee has established minimum stock ownership levels for our executive officers, including the named executive officers, because we believe stock ownership directly aligns their interests with those of our shareholders. The Compensation Committee reviews compliance with the minimum stock ownership guidelines semi-annually.

Historically, the Compensation Committee established minimum stock ownership levels in our executive officers’ employment agreements. Effective for 2013, the Compensation Committee adopted stand-alone minimum stock ownership guidelines for the Company’s executive officers. Executives are expected to be in compliance with these minimum guidelines within five years of employment or assignment to a new organizational tier. All named executive officers are currently in

compliance with these minimum guidelines. The stock ownership policy requires that each executive own at least a number of shares of common stock equal to a multiple of the executive’s base salary, measured against the value of the executive’s holdings, based on the greater of a spot price or the trailing 36-month average closing price of the Company’s common stock. After achieving the minimum stock ownership guidelines, each executive must continue to meet the minimum stock ownership guidelines for his or her current office. An executive that has fallen out of compliance with the guidelines has six months to cure, measured from the later of the date of receipt of written notice of non-compliance or the first day of the next open trading window following receipt of such notice. The ownership guidelines are as follows:

 

 

  Position   Guideline
 

CEO

  5.0 times total cash compensation (base salary plus bonus)

EVPs

  3.0 times base salary, subject to a 25,000 share floor

SVPs

  2.5 times base salary, subject to a 10,000 share floor
 

In measuring compliance with the guidelines, the Company includes shares purchased in the open market; shares held in Company plans (401(k) and deferred compensation); the unvested portion of restricted stock units and restricted stock; and shares beneficially owned both directly and indirectly. Neither unexercised stock options nor unearned PSUs count toward satisfaction of the guidelines.

 

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Prohibition of Margining and Derivative or Speculative Transactions

 

Our Insider Trading Policy applies to directors and employees and prohibits derivative or speculative transactions involving Company stock. In March 2013, the Compensation Committee revised the policy, eliminating the practice of applying the prohibition only with respect to shares held in satisfaction of the minimum stock ownership guidelines and making the policy an outright prohibition on any derivative or speculative transactions involving Company stock. The transactions

covered by the policy include trading in puts, calls, covered calls or other derivative securities involving Company stock or engaging in hedging or monetization transactions with respect to Company stock. The policy also prohibits directors and executive officers from holding Company stock in a margin account or pledging Company stock as collateral for a loan. We believe the expanded application of the prohibition more effectively aligns each officer’s interests with those of our long-term shareholders.

 

 

Compensation Recovery or “Clawback” Policy

 

In 2012, the Board adopted a compensation recovery policy, also known as a “clawback,” pursuant to which the Company will recover from any current or former executive officer incentive-based compensation in the event of an accounting restatement resulting from the Company’s material noncompliance with financial reporting requirements under applicable securities laws. The amount of incentive-based compensation subject to recovery would be the amount in excess of what the executive officer would have earned in accordance with the restatement as determined by the Compensation Committee.

The Company also maintains compensation recovery provisions relating to stock options, restricted shares and PSUs. Under these provisions, the Company may cancel such long-term incentive awards, in whole or in part, whether or not vested, of executives who engage in serious breaches of conduct, including violations of employment agreements, confidentiality or other proprietary matters, or otherwise act in competition with the business of the Company. We believe these provisions serve to ensure that executives act in the best interest of the Company and its shareholders.

 

 

Relationship Between Compensation Program and Risk

 

Our Compensation Committee performed a review of key attributes and structures of the Company’s compensation policies and programs and has determined that they do not encourage excessive or inappropriate risk taking and do not create risks that are reasonably likely to have a material adverse effect on the Company for the following reasons:

 

 

The compensation programs that apply to non-executive employees consist of competitive base salaries, formulaic annual incentives based on pre-determined metrics that drive the Company’s performance and long-term incentive compensation consisting of restricted stock unit awards that vest over three years. The steady income provided by base salaries allows employees to focus on the Company’s business. The annual incentives motivate employees to achieve the Company’s financial and operational goals without incentivizing inappropriate risk-taking. The long-term incentive awards align employees’ long-term interests with those of our shareholders and generally encourage a long-term view. The Compensation Committee has determined that the distribution of our compensation programs among short- and long-term goals do not represent a material risk to the Company.

 

 

In addition to restricted stock unit awards, the variable long-term incentive compensation for executive officers in 2013 also included awards of PSUs and stock options, all of which have multiple-year performance periods, thereby discouraging short-term risk taking.

 

The annual incentive compensation for executive officers in 2013 consisted of a mix of eleven financial and operational goals which are aligned with the Company’s strategic short-term goals and designed to improve the Company’s performance in the long term.

 

 

Our minimum stock ownership guidelines encourage our directors and executives to maintain a long-term perspective.

 

 

Our prohibition on derivative or speculative transactions involving Company stock by directors and executive officers reinforces the alignment of our directors’ and executives’ long-term interests with those of our shareholders.

 

 

Our compensation recovery policy is designed to recapture unearned incentive payments in the event of material noncompliance with any financial reporting requirement under applicable law that leads to an accounting restatement and permits the cancelation of long-term incentive awards of executives who engage in serious breaches of conduct or who otherwise act in competition with the business of the Company.

 

 

With the exception of the award of PSUs and stock options, both of which are awarded exclusively to our executive officers, essentially all of our employees participate in our compensation programs, which encourage consistent behavior across the Company.

 

 

Accounting and Tax Treatment of Compensation

 

In structuring executive compensation, the Company analyzes the anticipated accounting and tax treatment of various arrangements and payments, including the deductibility of executive compensation under Section 162(m) of the Code. Section 162(m) limits the annual tax deduction to $1 million for compensation paid by a publicly held company to its chief executive officer and each of the company’s three other most highly compensated named executive officers (other than the chief financial officer), unless such compensation qualifies as performance-based compensation under Section 162(m). Accounting for compensation arrangements is prescribed by the Financial Accounting Standards Board. In determining the design of our incentive arrangements, the accounting and tax treatment or method was

considered, but the accounting for or deductibility of compensation is not a determinative factor in compensation decisions. In 2013, we awarded compensation that is not deductible under Section 162(m) because we believed it was consistent with our compensation objectives and would be in the best interest of the Company and its shareholders. For example, the Compensation Committee recognized that the 2013 grant of restricted stock and restricted stock units is not deductible under Section 162(m), but believed that its retentive value outweighed any impact resulting from the inability to claim such a deduction. As detailed on page 28 under “—2013 Named Executive Officer Compensation—2013 Named Executive Officer Compensation Elements—Long-Term Incentive Compensation”, the 2013

 

 

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PSU awards were designed with the intent to qualify as performance-based compensation under Section 162(m). Additionally, the 2013 Annual Incentive Plan was approved by shareholders at our 2013 annual meeting of shareholders and annual incentive awards granted in 2013 under this plan were intended to qualify as performance-based compensation under Section 162(m). However, because of the fact-based nature of the

“performance-based compensation” exception under Section 162(m) and the limited availability of binding guidance thereunder, the Company cannot guarantee that compensation will qualify for exemption under Section 162(m) of the Code, which would prevent us from taking a deduction.

 

 

Actions Related to 2014 Executive Compensation

 

 

After considering the information and recommendations provided by F.W. Cook and Pay Governance, the Company’s performance in 2013 and the competitive market data, the Compensation Committee set base salaries, incentive compensation opportunities and performance measures for 2014. The Compensation Committee held Mr. Lawler’s 2014 total target compensation, including base salary, target annual incentive opportunity and target long-term incentive opportunity, at 2013

levels, which is below the median of the Company’s compensation peer group. Although certain competitive upward adjustments were made to Messrs. Doyle and Pigott’s total target compensation for 2014, the average 2014 total target compensation for current named executive officers other than Mr. Lawler was reduced by approximately 25% as compared to the annualized 2013 total target compensation.

 

 

Compensation Peer Group

 

In 2014, the Compensation Committee again assessed the compensation peer group, and determined to replace SandRidge Energy, Inc. with Encana Corporation, due primarily to Encana’s similarity to the Company in size and scope. The updated peer group below will be used for judging

relative TSR for 2014 PSUs, as explained below, and for benchmarking 2015 compensation of our named executive officers, including base salary, target annual incentive opportunities and target long-term incentive opportunities.

 

 

Anadarko Petroleum Corporation

  Devon Energy Corporation    Hess Corporation   Noble Energy, Inc.

Apache Corporation

  Encana Corporation    Marathon Oil Corporation   Occidental Petroleum Corporation

Continental Resources, Inc.

  EOG Resources, Inc.    Murphy Oil Corporation    

2014 Annual Incentive Program

 

The 2014 annual incentive program was established pursuant to the Annual Incentive Plan, which was approved by shareholders at the 2013 annual meeting. As with the 2013 annual incentive program, the annual incentive awards made under the Annual Incentive Plan are subject to a

formulaic methodology for determining award payments based on the Company’s achievement of performance goals established by the Compensation Committee before, or during the initial quarter of, the performance period.

 

 

Calculating Annual Incentive Awards. The following formula is used to calculate the payment awarded to a named executive officer:

Base Salary            X            Target Percentage of Base Salary            X            Payout Factor (0 - 200%)

The Compensation Committee will use the base salary in effect on the last day of the performance period in calculating the annual incentive payment. The Compensation Committee established a target percentage of base salary of 150% for the CEO, 125% for EVPs and 80-100% for SVPs to provide an annual incentive opportunity that is competitive with our peers.

Following the end of the performance period, the Compensation Committee will determine the payout factor based on the Company’s achievement of pre-established threshold, target and maximum performance levels and the corresponding payout opportunities of 50% (0% in the case of environmental, health and safety goals), 100% and 200% of the target percentage of base salary (using linear interpolation for performance levels falling in between threshold and target and between target and maximum). The Committee may make upward or downward adjustments to earned awards to account for material circumstances affecting the Company’s performance, subject to the maximum award opportunity. The following chart shows the range of annual incentive opportunities expressed as a percentage of salary for the named executive officers by title, based on the target percentage of base salary multiplied by the above-listed threshold, target and maximum payout opportunities.

 

 Executive Level    Threshold(a)     Target   Maximum
 

CEO

     75   150%   300%

EVP

     62.5   125%   250%

SVP

     50   100%   200%
  (a)

For environmental, health and safety performance goals, payout begins at 0% (as opposed to 50% for other goals) once threshold performance is met. The Committee and Board are committed to exceptional EH&S performance and have designed the compensation program to reflect that belief.

 

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2014 Performance Goals. For the 2014 annual incentive program, the Compensation Committee established the following six performance goals and a cash cost management multiplier, which it believes appropriately reflect factors that will positively impact shareholder value in 2014:

 

Criteria(a)    Weighting      Threshold      Target      Maximum  
   

Financial

           

Adjusted EBITDA/BOE

     20%       $ 20       $ 21       $ 22   

Capital Expenditures

     20%       $       5.7 billion       $       5.5 billion       $       5.2 billion   

Operational

           

Production Growth

     20%         2%         3%         5%   

Proved Reserves Organically Added (mmboe)

     20%         250         300         330   

Environmental, Health and Safety

           

Total Recordable Incident Rate (expressed as % reduction)

     10%         0%         10%         20%   

Reportable Spills (expressed as % reduction)

     10%         0%         25%         50%   

Subtotal

     100%            

Cash Cost Management Factor ($/BOE)

     £10%  Multiplier                $ 5.54            
  (a)

Criteria are objectively measured based on reported figures and are adjusted for certain one-time items not contemplated in the performance forecast.

Cash Cost Management Multiplier. This factor acts as a potential multiplier of the annual incentive program performance results for 2014 and is intended to encourage employees to focus on efficiencies that impact controllable cash costs. The cash cost management factor is calculated as oil and gas lease operating expense plus general and administrative expense divided by production volumes. If achieved, it will serve as a multiplier of up to 10% of the total annual incentive program payout; provided, however the total payout may not exceed 200% of target.

Please see Exhibit E for an explanation of the non-GAAP financial measures used in the table above.

2014 Long-Term Incentive Program

 

For 2014, target long-term incentive awards for current named executive officers were reduced by more than 20% as compared to annualized 2013 target long-term incentive awards.

Target Long-Term Incentive Mix. On January 10, 2014, the Compensation Committee granted long-term incentive compensation to then-serving named executive officers and other senior executives pursuant to the 2005 LTIP. One-half of each named executive officer’s long-term incentive award was in the form of PSUs (the value of which is determined in part based on the closing price of the Company’s common stock and in part by a Monte Carlo simulation, each on the grant date), and the other half was equally divided between restricted stock units (the value of which is based on the closing price of the Company’s common stock on the grant date) and stock options (the value of which is determined using Black-Scholes option pricing on the grant date), each vesting ratably over a three-year period ending on December 31, 2016.

PSU Program. For 2014, to determine the appropriate performance measure for the PSU grants, the Compensation Committee reviewed a

survey conducted by Pay Governance of the performance-based compensation plans of our peer group companies. Ten of eleven of our peer group companies used a similar performance-based compensation plan, and all ten used 100% TSR to measure performance. Based on this survey and the Committee’s belief that operational measures are appropriately incentivized in the annual incentive program, for PSU grants made in 2014, it determined to eliminate the operational modifier and to base performance solely on relative TSR at the end of the three-year performance period.

The Company’s relative TSR performance will be measured against the Company’s 2014 compensation peer group described above consisting of Anadarko Petroleum Corporation, Apache Corporation, Continental Resources, Inc., Devon Energy Corporation, Encana Corporation, EOG Resources, Inc., Hess Corporation, Marathon Oil Corporation, Murphy Oil Corporation, Noble Energy Inc., and Occidental Petroleum Corporation. The performance period is three years covering January 1, 2014 through December 31, 2016, and will use a number rank to determine the payout as follows:

 

 

 CHK TSR Ranking   1     2     3     4     5     6     7     8     9     10-12  
                                                   

Payout as % of Target

    200     182     164     146     128     110     92     74     56     0

Absolute TSR Circuit Breaker. 2014 PSUs will be subject to an absolute total shareholder return circuit breaker to moderate payouts when absolute total shareholder return is negative over the performance period. The final PSU modifier is subject to a 100% maximum if the Company’s absolute total shareholder return is negative over the performance period.

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis set forth above. Based on the review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s 2013 Form 10-K and this proxy statement.

Members of the Compensation Committee:

Merrill A. (“Pete”) Miller, Jr., Chairman

Bob G. Alexander

R. Brad Martin

 

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Executive Compensation Tables

Summary Compensation Table

 

 

  Name and

  Principal Position

  Year     Salary     Bonus(a)    

Stock

Awards(b)

    Option
Awards(c)
   

Non-Equity
Incentive

Plan

Compen-
sation(d)

   

Change in
Pension

Value and
Nonqualified
Deferred
Compensation
Earnings(e)

    All Other
Compen-
sation(f)
    Total  
                                           

Robert D. (“Doug”) Lawler

President and Chief

Executive Officer

    2013      $ 649,038      $ 2,000,000      $ 12,750,035 (g)    $ 5,250,001      $ 1,619,260      $             —      $ 155,033      $ 22,423,367   

Domenic J. (“Nick”)

Dell’Osso, Jr.

Executive Vice President and

Chief Financial Officer

    2013        725,000               4,312,596        3,789,524        1,442,750               214,598        10,484,468   
    2012        722,596        1,550        5,430,294               750,000               450,041        7,354,481   
    2011        559,904        1,026,000        3,708,176                             429,586        5,723,665   

Douglas J. Jacobson

Executive Vice President

–Acquisitions and

Divestitures

    2013        800,000        1,500,300        3,937,584        1,312,501        1,592,000               244,598        9,386,983   
    2012        800,000        2,403,875        6,299,162               700,000               477,023        10,680,060   
    2011        800,000        3,604,125        5,401,087                             678,690        10,483,902   

M. Christopher Doyle

Senior Vice President,

Operations–Northern Division

    2013        179,808        600,000        4,575,064 (h)      425,002        400,000               45,995        6,225,869   

Mikell J. (“Jason”) Pigott

Senior Vice President,

Operations–Southern Division

    2013        171,154        555,748        4,575,064 (h)      425,002        244,252               81,253        6,052,473   

Aubrey K. McClendon

Former Chief Executive

Officer

    2013        266,250               10,125,145        3,375,029                      9,940,943        23,707,367   
    2012        975,000        750        15,204,670                             721,025        16,901,445   
    2011        975,000        1,951,000        13,627,556                             1,328,441        17,881,997   

Steven C. Dixon

Former Acting Chief

Executive Officer

    2013        707,346               5,062,620        4,509,933                      2,489,412        12,769,311   
    2012        860,000        2,403,875        8,036,640               775,000               463,269        12,538,784   
    2011        860,000        3,764,125        6,813,778                             791,632        12,229,535   

Jeffrey A. Fisher

    2013        549,327               2,437,630        2,772,520                      1,926,064        7,685,541   

Former Executive Vice

President–Production

    2012        724,519        289,125        3,366,826               575,000               232,692        5,188,162   
                                           
  (a)

The bonus amounts shown above as earned in 2013 include (i) signing bonuses of $2,000,000, $500,000 and $500,000, respectively, for each of Messrs. Lawler, Doyle and Pigott; (ii) a $1,500,000 performance cash bonus for Mr. Jacobson upon the closing of, and in consideration of his efforts with regard to, the Company’s Mississippi Lime joint venture transaction; and (iii) performance cash bonuses of $100,000 and $55,748, respectively, for Messrs. Doyle and Pigott in consideration of their individual performance and positive impact on the Company’s operations in 2013. Mr. Lawler’s signing bonus was subject to repayment if Mr. Lawler was terminated for cause or he terminated without good reason prior to March 31, 2014. Signing bonuses for Messrs. Doyle and Pigott are subject to repayment if they are terminated for cause or they terminate employment without good reason prior to August 14, 2015

 

  (b)

These amounts represent the aggregate grant date fair value of restricted stock, or restricted stock unit, and PSU awards, determined in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures during the applicable vesting periods. The value ultimately realized by the executive upon the actual vesting of the awards may be more or less than the grant date fair value. For restricted stock grants, values are based on the closing price of the Company’s common stock on the grant date. Named executive officers have voting and dividend rights with respect to unvested restricted stock awards and have dividend equivalent rights with respect to unvested restricted stock unit awards. For the PSU awards, the Company utilized the Monte Carlo simulation for all three performance conditions, and used the following weighted average assumptions to determine the fair value of the PSUs granted in 2013: historical volatility of 42.54%; dividend yield of 0% for valuing TSR; dividend yield of 1.81% for valuing the awards; and risk-free interest rate of 0.42% for the TSR performance measure. The grant date fair value of the PSUs was determined based on the vesting at target of the PSUs awarded, which is the performance the Company believed was probable on the grant date. The PSUs are settled in cash upon vesting and the maximum award opportunity for each named executive officer for the 2013 PSU awards as of the grant date is as follows: Mr. Lawler, $8,850,981; Mr. Dell’Osso, $5,246,723; Mr. Jacobson, $4,790,494; Mr. Doyle, $1,268,647; Mr. Pigott, $1,268,647; Mr. McClendon, $12,318,359; Mr. Dixon, $6,159,180; and Mr. Fisher, $2,965,580. Refer to the Grants of Plan-Based Awards Table for 2013 for additional information regarding restricted stock and PSU awards made to the named executive officers in 2013.

 

  (c)

These amounts represent the aggregate grant date fair value of stock option awards, determined in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures during the applicable vesting periods. The value ultimately realized by the executive upon the actual vesting of the

 

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awards may be more or less than the grant date fair value. The assumptions used by the Company in calculating the amounts related to stock options are incorporated by reference to Note 9 of the consolidated financial statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on February 27, 2014. Refer to the Grants of Plan-Based Awards Table for 2013 for additional information regarding stock option awards made to the named executive officers in 2013.

(d)   

The amounts in this column represent 2013 annual incentive program awards paid to the named executive officers in March 2014 as described on page 26.

(e)   

The Company does not have a pension plan. In addition, our nonqualified deferred compensation plan does not provide for above-market or preferential earnings. Our nonqualified deferred compensation plan is discussed in detail in the narrative to the Nonqualified Deferred Compensation Table for 2013.

(f)   

See the All Other Compensation Table below for additional information.

(g)   

Includes (i) aggregate annual PSU and stock option awards of $10,500,013; (ii) a special award of restricted stock with an aggregate grant date fair value of $2,500,015 vesting in equal installments on the second, third and fourth anniversaries of the grant date which was granted in recognition of equity awards with Mr. Lawler’s previous employer which were forfeited upon his accepting employment with the Company; and (iii) a special award of restricted stock with an aggregate grant date fair value of $5,000,009 vesting in equal installments on the third, fourth and fifth anniversaries of the effective date which was granted in recognition of pension benefits with Mr. Lawler’s previous employer which were forfeited upon his accepting employment with the Company.

(h)   

Includes (i) aggregate annual PSU, restricted stock unit and stock option awards of $1,700,046; and (ii) a special award of restricted stock with an aggregate grant date fair value of $3,300,021 vesting in equal installments on the third, fourth and fifth anniversaries of the grant date which was granted in recognition of equity awards and retirement benefits which were forfeited upon accepting employment with the Company.

 

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All Other Compensation Table

 

 

Name   Year      Personal Use
of Fractionally
Owned  Company
Aircraft(a)
     Company
Matching
Contributions
to Retirement
Plans(b)
     New Hire
Benefits(c)
     Severance
Benefits(d)
     Other
Perquisites and
Benefits(e)
     Total  
                              

Robert D. (“Doug”) Lawler

      2013       $       $       $           132,653       $       $ 22,380       $ 155,033   

Domenic J. (“Nick”) Dell’Osso, Jr.

      2013                 195,000                         19,598         214,598   
      2012         219,032         213,389                         17,620         450,041   
      2011         237,046         172,673                         19,867         429,586   

Douglas J. Jacobson

      2013                 225,000                         19,598         244,598   
      2012         249,403         210,000                         17,620         477,023   
      2011         359,249         300,000                         19,441         678,690   

M. Christopher Doyle

      2013                         42,702                 3,293         45,995   

Mikell J. (“Jason”) Pigott

      2013                         77,985                 3,268         81,253   

Aubrey K. McClendon

      2013         354,153         46,063                 9,513,051         27,677             9,940,943   
      2012         250,000         292,500                         178,525         721,025   
      2011         500,000         438,750                         389,691         1,328,441   

Steven C. Dixon

      2013                 222,352                 2,249,019         18,041         2,489,412   
      2012         214,649         231,000                         17,620         463,269   
      2011         439,230         333,000                         19,402         791,632   

Jeffrey A. Fisher

      2013                 168,649                 1,739,384         18.031         1,926,064   
      2012         31,425         183,678                         17,589         232,692   
                              

 

  (a)

Includes personal use of fractionally owned Company aircraft. The value of personal use of fractionally owned Company aircraft is based on the incremental cost to the Company determined by the amount invoiced to the Company by NetJets for operating costs of such use, including the cost of fuel, trip-related maintenance, crew travel expenses, on-board catering, landing fees and trip-related parking/hangar costs. Since the fractionally owned Company aircraft are used primarily for business travel, we do not include the fixed costs that do not change based on the usage, such as purchase costs and maintenance costs not related to trips.

 

  (b)

This column represents the matching contributions made by the Company for the benefit of the named executive officers under the Company’s 401(k) plan and nonqualified deferred compensation plan. These plans are discussed in more detail in the narrative to the Nonqualified Deferred Compensation Table for 2013 beginning on page 47.

 

  (c)

This column includes relocation benefits, including temporary housing, of $104,167, $39,206 and $71,691 for Messrs. Lawler, Doyle and Pigott, respectively, and reimbursement of premiums paid by each for continuing health insurance under the Consolidated Omnibus Budget Reconciliation Act of 1985. For Mr. Lawler, amounts also include $25,000 for reimbursement of advisory fees paid in connection with his employment agreement.

 

  (d)

Messrs. McClendon, Dixon and Fisher separated from the Company in 2013. Pursuant to his separation agreement, Mr. McClendon received (i) continued payment of his base salary and annual bonus in 2013, which totaled $2,133,750; (ii) a lump sum of $112,500 related to his accrued but unused paid time off; (iii) the right to use a 28.125% interest in a Citation X aircraft until December 31, 2016, which was estimated by the Company to be valued at $7,226,151; (iv) used electronic equipment valued at $33,781; and (v) continued medical, dental and other benefits for 2013, each of which is reflected in this column for Mr. McClendon. Mr. McClendon also received certain other transition services related to his participation in the FWPP in connection with his departure in 2013 pursuant to the Founder Joint Operating Services Agreement, which is described in detail under “Corporate Governance—Transactions with Related Persons—Transactions with Former Chief Executive Officer—Separation Arrangements”. Pursuant to their separation agreements, Messrs. Dixon and Fisher received (i) lump sum payments of $2,108,333 and $1,631,250, respectively, representing 100% of base salary and annual bonus; (ii) lump sum payments of $136,406 and $107,007, respectively, related to accrued but unused paid time off; and (iii) certain computer equipment, each of which is reflected in this column for Messrs. Dixon and Fisher. Amounts paid and accrued to Messrs. McClendon, Dixon and Fisher are subject to certain restrictions provided in their respective separation agreements. For more information regarding the payments made to Messrs. McClendon, Dixon and Fisher upon their separation and the other benefits to which they were entitled upon separation, see “Post-Employment Compensation—Named Executive Officer Separations” on page 50 below.

 

  (e)

This column represents the value of other benefits provided to the named executive officers in 2013 and includes amounts for supplemental life insurance premiums for all named executive officers and, other than Mr. McClendon, amounts for financial advisory services. For Messrs. Lawler and McClendon, amounts include $15,823 and $26,543, respectively, for personal security. Mr. McClendon also received accounting and engineering support prior to his departure in 2013. The incremental cost to the Company before reimbursement for Mr. McClendon’s personal accounting and engineering support was $153,361 and $257,205, respectively. Mr. McClendon fully reimbursed the Company for personal accounting and engineering support received prior to his departure in 2013. Personal accounting support costs for Mr. McClendon include the following with respect

 

40     CHESAPEAKE ENERGY CORPORATION


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to personnel providing such support: (i) cash compensation; (ii) equity compensation; (iii) Company matching contributions under the 401(k) plan and deferred compensation plan; (iv) Company-paid life insurance premiums; (v) Chesapeake’s portion of payroll taxes; and (vi) overhead (utilities, office equipment, health and welfare benefit plans, etc.). Mr. McClendon fully reimbursed the Company for all costs related to dedicated engineering support. Mr. McClendon also reimbursed the Company for the following for each employee who provided part-time engineering services to Mr. McClendon: (i) cash compensation for the hours worked on Mr. McClendon’s matters and (ii) a 25% additional charge for each employee for overhead and other employee costs. The named executive officers also receive benefits for which there is no incremental cost to the Company, such as tickets to certain sporting and cultural events. From time to time, a named executive officer’s spouse will accompany the named executive officer on business trips using the fractionally owned Company aircraft.

Employment Agreements

 

 

We maintain employment agreements with the named executive officers, the material terms of which are described throughout this proxy statement. The Compensation Committee periodically reviews the terms of the agreements, generally focusing on the permitted activities allowed for the named executive officers and the competitiveness, value and adequacy of the severance arrangements. Below is a discussion of the employment agreements that we have entered into with our named executive officers. In addition to the terms described below, the

employment agreements provide that payments will be due to the named executive officers upon the occurrence of specified events, such as termination of their employment or a change of control of the Company. The terms of our equity compensation and nonqualified deferred compensation plans also govern the payments and benefits named executive officers are entitled to receive upon the occurrence of specified termination events. See “Post-Employment Compensation” beginning on page 48 for a discussion of payments due upon such events.

 

 

Robert D. (“Doug”) Lawler

 

The Company’s employment agreement with Mr. Lawler was effective on June 17, 2013. The employment agreement has a three-year term beginning on the effective date, with automatic renewals for successive one-year terms unless either party gives notice of nonrenewal. The agreement provides, among other things, for (i) an initial annual base salary of $1,250,000, which will be reviewed annually and which may be increased at the discretion of the Compensation Committee; (ii) eligibility for annual incentive plan payments payable at achievement of target and maximum levels of 150% and 300%, respectively, including a prorated bonus for 2013 of at least $800,000 to account for his forfeited bonus from his previous employer; (iii) annual grants of equity-based incentive awards under the Company’s equity compensation plans, including a 2013 award with an aggregate grant date fair value of $10,500,000, consisting of 50% stock options and 50% PSUs vesting over three years; (iv) a relocation package; and (v) health and other benefits similar to other executive officers.

In addition, in recognition of equity awards with Mr. Lawler’s previous employer which were forfeited upon his accepting employment with the Company, Mr. Lawler received (i) a cash signing bonus of $2,000,000, which would have been repayable to the Company if Mr. Lawler’s employment had been terminated for cause or if he had resigned without good reason prior to March 31, 2014; and (ii) an award of restricted stock with an aggregate grant date fair value of $2,500,000 vesting in equal installments on the second, third and fourth anniversaries of the grant date, referred to as the Equity Makeup Restricted Stock. In recognition of forfeited pension benefits, the Company also granted Mr. Lawler restricted stock with an aggregate grant date fair value of $5,000,000 vesting in equal installments on the third, fourth and fifth anniversaries of the effective date, referred to as the Pension Makeup Restricted Stock. If Mr. Lawler remains continuously employed with the Company through the fifth anniversary of the effective date, he will receive an additional grant of Pension Makeup Restricted Stock with an aggregate grant date fair value of $5,000,000 with vesting on the third, fourth and fifth anniversaries of the grant date.

 

 

Other Current Named Executive Officers

Domenic J. (“Nick”) Dell’Osso and Douglas J. Jacobson

Effective January 1, 2013, the Company entered into new three-year employment agreements with Messrs. Dell’Osso and Jacobson. The new employment agreements provide, among other things, for (i) minimum annual base salaries of $725,000 and $800,000, respectively, for Messrs. Dell’Osso and Jacobson; (ii) eligibility for annual incentive compensation for each fiscal year during the term of the agreement under the Company’s then-current annual incentive program; (iii) eligibility for equity awards under the Company’s stock compensation plans; and (iv) health and other benefits.

M. Christopher Doyle and Mikell J. (“Jason”) Pigott

 

Effective August 14, 2013, the Company entered into employment agreements with Messrs. Doyle and Pigott. The employment agreements are coterminous with the other executive officer employment agreements entered into in 2013 and will terminate on December 31, 2015. The agreements provide, among other things, for (i) an initial annual base salary of $550,000 and $500,000, respectively, for Messrs. Doyle and Pigott; (ii) eligibility for annual incentive compensation for each fiscal year during the term of the agreement under the Company’s then-current annual incentive program; provided that for 2013, target annual incentive compensation was set at 80% of base salary for each of Messrs. Doyle

and Pigott and prorated for the time each of them was employed by the Company in 2013, subject to a requirement that Messrs. Doyle and Pigott receive annual incentive compensation of at least $400,000 and $200,000, respectively, for 2013 to account for forfeited bonus amounts from their previous employer; (iii) annual grants of equity-based incentive awards under the Company’s equity compensation plans, including a 2013 award with an aggregate grant date fair value of $1,700,000 for each of Messrs. Doyle and Pigott, consisting of 25% stock options vesting over three years, 25% restricted stock units vesting over three years and 50% PSUs with a three-year performance period, each with

 

 

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terms and conditions consistent with similar grants made to other senior management for 2013; (iv) a relocation package; and (v) health and other benefits similar to other executive officers.

In addition, in recognition of equity awards and retirement benefits with Messrs. Doyle and Pigott’s previous employer which were forfeited upon their accepting employment with the Company, Messrs. Doyle and Pigott

each received (i) a cash signing bonus of $500,000, which will be repayable to the Company if their employment is terminated for cause or if they resign without good reason prior to August 14, 2015; and (ii) a grant of restricted stock units with an aggregate grant date fair value of $3,300,000 vesting in equal installments on the third, fourth and fifth anniversaries of the grant date, referred to as the Equity Makeup Restricted Stock Units.

 

Departed Named Executive Officers

On April 1, 2013, Mr. McClendon ceased serving as President and CEO of the Company and resigned as a director of its Board. On April 18, 2013, the Company and Mr. McClendon entered into a Founder Separation and Services Agreement, which was effective January 29, 2013. In addition, effective September 24, 2013, Messrs. Dixon and Fisher separated from the Company. See “Post-Employment Compensation—Named Executive Officer Separations” on page 50 for a discussion of the Founder Separation and Services Agreement and severance arrangements for Messrs. Dixon and Fisher.

 

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Grants of Plan-Based Awards Table for 2013

 

 

                     

Estimated Possible Payouts Under

Non-Equity Incentive Plan Awards(b)

   

Estimated Future Payouts Under
Equity Incentive Plan

Awards(c)

    All Other
Stock
Awards:
Number
   

All Other
Option

Awards:
Number

    Exercise
Price of
       

  Name

  Type of
Award(a)
   

Grant

Date

   

Approval

Date

    Threshold     Target     Maximum     Threshold     Target     Maximum     of Shares
of Stock(d)
    of Shares
of Stock(e)
    Option
Awards(f)
    Grant Date
Fair Value(g)
 
                                                                           

Robert D. (“Doug”) Lawler(h)

    AIP                    $ 800,000      $ 1,017,123      $ 2,034,246                 
    PSU        6/17/2013        5/3/2013              26,292        210,337        420,674            $ 5,250,012   
    RS        6/17/2013        5/3/2013                    237,643            5,000,009   
    RS        6/17/2013        5/3/2013                    118,822            2,500,015   
    SO        6/17/2013        5/3/2013                                                                624,257      $ 21.04        5,250,001   

Domenic J. (“Nick”) Dell’Osso, Jr.

    AIP                      453,125        906,250        1,812,500                 
    PSU        1/29/2013        1/29/2013              17,286        138,290        276,580              2,875,049   
    RS        1/29/2013        1/29/2013                    75,780            1,437,547   
    SO        1/29/2013        1/29/2013                      194,260        18.97        1,437,524   
    SO        1/29/2013        1/29/2013                                                                300,000        18.97        2,352,000   

Douglas J. Jacobson

    AIP                      500,000        1,000,000        2,000,000                 
    PSU        1/29/2013        1/29/2013              15,783        126,265        252,530              2,625,049   
    RS        1/29/2013        1/29/2013                    69,190            1,312,534   
    SO        1/29/2013        1/29/2013                                                                177,365        18.97        1,312,501   

M.

Christopher Doyle(h)

    AIP                      400,000        400,000        400,000                 
    PSU        8/26/2013        8/6/2013              3,009        24,073        48,146              850,018   
    RSU        8/26/2013        8/6/2013                    125,238            3,300,021   
    RSU        8/26/2013        8/6/2013                    16,130            425,026   
    SO        8/26/2013        8/6/2013                                                                38,323        26.35        425,002   

Mikell J. (“Jason”) Pigott(h)

    AIP                      200,000        200,000        306,849                 
    PSU        8/26/2013        8/6/2013              3,009        24,073        48,146              850,018   
    RSU        8/26/2013        8/6/2013                    125,238            3,300,021   
    RSU        8/26/2013        8/6/2013                    16,130            425,026   
    SO        8/26/2013        8/6/2013                                                                38,323        26.35        425,002   

Aubrey K. McClendon(i)

    PSU        1/29/2013        1/29/2013              40,585        324,680        649,360              6,750,097   
    RS        1/29/2013        1/29/2013                    177,915            3,375,048   
    SO        1/29/2013        1/29/2013                                                                456,085        18.97        3,375,029   
Steven C. Dixon(i)     AIP                      537,500        1,075,000        2,150,000                 
    PSU        1/29/2013        1/29/2013              20,293        162,340        324,680              3,375,049   
    RS        1/29/2013        1/29/2013                    88,960            2,346,765   
    SO        1/29/2013        1/29/2013                      228,045        18.97        1,687,533   
    SO        1/29/2013        1/29/2013                                                                360,000        18.97        2,822,400   
Jeffrey A. Fisher(i)     AIP                      453,125        906,250        1,812,500                 
    PSU        1/29/2013        1/29/2013              9,771        78,165        156,330              1,625,050   
    RS        1/29/2013        1/29/2013                    42,835            812,580   
    SO        1/29/2013        1/29/2013                      109,800        18.97        812,520   
    SO        1/29/2013        1/29/2013                                                                250,000        18.97        1,960,000   

 

(a)

These awards are described in the Compensation Discussion and Analysis beginning on page 20.

 

(b)

The actual amount earned in 2013 was paid in March 2014 and is shown in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. See “Compensation Discussion and Analysis—2013 Named Executive Officer Compensation—2013 Named Executive Officer Compensation Elements—Performance-Based Annual Incentives” for more information regarding our 2013 annual incentive program.

 

(c)

These columns reflect the potential payout range, in units, of aggregate PSUs granted in 2013. 2013 PSU awards vest ratably over three years from the date of grant. No PSUs will be earned unless the Company’s relative TSR, proved reserves growth or production growth meet the minimum threshold of the 25th percentile. Named executive officers do not have voting or dividend rights with respect to unvested PSU awards. See “Compensation Discussion and Analysis—2013 Named Executive Officer Compensation—2013 Named Executive Officer Compensation Elements—Long-Term Incentive Compensation” on page 28 for more information regarding our 2013 long-term incentive program.

 

(d)

The restricted stock (or restricted stock unit) awards generally vest ratably over three years from the date of grant. Mr. Lawler’s restricted stock award of 237,643 shares vests ratably on the third, fourth and fifth anniversaries of the grant date and his restricted stock award of 118,822

 

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shares vests ratably on the second, third and fourth anniversaries of the grant date. The grant of 125,238 shares of restricted stock to each of Messrs. Doyle and Pigott vests ratably on the third, fourth and fifth anniversaries of the grant date. Named executive officers have voting and dividend rights with respect to unvested restricted stock awards and have dividend equivalent rights with respect to unvested restricted stock unit awards.

 

(e)

The stock option awards vest ratably over three years from the date of grant. As described under “Compensation Discussion and Analysis—2013 Named Executive Officer Compensation—2013 Named Executive Officer Compensation Elements—Long-Term Incentive Compensation—Retention Awards” above on page 31, Messrs. Dell’Osso, Dixon and Fisher received 300,000, 360,000 and 250,000 retention stock options, respectively, in January 2013 in an effort to promote stability and continuity during the Company’s search for a new CEO and period of transition. The retention options vest ratably on the third, fourth and fifth anniversaries of the grant date. Named executive officers do not have voting or dividend rights with respect to unvested stock option awards.

 

(f)

Stock option exercise prices reflect the closing price of the Company’s stock on the date of grant.

 

(g)

These amounts represent the aggregate grant date fair value of restricted stock, or restricted stock unit, stock option and PSU awards, determined in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures during the applicable vesting periods. The value ultimately realized by the executive upon the actual vesting of the awards may be more or less than the grant date fair value. For restricted stock grants, values are based on the closing price of the Company’s common stock on the grant date. Named executive officers have voting and dividend rights with respect to unvested restricted stock awards and have dividend equivalent rights with respect to unvested restricted stock unit awards. The assumptions used by the Company in calculating the amounts related to stock options are incorporated by reference to Note 9 of the consolidated financial statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on February 27, 2014. The assumptions used by the Company in calculating the amounts related to the PSUs are provided in footnote (b) to the “Summary Compensation Table” on page 38. The grant date fair value of the PSUs was determined based on the vesting at target of the PSUs awarded, which is the performance the Company believed was probable on the grant date.

 

(h)

Mr. Lawler joined the Company on June 17, 2013 and Messrs. Doyle and Pigott joined the Company on August 14, 2013. Pursuant to the terms of their employment agreements, 2013 annual incentive awards for Messrs. Lawler, Doyle and Pigott were prorated for the number of days employed with the Company in 2013, subject to contractual minimums of $800,000, $400,000 and $200,000, respectively. Messrs. Lawler, Doyle and Pigott’s equity awards reflect annual and special, one-time awards granted to them in 2013. See “—Employment Agreements” above for more information regarding Messrs. Lawler, Doyle and Pigott’s employment agreements.

 

(i)

Messrs. McClendon, Dixon and Fisher separated from the Company in 2013. Pursuant to the terms of the Annual Incentive Plan, Messrs. Dixon and Fisher forfeited their annual incentive awards upon their separation. Equity-based awards granted to Mr. McClendon in 2013 were subject to continued vesting pursuant to the terms of his separation agreement. Equity awards granted to Messrs. Dixon and Fisher in 2013 were subject to pro rata accelerated vesting and Mr. Dixon’s remaining unvested 2013 equity-based awards were subject to continued vesting due to his satisfaction of age- and service-related retirement qualifications. For more information regarding the treatment of 2013 awards made to Messrs. McClendon, Dixon and Fisher upon their separation, see “Post-Employment Compensation—Named Executive Officer Separations” on page 50 below.

 

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Outstanding Equity Awards at Fiscal Year End Table for 2013

 

 

Name   Option Awards

 

    Stock Awards

 

 
 

Number of

Securities

Underlying

Unexercised

Options

 

    Option
Exercise
Price
    Option
Expiration
Date
     Number of
Shares
or Units
of Stock That
Have Not
Vested(b)
    Market Value
of Shares or
Units of
Stock That
Have Not
Vested(c)
   

Equity Incentive
Plan Awards:
Number of
Unearned Units
That Have Not

Vested(d)

    Equity Incentive
Plan Awards:
Value of
Unearned Units
That Have Not
Vested(e)
 
  Exercisable     Unexercisable(a)              
                                   

Robert D. (“Doug”) Lawler

           624,257      $ 21.04        6/17/2023        356,465 (f)    $   9,674,460        210,337      $ 5,674,892   

Domenic J. (“Nick”) Dell’Osso, Jr.

           494,260        18.97        1/29/2023        235,358 (g)      6,387,616        241,156        6,506,389   

Douglas J. Jacobson

           177,365        18.97        1/29/2023        298,285 (h)      8,095,455        245,590        6,626,018   

M. Christopher Doyle

           38,323        26.35        8/26/2023        141,368 (i)      3,836,728        24,073        649,490   

Mikell J. (“Jason”) Pigott

           38,323        26.35        8/26/2023        141,368 (i)      3,836,728        24,073        649,490   

Aubrey K. McClendon

           456,085        18.97        1/29/2023        177,915 (j)      4,828,613        324,680        8,759,866   

Steven C. Dixon

    417,011               18.97        9/24/2014        66,720 (j)      1,810,781        121,755        3,284,950   
      19,004 (k)      18.97        1/29/2015                               
      76,015 (k)      18.97        1/29/2016