def14a
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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 (Amendment No.     )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
o   Preliminary Proxy Statement
o   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ   Definitive Proxy Statement
o   Definitive Additional Materials
o   Soliciting Material Pursuant to §240.14a-12
Noble Energy, Inc.
 
(Name of Registrant as Specified In Its Charter)
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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þ   No fee required.
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(1)
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(3)
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o   Fee paid previously with preliminary materials.
 
o   Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
     
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(4)
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TABLE OF CONTENTS

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To Be Held On April 28, 2009
INTRODUCTION
CORPORATE GOVERNANCE
VOTING SECURITIES
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
PROPOSAL I ELECTION OF DIRECTORS
INFORMATION CONCERNING THE BOARD OF DIRECTORS
PROPOSAL II RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR
PROPOSAL III APPROVAL OF AMENDMENT TO 1992 STOCK OPTION AND RESTRICTED STOCK PLAN
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION COMPENSATION DISCUSSION AND ANALYSIS
REPORT OF THE COMPENSATION, BENEFITS AND STOCK OPTION COMMITTEE ON EXECUTIVE COMPENSATION
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
CERTAIN TRANSACTIONS
REPORT OF THE AUDIT COMMITTEE
MATTERS RELATING TO THE INDEPENDENT AUDITOR
STOCKHOLDER PROPOSALS AND OTHER MATTERS


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(NOBLE ENERGY LOGO)
100 Glenborough Drive
Suite 100
Houston, Texas 77067
 
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held On April 28, 2009
 
To the Stockholders of
Noble Energy, Inc.:
 
The annual meeting of stockholders of NOBLE ENERGY, INC., a Delaware corporation (“Company”), will be held on Tuesday, April 28, 2009, at 9:30 a.m., Central Time, at The Woodlands Waterway Marriott Hotel & Convention Center, 1601 Lake Robbins Drive, The Woodlands, Texas 77380, for the following purposes:
 
  1.   To elect the nine nominees named in the attached Proxy Statement as members of the Board of Directors of the Company to serve until the next annual meeting of the Company’s stockholders;
 
  2.   To ratify the appointment of the independent auditor by the Company’s Audit Committee;
 
  3.   To approve an amendment to the Company’s 1992 Stock Option and Restricted Stock Plan to increase the number of shares of common stock authorized for issuance under the plan from 22,000,000 to 24,000,000; and
 
  4.   To transact such other business as may properly come before the meeting and any adjournment or postponement thereof.
 
The Board of Directors has fixed the close of business on March 10, 2009 as the record date for the determination of stockholders entitled to notice of, and to vote at, the meeting and any adjournment or postponement thereof. Only stockholders of record at the close of business on the record date are entitled to notice of, and to vote at, the meeting. A complete list of the stockholders will be available for examination at the offices of the Company in Houston, Texas during ordinary business hours for a period of 10 days prior to the meeting.
 
A record of the Company’s activities during 2008 and its financial statements for the fiscal year ended December 31, 2008 are contained in the Company’s 2008 Annual Report on Form 10-K. The Annual Report does not form any part of the material for solicitation of proxies.
 
All stockholders are cordially invited to attend the meeting. Stockholders are urged, whether or not they plan to attend the meeting, to complete, date and sign the accompanying proxy card and to return it promptly in the postage-paid return envelope provided, or, alternatively, to vote their proxy by telephone or the internet according to the instructions on the proxy card. If a stockholder who has returned a proxy attends the meeting in person, the stockholder may revoke the proxy and vote in person on all matters submitted at the meeting.
 
By Order of the Board of Directors of
Noble Energy, Inc.
 
-s- Arnold J. Johnson
Arnold J. Johnson
Senior Vice President, General Counsel and Secretary
 
Houston, Texas
March 23, 2009
 
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR
THE 2009 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 28, 2009.
 
The Company’s Proxy Statement for the 2009 Annual Meeting of Stockholders, Annual Report to Stockholders for the fiscal year ended December 31, 2008 and Annual Report on Form 10-K for the fiscal year ended December 31, 2008 are available at http://materials.proxyvote.com/655044.


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(NOBLE ENERGY LOGO)
100 Glenborough Drive
Suite 100
Houston, Texas 77067
 
PROXY STATEMENT
 
For Annual Meeting of Stockholders
To Be Held On April 28, 2009
 
INTRODUCTION
 
The accompanying proxy, mailed together with this proxy statement, is solicited by and on behalf of the Board of Directors (“Board of Directors” or “Board”) of Noble Energy, Inc., a Delaware corporation (“Company”), for use at the annual meeting of stockholders of the Company to be held at 9:30 a.m. Central Time on Tuesday, April 28, 2009, at The Woodlands Waterway Marriott Hotel & Convention Center, 1601 Lake Robbins Drive, The Woodlands, Texas 77380, and at any adjournment or postponement thereof. The approximate date on which this proxy statement and the accompanying proxy will first be mailed to our stockholders is March 25, 2009.
 
Shares represented by valid proxies will be voted at the meeting in accordance with the directions given. If no directions are given, the shares will be voted in accordance with the recommendations of our Board unless otherwise indicated. Any stockholder of the Company returning a proxy has the right to revoke the proxy at any time before it is voted by communicating the revocation in writing to Arnold J. Johnson, Secretary, Noble Energy, Inc., 100 Glenborough Drive, Suite 100, Houston, Texas 77067, or by executing and delivering a proxy bearing a later date. No revocation by written notice or by delivery of another proxy will be effective until the notice of revocation or other proxy, as the case may be, has been received by the Company at or prior to the meeting.
 
In order for an item of business proposed by a stockholder to be considered properly brought before the annual meeting of stockholders as an agenda item or to be eligible for inclusion in our proxy statement, our By-laws require that the stockholder give written notice to our Secretary. The notice must specify certain information concerning the stockholder and the item of business proposed to be brought before the meeting. The notice must be received by our Secretary no later than 120 calendar days before the anniversary of the previous year’s annual meeting of stockholders; provided, however, that in the event that (1) no annual meeting was held in the previous year or (2) the date of the annual meeting has changed by more than 30 days from the date of the previous year’s meeting, notice by the stockholder must be received no later than the close of business on the tenth day following the earlier of the day on which notice of the meeting date was mailed or public disclosure of the meeting date was made for such notice to be timely. Accordingly, proper notice of a stockholder proposal for the 2010 annual meeting must be received by us no later than December 29, 2009.
 
Voting Procedures and Tabulation
 
Holders of record of our common stock may vote using one of the following three methods:
 
By Mail:  Stockholders of record may vote by signing, dating and returning the proxy card in the accompanying postage-paid envelope.
 
By Telephone:  Stockholders of record may call the toll-free number on the accompanying proxy card to vote by telephone, in accordance with the instructions set forth on the proxy card and through voice prompts received during the call.
 
By Internet:  By accessing the voting website listed on the accompanying proxy card, stockholders of record may vote through the internet in accordance with the instructions included on the proxy card and on the voting website. Stockholders electing to vote through the internet may incur telephone and internet access charges.


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Proxies submitted by telephone or the internet are treated in the same manner as if the stockholder had signed, dated and returned the proxy card by mail. Therefore, stockholders of record electing to vote by telephone or the internet should not return their proxy cards by mail.
 
Stockholders whose shares of our common stock are held in the name of a bank, broker or other holder of record (that is, “street name”) will receive separate instructions from such holder of record regarding the voting of proxies.
 
We will appoint one or more inspectors of election to act at the meeting and to make a written report thereof. Prior to the meeting, the inspectors will sign an oath to perform their duties in an impartial manner and according to the best of their ability. The inspectors will ascertain the number of shares outstanding and the voting power of each, determine the shares represented at the meeting and the validity of proxies and ballots, count all votes and ballots, and perform certain other duties as required by law.
 
The inspectors will tabulate the number of votes cast for, or withheld from, each matter submitted at the meeting for a stockholder vote. Votes that are withheld will be excluded entirely from the vote and will have no effect. Under the rules of the New York Stock Exchange (“NYSE”), brokers who hold shares in street name have the discretionary authority to vote on certain “routine” items when they have not received instructions from beneficial owners. For purposes of our 2009 annual meeting, routine items include the election of directors and the ratification of the appointment of our independent auditor. In instances where brokers are prohibited from exercising discretionary authority and no instructions are received from beneficial owners with respect to such item (so-called “broker non-votes”), the shares they hold will have no effect on the vote. For purposes of our 2009 annual meeting, brokers will be prohibited from exercising discretionary authority with respect to the proposal to approve the amendment to our 1992 Stock Option and Restricted Stock Plan (“1992 Plan”).
 
CORPORATE GOVERNANCE
 
We are committed to integrity, reliability and transparency in our disclosures to the public. To this end, we adhere to corporate governance practices designed to ensure that our business is conducted in the best interest of our stockholders and in compliance with our legal and regulatory obligations, including the listing standards of the NYSE and the rules and regulations of the Securities and Exchange Commission (“SEC”). We monitor developments in the area of corporate governance.
 
Recent Corporate Governance Initiatives
 
Our Board recently approved an amendment to our By-laws that will require each of our directors to receive a majority of the votes cast in uncontested elections. In contested elections, the vote standard will continue to be a plurality of votes cast. Our Board also approved an amendment to our Corporate Governance Guidelines to address situations where a director nominee fails to receive the required majority vote in an uncontested election, requiring a director nominee to execute an irrevocable letter of resignation in order to be nominated by our Board for election. The tendered resignation will only go into effect if (1) that nominee does not receive a majority of the votes cast in the uncontested election and (2) the nominee’s resignation is accepted by our Board. These amendments will not apply to the director election covered by this proxy statement, which will utilize the plurality vote standard, but will become effective on June 1, 2009.
 
Director Independence
 
The standards applied by our Board in affirmatively determining whether a director is “independent” in compliance with the listing standards of the NYSE generally provide that a director is not independent if:
 
1. the director is, or has been within the last three years, an employee of the Company, or an immediate family member (defined as including a person’s spouse, parents, children, siblings, mothers- and fathers-in-law, sons-and daughters-in-law, brothers- and sisters-in-law, and anyone, other than domestic employees, who shares such person’s home) is, or has been within the last three years, an executive officer, of the Company;


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2. the director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $120,000 per year in direct compensation from us, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service);
 
3. (a) the director is a current partner or employee of our internal or external auditor; (b) the director has an immediate family member who is a current partner of that firm; (c) the director has an immediate family member who is a current employee of that firm and personally works on our audit; or (d) the director or an immediate family member was, within the last three years, a partner or employee of that firm and personally worked on our audit during that time;
 
4. the director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of our present executive officers at the same time serves or served on that company’s compensation committee; or
 
5. the director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, us for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million or 2% of such other company’s consolidated gross revenues.
 
In addition to these objective standards, our Board has adopted a general standard, also in compliance with the NYSE listing standards, to the effect that no director qualifies as “independent” unless the Board affirmatively determines that the director has no material relationship with the Company that could interfere with the director’s ability to exercise independent judgment. Our Board exercises appropriate discretion in identifying and evaluating the materiality of any relationships directors may have with us or with parties that conduct business with us.
 
On February 17, 2009, our Board reviewed our directors’ relationships with the Company (and those of their immediate family members), including information related to transactions, relationships or arrangements between the Company and our directors or parties related to our directors. The following is a description of categories or types of transactions, relationships or arrangements considered by our Board in making its determination that these directors are independent:
 
  •  Jeffrey L. Berenson is President and CEO of Berenson & Company, as well as a director and member of the Compensation Committee of Epoch Holdings Corporation, a holding company that provides investment management and advisory services. Mr. Berenson is a former director of Patina Oil & Gas Corporation, which we acquired by merger in May 2005.
 
  •  Michael A. Cawley is President, Chief Executive Officer and Trustee of The Samuel Roberts Noble Foundation, Inc. (“Foundation”), which paid $9,994 to us in 2008 for the use of our aircraft. Mr. Cawley received payments totaling $45,799 in 2008 attributable to his interests in certain oil and gas royalties that he purchased from the Company in the 1990s. Mr. Cawley is also a director and member of the Compensation Committee of Noble Corporation, a publicly traded drilling company with which the Company conducted business in 2008.
 
  •  Edward F. Cox received payments in 2008 totaling $361,076 attributable to his interests in certain oil and gas royalties and interests in two general partnerships that hold royalties and are managed by the Company. Mr. Cox purchased these interests from the Company in the 1980s and 1990s.
 
  •  Eric P. Grubman is Executive Vice President of the National Football League and a private equity investor in Vantage Energy.
 
  •  Kirby L. Hedrick was, throughout 2008, a director and member of the Audit Committee and member and chair of the Reserves, Operations and Environmental, Health and Safety Committee of Pengrowth Energy Trust, a closed-end investment trust that engages in the acquisition, ownership and management of working interests and royalty interests in oil and natural gas properties and processing facilities in Canada. Mr. Hedrick was also a member of the Wyoming Environmental Quality Council throughout 2008. He discontinued both relationships effective December 31, 2008.


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  •  Scott D. Urban retired as Group Vice President, Upstream for several profit centers at BP in 2005, and is a partner in Edgewater Energy Partners, an organizational consulting firm for energy-related industries. Mr. Urban is also a director and member of the Nominating and Governance Committee and Compensation Committee of Pioneer Drilling.
 
  •  William T. Van Kleef is a director and chair of the Audit Committee of Oil States International, Inc., a publicly traded company that provides specialty products and services to oil and gas drilling and production companies worldwide and with which the Company conducted business in 2008. Mr. Van Kleef retired as Chief Operating Officer of Tesoro Corporation in 2005.
 
After reviewing these transactions, relationships and arrangements, and after applying the NYSE independence standards described above, our Board affirmatively determined that no material relationship existed that would interfere with the ability of Messrs. Berenson, Cawley, Cox, Grubman, Hedrick, Urban or Van Kleef to exercise independent judgment and that each is independent for Board membership purposes. Our Board also determined that all members of our Audit Committee, Corporate Governance and Nominating Committee and Compensation, Benefits and Stock Option Committee are independent under the NYSE independence standards and applicable SEC rules.
 
Lead Independent Director and Executive Sessions
 
  •  We have an empowered Lead Independent Director, currently Michael A. Cawley, who is elected annually by our independent directors. Our Board believes that the interests of the Company and its stockholders continue to be best served by the leadership and direction provided by a full-time Chairman and Chief Executive Officer with an empowered Lead Independent Director serving as a key component of our governance structure, subject to oversight by the independent members of our Board. We have not experienced any problematic governance or management issues resulting from this arrangement. The Lead Independent Director’s responsibilities and authority generally include:
 
  •  approving the scheduling of regular and, where feasible, special meetings of the Board to ensure that there is sufficient time for discussion of all agenda items;
 
  •  consulting with the Chairman to establish, and approving, the agenda for each Board meeting;
 
  •  discussing with the Chairman and approving the scope of materials to be delivered to the directors in advance of Board meetings;
 
  •  presiding at all executive sessions of the independent or non-management directors and all other Board meetings at which the Chairman is not present;
 
  •  serving as a liaison between the Chairman and the independent or non-management directors;
 
  •  coordinating the activities of such directors;
 
  •  coordinating the agenda for, and moderating, sessions of the Board’s independent directors and other non-management directors;
 
  •  facilitating communications among the other members of the Board; and
 
  •  consulting with the chairs of the Board committees and soliciting their participation to avoid diluting their authority or responsibilities.
 
     Our Lead Independent Director’s responsibilities and authority are more specifically described in our Corporate Governance Guidelines.
 
  •  Our non-management directors hold executive sessions without management at regularly scheduled meetings of our Board and at such other times as our Lead Independent Director shall designate. These sessions take place outside the presence of our Chief Executive Officer or any of our other employees. The Lead Independent Director presides at these executive sessions, which allow our non-management directors the opportunity to separately consider management performance and broader matters of strategic significance to us. During 2008, our non-management directors met six times in executive sessions of the Board.


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Audit Committee
 
  •  All members of our Audit Committee have been determined to meet the standards of independence required of audit committee members by the NYSE and applicable SEC rules. See “Director Independence” above.
 
  •  Our Board has determined that all members of our Audit Committee are financially literate. Our Board has also determined that William T. Van Kleef possesses accounting or related financial management expertise within the meaning of the listing standards of the NYSE and is an “audit committee financial expert” within the meaning of applicable SEC rules.
 
  •  Our Audit Committee operates under a charter adopted by our Board that governs its duties and conduct. A copy of the charter can be obtained free of charge from our website, www.nobleenergyinc.com, or by written request to us at the address appearing on the first page of this proxy statement to the attention of our Secretary or by calling (281) 872-3100.
 
  •  KPMG LLP, our independent auditor, reports directly to our Audit Committee.
 
  •  Our Audit Committee, consistent with the Sarbanes-Oxley Act of 2002 and the rules adopted thereunder, meets with management and our independent auditor to receive information concerning, among other things, the integrity of our financial controls and reporting.
 
  •  Our Audit Committee has adopted a Policy on Reporting Concerns and Complaints Regarding Accounting, Internal Accounting Controls and Auditing Matters to enable confidential and anonymous reporting to the Audit Committee of concerns regarding questionable accounting matters.
 
Compensation, Benefits and Stock Option Committee
 
  •  All members of our Compensation, Benefits and Stock Option Committee (“Compensation Committee”) have been determined to meet the NYSE standards for independence. See “Director Independence” above. Further, each member of our Compensation Committee is a “Non-Employee Director” as defined in Rule 16b-3 under the Securities Exchange Act of 1934 and an “outside director” as defined for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended.
 
  •  Our Compensation Committee operates under a charter adopted by our Board that governs its duties and conduct. A copy of the charter can be obtained free of charge from our website, www.nobleenergyinc.com, or by written request to us at the address appearing on the first page of this proxy statement to the attention of our Secretary or by calling (281) 872-3100.
 
Corporate Governance and Nominating Committee
 
  •  All members of our Corporate Governance and Nominating Committee (“Governance Committee”) have been determined to meet the NYSE standards for independence. See “Director Independence” above.
 
  •  Our Governance Committee operates under a charter adopted by our Board that governs its duties and conduct. A copy of the charter can be obtained free of charge from our website, www.nobleenergyinc.com, or by written request to us at the address appearing on the first page of this proxy statement to the attention of our Secretary or by calling (281) 872-3100.
 
  •  Our Governance Committee considers candidates for Board membership suggested by its members and other Board members, as well as by our management and stockholders. A stockholder who wishes to recommend a prospective nominee for the Board should follow the procedures described in this proxy statement under the caption “Evaluation of Director Nominees.”
 
Corporate Governance Guidelines
 
  •  We have adopted a set of Corporate Governance Guidelines, including standards for director qualification and director responsibilities. The guidelines can be obtained free of charge from our website, www.nobleenergyinc.com, or by written request to us at the address appearing on the first page of this proxy statement to the attention of our Secretary or by calling (281) 872-3100.


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Codes of Business Conduct and Ethics
 
  •  We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees and sets out our policy regarding laws and business conduct, contains other policies relevant to business conduct and sets out a process for reporting violations thereof. A copy of this code can be obtained free of charge from our website, www.nobleenergyinc.com, or by written request to us at the address appearing on the first page of this proxy statement to the attention of our Secretary or by calling (281) 872-3100. Amendments to this code will be promptly posted on our website.
 
  •  We have also adopted a Code of Ethics for Chief Executive and Senior Financial Officers, violations of which are to be reported to our Audit Committee. A copy of this code can be obtained free of charge from our website, www.nobleenergyinc.com, or by written request to us at the address appearing on the first page of this proxy statement to the attention of our Secretary or by calling (281) 872-3100. Amendments to this code will also be promptly posted on our website.
 
Personal Loans to Executive Officers and Directors
 
We comply with, and operate in a manner consistent with, applicable law prohibiting extensions of credit in the form of personal loans to, or for the benefit of, our directors and executive officers.
 
Directors Attendance at Annual Meetings of Stockholders
 
All of our directors are expected to attend each annual meeting of our stockholders. A director who is unable to attend the annual meeting, which it is understood will occur on occasion, is expected to notify the Chairman of the Board in advance of such meeting. Attendance at our annual meeting will be considered by our Governance Committee in assessing each director’s performance. Last year, all of our directors attended our annual meeting of stockholders.
 
Communication with the Board of Directors
 
Stockholders and other interested parties may contact any member of our Board, any Board committee or any chair of any such committee by mail, electronically or by calling our independent, toll-free compliance line. To communicate by mail with our Board, any individual director or any group or committee of directors, correspondence should be addressed to our Board or any individual director or group or committee of directors by either name or title. All correspondence should be sent to Noble Energy, Inc., Attention: Secretary, at 100 Glenborough, Suite 100, Houston, Texas 77067. To communicate with any of our directors electronically, stockholders should go to our website at www.nobleenergyinc.com. Under the headings “Corporate Governance/Corporate Governance Guidelines,” you will find a link under Exhibit 3 (“Shareholder Communications with Directors”) that may be used for writing an electronic message to our Board, any individual director, or any group or committee of directors. In addition, stockholders may call our independent, toll-free compliance line listed on our website under the heading “Corporate Governance/Audit Committee Complaints Policy.”
 
All stockholder communications properly received will be reviewed by the office of our General Counsel to determine whether the contents represent a message to our directors. Any contents that are not in the nature of advertising, promotions of a product or service, or patently offensive material will be forwarded promptly to the appropriate director or directors.
 
VOTING SECURITIES
 
Only holders of record of our common stock, par value $3.331/3 per share, at the close of business on March 10, 2009, the record date for our annual meeting, are entitled to notice of, and to vote at, the meeting. A majority of the shares of common stock entitled to vote, present in person or represented by proxy, is necessary to constitute a quorum. Abstentions and broker non-votes on filed proxies and ballots are counted as present for establishing a quorum. On the record date for our annual meeting, there were issued and outstanding 173,328,806 shares of common stock. Each share of common stock is entitled to one vote.


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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
 
The following tabulation sets forth, as of March 10, 2009, information with respect to the only persons who were known to us to be beneficial owners of more than five percent of the outstanding shares of our common stock, based on statements filed with the SEC pursuant to Section 13(g) or 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
 
                 
    Number of Shares
   
    of Common Stock
  Percent
Name and Address of Beneficial Owner
  Beneficially Owned   of Class
 
Wellington Management Company, LLP
    18,051,752 (1)     10.4 %
75 State Street
Boston, MA 02109
               
                 
FMR LLC
    14,758,588 (2)     8.5 %
82 Devonshire Street
Boston, MA 02109
               
                 
Barclays Global Investors, NA
    12,902,746 (3)     7.4 %
400 Howard Street
San Francisco, CA 94105
               
                 
NWQ Investment Management Company, LLC
    12,195,877 (4)     7.0 %
2049 Century Park East, 16th Floor
Los Angeles, CA 90067
               
                 
Capital World Investors
    9,729,000 (5)     5.6 %
333 South Hope Street
Los Angeles, CA 90071
               
 
 
(1) Wellington Management Company LLP, in its capacity as investment adviser, may be deemed to beneficially own 18,051,752 shares of common stock, which are held of record by clients of Wellington Management Company LLP. Wellington has shared voting power with respect to 9,552,830 shares of common stock and shared dispositive power with respect to 18,010,852 shares of common stock.
 
(2) Included in the shares of common stock that are beneficially owned by FMR LLC are (a) 14,380,571 shares beneficially owned by Fidelity Management & Research Company, a wholly-owned subsidiary of FMR Corp. and an investment adviser registered under the Investment Advisers Act of 1940 (“Investment Advisers Act”) (which includes 9,778,336 shares held by Fidelity Contrafund, an investment company), (b) 1,401 shares beneficially owned by Strategic Advisors, Inc., a wholly-owned subsidiary of FMR LLC and an investment adviser registered under the Investment Advisers Act, (c) 308,326 shares beneficially owned by Pyramis Global Advisors Trust Company, an indirect wholly-owned subsidiary of FMR LLC and a bank as defined under Section 3(a)(6) of the Exchange Act, and (d) 68,290 shares beneficially owned by FIL Limited, a qualified institution.
 
(3) Included in the shares of common stock that are beneficially owned by Barclays Global Investors, NA. are (a) 1,041,663 shares beneficially owned by Barclays Global Investors, NA, a bank as defined under Section 3(a)(6) of the Exchange Act, which has sole voting power with respect to 868,997 shares of common stock and sole dispositive power with respect to 1,041,663 shares of common stock, (b) 2,416,098 shares beneficially owned by Barclays Global Fund Advisors, an investment adviser registered under the Investment Advisers Act, which has the sole voting power with respect to 2,405,300 shares of common stock and the sole dispositive power with respect to 2,416,098 shares of common stock, (c) 1,041,663 shares beneficially owned by Barclays Global Investors, Ltd, a bank as defined under Section 3(a)(6) of the Exchange Act, which has sole voting power with respect to 868,997 shares of common stock and sole dispositive power with respect to 1,041,663 shares of common stock, (d) 641,792 shares beneficially owned by Barclays Global Investors Japan Limited, an investment adviser registered under the Investment Advisers Act of 1940, (e) 244,989 shares beneficially owned by Barclays Global Investors Canada Limited, an investment adviser registered under the Investment Advisers Act, and (f) 17,199 shares beneficially owned by Barclays Global Investors Australia Limited.


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(4) Includes shares of common stock beneficially owned by clients of NWQ Investment Management Company, LLC, which clients may include investment companies registered under the Investment Company Act of 1940, as amended (“Investment Company Act”), and/or employee benefit plans, pension funds, charitable funds, and other institutional and high net worth clients. NWQ has sole voting power with respect to 10,609,328 shares of common stock and sole dispositive power with respect to 12,195,877 shares of common stock.
 
(5) Capital World Investors is deemed to be the beneficial owner of 9,729,000 shares of common stock as a result of CRMC acting as investment adviser to various investment companies registered under the Investment Company Act.
 
PROPOSAL I
 
ELECTION OF DIRECTORS
 
As of the date of this proxy statement, our Board consists of nine directors, seven of whom are independent. Information regarding the business experience of each nominee is provided below. All directors are elected annually to serve until the next annual meeting and until their successors are elected.
 
Directors will be elected by plurality vote of the shares present at the 2009 annual meeting, meaning that the director nominee with the most affirmative votes for a particular slot is elected for that slot. The proxyholders will vote in favor of the nine candidates listed below unless contrary instructions are given.
 
If you sign your proxy card but do not give instructions with respect to the voting of directors, your shares will be voted for the nine persons recommended by our Board, except where authorization to do so is withheld.
 
Our Board expects that all of the nominees will be available to serve as directors as indicated. In the event that any nominee should become unavailable, however, the proxyholders will vote for a nominee or nominees who would be designated by our Board unless the Board chooses to reduce the number of directors serving on our Board.
 
Company Nominees for Director
 
Jeffrey L. Berenson — Mr. Berenson, age 58, is President and Chief Executive Officer of Berenson & Company, a private investment banking firm in New York City that he co-founded in 1990. From 1978 until co-founding Berenson & Company, Mr. Berenson was with Merrill Lynch’s Mergers and Acquisitions department, becoming head of that department in 1986 and then co-head of its Merchant Banking unit in 1988. He was appointed to the Board of Directors of Patina Oil & Gas Corporation (“Patina”) in December 2002 and joined our Board upon completion of our merger with Patina on May 16, 2005. Mr. Berenson is also a member of the Board of Directors of Epoch Holdings Corporation.
 
Michael A. Cawley — Mr. Cawley, age 61, has served as President and Chief Executive Officer of The Samuel Roberts Noble Foundation, Inc. (“Foundation”) since February 1, 1992, after serving as Executive Vice President of the Foundation since January 1, 1991. Prior to 1991, Mr. Cawley was the President of Thompson, Cawley, Veazey & Burns, a professional corporation, attorneys at law. Mr. Cawley has served as a trustee of the Foundation since 1988 and is also a director of Noble Corporation. He has served on our Board since 1995 and has been our Lead Independent Director since 2001.
 
Edward F. Cox — Mr. Cox, age 62, is Of Counsel to, and prior to 2009 was a partner in, the law firm of Patterson Belknap Webb & Tyler llp, New York, New York, for more than five years serving as the chair of the firm’s corporate department and as a member of its management committee. He is chair of the New York League of Conservation Voters Education Fund, of the community college and charter school committees of the Trustees of The State University of New York and of the State University Construction Fund. He is also a member of New York’s merit selection constitutional Commission on Judicial Nomination. In 2006 and 2007, Mr. Cox served as the New York State Chair of Senator John McCain’s presidential campaign. Mr. Cox has served on our Board since 1984.
 
Charles D. Davidson — Mr. Davidson, age 59, has served as our President and Chief Executive Officer since October 2000 and has served as Chairman of our Board since April 2001. Prior to October 2000, he served as


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President and Chief Executive Officer of Vastar Resources, Inc. (“Vastar”) from March 1997 to September 2000 (Chairman from April 2000) and was a Vastar director from March 1994 to September 2000. From September 1993 to March 1997, he served as a Senior Vice President of Vastar. From 1972 to October 1993, he held various positions with ARCO.
 
Thomas J. Edelman — Mr. Edelman, age 58, founded Patina Oil & Gas Corporation and served as its Chairman and Chief Executive Officer from its formation in 1996 through its merger with Noble Energy, Inc. in 2005. He co-founded Snyder Oil Corporation and was its President from 1981 through 1997. He served as Chairman and Chief Executive Officer and later as Chairman of Range Resources Corporation from 1988 through 2003. From 1980 to 1981, he was with The First Boston Corporation and, from 1975 through 1980 with Lehman Brothers Kuhn Loeb Incorporated. Mr. Edelman is Managing Partner of White Deer Energy LP, an energy private equity fund, and serves as Chairman of Berenson & Company. He is also President of Lenox Hill Neighborhood House, a Trustee and Chair of the Investment Committee of The Hotchkiss School and a member of the Board of Directors of Georgetown University.
 
Eric P. Grubman — Mr. Grubman, age 51, has served as Executive Vice President of the National Football League since 2004. He was responsible for Finance and Strategic Transactions from 2004 to 2006, and has served as the League’s President of Business Ventures from 2006 to present. He was a private investor from 2001 to 2004, Co-President of Constellation Energy Group, Inc. from 2000 to 2001 and Partner and Co-Head of the Energy Group at Goldman Sachs from 1996 to 2000. Mr. Grubman joined our Board on January 27, 2009.
 
Kirby L. Hedrick — Mr. Hedrick, age 56, served as Executive Vice President over upstream operations for Phillips Petroleum Company from 1997 until his retirement in 2000. He joined our Board on August 1, 2002.
 
Scott D. Urban — Mr. Urban, age 55, served in executive management positions at Amoco and its successor, BP, from 1977 to 2005. At the time of his retirement from BP in 2005, he was Group Vice President, Upstream for several profit centers including North America Gas, Alaska, Egypt and Middle East and, before that, Group Vice President, Upstream North Sea. Mr. Urban held various positions at Amoco including, at the time of its merger with BP, Group Vice President, Worldwide Exploration. He is also a partner in Edgewater Energy Partners, an organizational consulting firm for energy-related industries, and a member of the Board of Directors of Pioneer Drilling. Mr. Urban joined our Board on October 23, 2007.
 
William T. Van Kleef — Mr. Van Kleef, age 57, served in executive management positions at Tesoro Corporation (“Tesoro”) from 1993 to 2005, most recently as Tesoro’s Executive Vice President and Chief Operating Officer. During his tenure at Tesoro, Mr. Van Kleef held various positions, including President, Tesoro Refining and Marketing, and Executive Vice President and Chief Financial Officer. Before joining Tesoro, Mr. Van Kleef, a Certified Public Accountant, served in various financial and accounting positions with Damson Oil from 1982 to 1991, most recently as Senior Vice President and Chief Financial Officer. He joined our Board on November 11, 2005. Mr. Van Kleef is also a member of the Board of Directors of Oil States International, Inc.
 
Generally, our By-laws provide that a stockholder must deliver written notice to our Secretary no later than 120 calendar days prior to our annual meeting naming the stockholder’s nominee(s) for director and specifying certain information concerning the stockholder and nominee(s) as described below under the section “Evaluation of Director Nominees.” Accordingly, a stockholder’s nominee(s) for director to be presented at our 2010 annual meeting of stockholders must be received by us no later than December 29, 2009.
 
Our Board unanimously recommends that stockholders vote FOR the election of each of its nine nominees.


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INFORMATION CONCERNING THE BOARD OF DIRECTORS
 
Our Board held eleven meetings in 2008, consisting of five regular meetings, its annual organizational meeting and five special meetings.
 
Evaluation of Director Nominees
 
Our Governance Committee believes that the minimum qualifications for serving as a director of the Company are that a nominee demonstrate, by significant accomplishment in his or her field, an ability to make a meaningful contribution to our Board’s oversight of the business and affairs of the Company and have an impeccable record and reputation for honest and ethical conduct in both his or her professional and personal activities. Nominees for director shall be those people who, after taking into account their skills, expertise, integrity, diversity, character, judgment, age, independence, corporate experience, length of service, potential conflicts of interest and commitments (including, among other things, service on the boards or comparable governing bodies of other public companies, private business companies, charities, civic bodies or similar organizations) and other qualities, are believed to enhance our Board’s ability to manage and direct, in an effective manner, the affairs and business of the Company, including, when applicable, to enhance the ability of committees of our Board to fulfill their duties and to satisfy any independence requirements imposed by law, regulation or listing standards of the NYSE.
 
In general, nominees for director should have an understanding of the workings of large business organizations such as the Company and senior level executive experience, as well as the ability to make independent, analytical judgments, the ability to be an effective communicator and the ability and willingness to devote the time and effort to be an effective and contributing member of our Board. In addition, our Governance Committee will examine a candidate’s specific experiences and skills, time availability in light of other commitments, potential conflicts of interest and independence from management and the Company. Our Governance Committee will also seek to have our Board represent a diversity of backgrounds, experience, gender and race.
 
Our Governance Committee will identify potential nominees by asking current directors and executive officers to notify the committee if they become aware of persons meeting the criteria described above who have had a change in circumstances that might make them available to serve on our Board — for example, retirement as a CEO or CFO of a public company or exiting government or military service or business and civic leaders in the communities in which our facilities are located. Our Governance Committee also, from time to time, will engage firms that specialize in identifying director candidates. Our Governance Committee will also consider candidates recommended by our stockholders.
 
Once a person has been identified by our Governance Committee as a potential candidate, the committee may collect and review available information regarding the person to assess whether the person should be considered further. If our Governance Committee determines that the person warrants further consideration, the committee Chair or another member of our Governance Committee will contact the individual. Generally, if the person expresses a willingness to be considered and to serve on our Board, our Governance Committee will request information, review the person’s accomplishments and qualifications, including in light of any other candidates that the committee might be considering, and conduct one or more interviews with the candidate. In certain instances, Governance Committee members may contact one or more references provided by the candidate or may contact other members of the business community or other persons that may have greater first-hand knowledge of the candidate’s accomplishments. Our Governance Committee’s evaluation process will be the same whether or not a candidate is recommended by a stockholder, although our Board may take into consideration the number of shares held by the recommending stockholder and the length of time that such shares have been held.
 
Our Governance Committee will consider director nominees of stockholders, provided that such recommendations are made in writing to the attention of our Secretary and generally received not less than 120 days before the anniversary date of the immediately previous year’s annual meeting of stockholders. A stockholder must include the following information with each recommendation for a director nominee:
 
  •  the name and address of the stockholder and evidence of the stockholder’s ownership of our stock, including the number of shares owned and the length of time of ownership, as well as any other direct or indirect pecuniary or economic interest the person may have in any of our stock;


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  •  whether the stockholder intends to appear in person or by proxy at our annual stockholders’ meeting to make the nomination;
 
  •  a description of all arrangements or understandings between the stockholder and the nominee and any other person or persons (naming such person or persons) pursuant to which the nomination is made; and
 
  •  the name, age and business and residence address of the candidate, the candidate’s résumé or a listing of his or her principal occupation or employment and qualifications to be a member of our Board and the person’s consent to be named as a director if selected by our Governance Committee and nominated by our Board; and
 
  •  the class and number of shares of our stock that are beneficially owned by the candidate and any other direct or indirect pecuniary economic interest that the candidate may have in any of our stock.
 
Changes in the Board of Directors
 
Bruce A. Smith resigned from our Board effective February 1, 2008. After evaluation of director candidates to fill the position vacated by Mr. Smith, Eric P. Grubman was appointed to our Board on January 27, 2009.
 
Committees of the Board of Directors
 
Our Board has four standing committees, whose names, current members and purposes are as follows:
 
Audit Committee — William T. Van Kleef, Chair; Michael A. Cawley; and Scott D. Urban. The primary purpose of our Audit Committee is to: (1) assist our Board in fulfilling its responsibility to oversee the integrity of our financial statements, our compliance with legal and regulatory requirements, the independent auditor’s qualifications and independence, and the performance of our internal audit function and independent auditor and (2) prepare a committee report as required by the SEC to be included in our annual proxy statement. Our Audit Committee held eight meetings during 2008. For more details, see information under the section “Report of the Audit Committee.”
 
Compensation, Benefits and Stock Option Committee — Kirby L. Hedrick, Chair; Jeffrey L. Berenson; and Edward F. Cox. The purpose of our Compensation Committee is to: (1) review and approve our goals and objectives in the areas of: (a) salary and bonus compensation, (b) benefits, and (c) equity-based compensation, as they relate to our Chief Executive Officer (“CEO”), evaluating our CEO’s performance based on those goals and objectives and, either as a committee or together with the other independent directors (as directed by our Board), determine and approve our CEO’s compensation level based on that evaluation; (2) make recommendations to our Board with respect to non-CEO executive officer compensation, incentive-compensation plans and equity-based plans that are subject to Board approval; and (3) produce an annual report on executive compensation as required by the SEC to be included, or incorporated by reference, in our proxy statement or other applicable SEC filings. Our Board has delegated authority to our Compensation Committee to determine and approve our compensation philosophy; the annual salary, bonus, equity-based compensation and other benefits applicable to our executive officers; and equity-based compensation applicable to non-executive-officer employees. Our Compensation Committee held seven meetings during 2008. For more details, see information under the section “Compensation Discussion and Analysis.”
 
Corporate Governance and Nominating Committee — Michael A. Cawley, Chair; Jeffrey L. Berenson; Edward F. Cox; Kirby L. Hedrick; Scott D. Urban; and William T. Van Kleef. The overall purpose of our Governance Committee is to: (1) take a leadership role in providing a focus on corporate governance to enable and enhance our short- and long-term performance; (2) engage in appropriate identification, selection, retention and development of qualified directors consistent with criteria approved by our Board; (3) develop, and recommend to our Board, a set of corporate governance principles or guidelines applicable to us; (4) advise our Board with respect to the Board’s composition, procedures and committees; and (5) oversee the evaluation of our Board and management. Our Governance Committee held five meetings during 2008.
 
Environment, Health and Safety Committee — Edward F. Cox, Chair; Charles D. Davidson; Thomas J. Edelman; Kirby L. Hedrick; and Scott D. Urban. The overall purpose of our Environment, Health and Safety


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Committee is to assist our Board in determining whether we have appropriate policies and management systems in place with respect to environment, health and safety (“EH&S”) matters and to monitor and review compliance with applicable EH&S laws, rules and regulations. Our Environment, Health and Safety Committee held three meetings during 2008.
 
Each of our directors attended at least 75% of the meetings of our Board and its committees of which such director was a member during 2008.
 
Compensation Committee Interlocks and Insider Participation
 
Kirby L. Hedrick, Jeffrey L. Berenson and Edward F. Cox served on our Compensation Committee for all of 2008. There were no Compensation Committee interlocks nor insider (employee) participation during 2008.
 
PROPOSAL II
 
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR
 
The Audit Committee of our Board has appointed the firm of KPMG LLP to serve as our independent auditor for the fiscal year ending December 31, 2009. This firm has audited our accounts since May 2002. Although action by our stockholders on this matter is not required, our Audit Committee believes that it is important to seek stockholder ratification of this appointment in light of the critical role played by our independent auditor in maintaining the integrity of our financial controls and reporting.
 
One or more representatives of KPMG LLP are expected to be present at our annual meeting, will be able to make a statement if they so desire, and will be available to respond to appropriate questions.
 
Our Board unanimously recommends that stockholders vote FOR ratification of the appointment of KPMG LLP as our independent auditor.
 
PROPOSAL III
 
APPROVAL OF AMENDMENT TO
1992 STOCK OPTION AND RESTRICTED STOCK PLAN
 
Our 1992 Plan was adopted by our Board and approved by our stockholders at the 1992 annual meeting of stockholders, and was most recently amended in 2007. At the 2009 annual meeting, our stockholders are being asked to approve an amendment to our 1992 Plan to increase the number of shares of common stock authorized for issuance under the 1992 Plan from 22,000,000 shares to 24,000,000 shares (an increase of 2,000,000 shares). Our Board unanimously adopted this amendment on March 18, 2009, subject to stockholder approval at our annual meeting.
 
Background and Purpose
 
Our Board recommends approval of the amendment to the 1992 Plan to enable the continued use of the 1992 Plan for stock-based grants consistent with the objectives of our compensation program in order to:
 
  •  promote the long-term success of the Company;
 
  •  continue to attract and retain high quality talent;
 
  •  motivate key employees by instilling a sense of business ownership in the Company;
 
  •  provide incentive compensation opportunities that are competitive with those of our compensation peer group; and
 
  •  further align the interests of our stockholders, executive officers and employees.
 
We believe that the success of our compensation program, including the use of stock-based grants under our 1992 Plan, is well-evidenced by the performance of our common stock over the last several years, as we ranked third


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among our peer group in total stockholder return for the three-year period 2006 through 2008 at 24.9%. Stockholder return represents the change in capital value of our common stock for the period indicated, plus dividends, expressed as a percentage.
 
The use of stock-based grants under our 1992 Plan continues to be an important part of our compensation program. Of the 22,000,000 shares currently authorized for issuance under the 1992 Plan, 2,805,109 shares remain as of March 10, 2009 after January 31, 2009 grants totaling 1,893,679 shares. We do not believe that this leaves sufficient shares available for more than one additional year of grants under the 1992 Plan. By increasing the number of shares authorized for issuance under our 1992 Plan by 2,000,000, a total of 4,805,109 shares would be available. This increase would, in essence, replenish the shares consumed in our January 31, 2009 grants and give us the flexibility to continue to make stock-based grants over the next two years in amounts determined appropriate by our Compensation Committee. The proposed amendment will not be implemented unless approved by our stockholders. If the proposed amendment is not approved by our stockholders, the 1992 Plan will remain in effect in its present form.
 
As of the record date of March 10, 2009, there were a total of 173,328,806 shares of our common stock issued and outstanding. In addition to the shares remaining available for issuance under the 1992 Plan, there were 568,841 shares available for grant under the 2005 Stock Plan for Non-Employee Directors of Noble Energy, Inc. (“2005 Plan”). The Company had a total of 7,004,445 stock options outstanding with a weighted average exercise price of $44.55 and a weighted average remaining term of 6.6 years, and 1,341,989 shares of restricted stock outstanding as of the record date.
 
The following is a summary of the principal features of our 1992 Plan as amended to reflect the proposed plan amendment. The summary does not purport to be a complete description of all provisions of our 1992 Plan and is qualified in its entirety by the text of the 1992 Plan, a copy of which (as amended to reflect the proposed plan amendment) is attached to this proxy statement as Appendix A. Capitalized terms not otherwise defined below have the meanings ascribed to them in the 1992 Plan.
 
General
 
Under our 1992 Plan, shares of Common Stock may be subject to grants of Nonqualified Options, SARs or awards of Restricted Stock to officers and other employees of the Company or one of its Affiliates. Our 1992 Plan originally also permitted grants of Incentive Options but was amended in 1996 to provide, among other things, that no Incentive Options or any SARs that relate to such Incentive Options could be granted after December 9, 2006. Nonqualified Options and any SARs related thereto may be granted, and Restricted Stock may be awarded, until the shares of Common Stock available under the 1992 Plan have been exhausted or the 1992 Plan has been terminated. Shares of Common Stock covered by a Nonqualified Option that expires or terminates prior to exercise and shares of Restricted Stock returned to the Company are again available for grant of Nonqualified Options and awards of Restricted Stock. Our 1992 Plan contains antidilution provisions that apply in the event of an increase or decrease in the number of outstanding shares of Common Stock, effected without receipt of consideration therefor by the Company, through a stock dividend or through a stock split, combination or exchange of our shares that results from a recapitalization, merger or other restructuring in which the Company is the surviving company. In the event of such increase or decrease, appropriate adjustments will be made in the maximum number of shares subject to the 1992 Plan and the number of shares and option prices under then outstanding Nonqualified Options.
 
Administration
 
Our 1992 Plan provides that it is to be administered by a committee of our Board. The committee must consist of two or more of our directors, all of whom must be (1) Non-Employee Directors as defined in Rule 16b-3 of the Exchange Act and (2) Outside Directors as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”), and the regulations promulgated thereunder. Our Compensation Committee meets these requirements and thus administers our 1992 Plan. In doing so, our Compensation Committee determines the grants of Nonqualified Options and awards of Restricted Stock, the terms and provisions of the respective agreements covering the grants or awards and all other decisions concerning the 1992 Plan. Our 1992 Plan provides that the determination of the committee is binding with respect to all questions of interpretation and


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application of the 1992 Plan and of Nonqualified Options granted or awards of Restricted Stock made thereunder, subject to the express provisions of the 1992 Plan and except as set forth below under “Stock Options and SARs” and “Amendment and Duration of the 1992 Plan.”
 
Eligibility
 
All of our regular salaried executive officers and other employees and those of our Affiliates are eligible to participate in the 1992 Plan. As of March 10, 2009, all of our executive officers and approximately 492 other current employees participate in the 1992 Plan.
 
Market Value
 
On March 10, 2009, the reported closing price per share of our Common Stock on the NYSE was $45.74.
 
Stock Options and SARs
 
Our 1992 Plan provides that, from time to time during the term of the plan, the committee, in its sole discretion, may grant Nonqualified Options, Restricted Stock or any combination thereof to any employee eligible under the 1992 Plan. Each person who accepts a Nonqualified Option is required to enter into an agreement with the Company whereupon the person shall become a participant in the 1992 Plan in accordance with the terms of the agreement.
 
The committee may, from time to time, grant SARs in conjunction with all or any portion of a Nonqualified Option either at the time of the initial Nonqualified Option grant or at any time after the initial grant while the Nonqualified Option is outstanding. SARs generally will be subject to the same terms and conditions and exercisable to the same extent as Nonqualified Options, as described above. SARs entitle an Optionee to receive without payment to the Company (except for applicable withholding taxes) the excess of the aggregate fair market value per share with respect to which the SAR is then being exercised (determined as of the date of the exercise) over the aggregate purchase price of the shares as provided in the related Nonqualified Option. Payment may be made in shares of already owned Common Stock or in cash, or a combination thereof, as determined by the committee.
 
Option Price
 
The option price for each Share covered by a Nonqualified Option shall not be less than the greater of (1) the par value of the Share or (2) 100% of the Fair Market Value of the Share at the time the Nonqualified Option is granted. If the Company agrees to substitute a new option under the 1992 Plan for an old Nonqualified Option, or to assume an old Nonqualified Option, as provided for in the 1992 Plan, the option price of the Shares covered by each new Nonqualified Option or assumed Nonqualified Option may be otherwise determined by a formula; provided, however, in no event shall: (a) the excess of the aggregate Fair Market Value of the Shares subject to the Nonqualified Option immediately after the substitution or assumption over the aggregate option price of the Shares be more than the excess of the aggregate Fair Market Value of all Shares subject to the option immediately prior to the substitution or assumption over the aggregate option price of the Shares; or (b) the ratio of the option price to the Fair Market Value of the stock subject to the Nonqualified Option immediately after the substitution or assumption be more favorable to the Optionee than the ratio of the option price to the Fair Market Value of the stock subject to the old Nonqualified Option immediately prior to the substitution or assumption, on a Share by Share basis.
 
Restricted Stock
 
Our 1992 Plan provides that Restricted Stock may be awarded by the committee to the eligible recipients as it may determine from time to time. The eligible recipients are those individuals who are eligible for Nonqualified Option grants. Restricted Stock is Common Stock that may not be sold, assigned, transferred, discounted, exchanged, pledged or otherwise encumbered or disposed of until the terms and conditions set by the committee, which terms and conditions may include, among other things, the achievement of specific goals, have been satisfied (“Restricted Period”). During the Restricted Period, unless specifically provided otherwise in accordance with the terms of the 1992 Plan, the recipient of Restricted Stock would be the record owner of the shares and have all the


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rights of a stockholder with respect to the shares, including the right to vote and the right to receive dividends or other distributions made or paid with respect to the shares.
 
Our 1992 Plan provides that the committee has the authority to cancel all or any portion of any outstanding restrictions prior to the end of the Restricted Period with respect to any and all of the shares of Restricted Stock awarded to an individual on the terms and conditions as the committee may deem appropriate. If the terms and conditions for the removal of the restrictions on the Restricted Stock that has been awarded to a recipient are not satisfied, the Restricted Stock is forfeited by the recipient and returned to the Company.
 
Amendment and Duration of the 1992 Plan
 
The Board may at any time amend, suspend or terminate our 1992 Plan; provided, however, the Board may not, without the approval of the stockholders of the Company, amend the 1992 Plan so as to (1) increase the maximum number of shares subject thereto, or (2) reduce the option price per share covered by Options granted under the 1992 Plan below the price specified in the 1992 Plan. Additionally, the Board may not modify, impair or cancel any outstanding Option or SARs related thereto, or the restrictions, terms or conditions applicable to Shares of Restricted Stock, without the consent of the holder thereof.
 
United States Federal Income Tax Consequences
 
The following summary is based upon an analysis of the Internal Revenue Code, existing laws, judicial decisions, administrative rulings, regulations and proposed regulations, all of which are subject to change. Moreover, the following is only a summary of United States federal income tax consequences and the consequences may be either more or less favorable than those described below depending on an employee’s particular circumstances.
 
Nonqualified Options.  No income will be recognized by an Optionee for federal income tax purposes upon the grant of a Nonqualified Option. Upon exercise of a Nonqualified Option, the Optionee will recognize ordinary income in an amount equal to the excess of the fair market value of the shares on the date of exercise over the amount paid for such shares and, subject to the deduction limitations described below, the Company will be entitled to a deduction equal to the ordinary income recognized by the Optionee.
 
The basis of shares transferred to an Optionee pursuant to exercise of a Nonqualified Option is the price paid for the shares plus an amount equal to any income recognized by the Optionee as a result of the exercise of the option. If an Optionee thereafter sells shares acquired upon exercise of a Nonqualified Option, any amount realized over the basis of the shares will constitute capital gain to the Optionee for federal income tax purposes.
 
If an Optionee uses already-owned shares of Common Stock to pay the exercise price for shares under a Nonqualified Option, the number of shares received pursuant to the Nonqualified Option which is equal to the number of shares delivered in payment of the exercise price will be considered received in a nontaxable exchange, and the fair market value of the remaining shares received by the Optionee upon the exercise will be taxable to the Optionee as ordinary income. If the already-owned shares of Common Stock are not “statutory option stock” (as defined in Section 424(c)(3)(B) of the Internal Revenue Code) or are statutory option stock with respect to which the applicable holding period referred to in Section 424(c)(3)(A) of the Internal Revenue Code has been satisfied, the shares received pursuant to the exercise of the Nonqualified Option will not be statutory option stock and the Optionee’s basis in the number of shares received in exchange for the stock delivered in payment of the exercise price will be equal to the basis of the shares delivered in payment. The basis of the remaining shares received upon the exercise will be equal to the fair market value of the shares. However, if the already-owned shares of Common Stock are statutory option stock with respect to which the applicable holding period has not been satisfied, it is not presently clear whether the exercise will be considered a disqualifying disposition of the statutory option stock, whether the shares received upon the exercise will be statutory option stock, or how the Optionee’s basis will be allocated among the shares received.
 
The ordinary income recognized by an Optionee upon the exercise of a Nonqualified Option is compensation subject to withholding for federal income tax purposes, and the Company must make arrangements with the Optionee to ensure that the amount of the tax required to be withheld by the Company is paid to the Internal


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Revenue Service for the benefit of the Optionee. This tax withholding obligation may be satisfied by an Optionee at the time of the exercise of a Nonqualified Option by paying cash to the Company or by transferring already-owned shares of Common Stock to the Company. If an Optionee transfers already-owned shares of Common Stock to the Company in order to satisfy the Company’s tax withholding obligation, the transfer of such shares will be a taxable event.
 
If the already-owned shares of Common Stock are not statutory option stock or are statutory option stock with respect to which the applicable holding period has been satisfied, the amount by which the consideration received by the Optionee (i.e., the amount of the Optionee’s tax withholding that is satisfied by the transfer, plus any cash paid by the Company to the Optionee in lieu of a fractional share) exceeds the Optionee’s basis in the transferred stock will be a capital gain to the Optionee (or, if the consideration received is less than the Optionee’s basis, the difference will be a capital loss to the Optionee). If the already-owned shares of Common Stock are statutory option stock with respect to which the applicable holding period has not been satisfied, the transfer of the shares will be a disqualifying disposition of statutory option stock.
 
SARs.  There will be no federal income tax consequences to either the recipient or the Company upon the grant of SARs. Generally, the recipient will recognize ordinary income subject to withholding upon the exercise of SARs in an amount equal to the amount of cash received and the fair market value of any shares acquired pursuant to the exercise. Subject to the deduction limitations described below, the Company generally will be entitled to a corresponding tax deduction equal to the amount includable in the recipient’s income.
 
Restricted Stock.  If the restrictions on an award of Restricted Stock are of a nature that the shares are both subject to a substantial risk of forfeiture and are not freely transferable within the meaning of Section 83 of the Internal Revenue Code, the recipient will not recognize income for federal income tax purposes at the time of the award unless the recipient affirmatively elects to include the fair market value of the shares of restricted stock on the date of the award, less any amount paid therefor, in gross income for the year of the award pursuant to Section 83(b) of the Internal Revenue Code. In the absence of an election, the recipient will be required to include in income for federal income tax purposes in the year in which the shares either become freely transferable or are no longer subject to a substantial risk of forfeiture within the meaning of Section 83 of the Internal Revenue Code, the fair market value of the shares of restricted stock on that date, less any amount paid therefor. The Company will be entitled to a deduction at the time of income recognition to the recipient in an amount equal to the amount the recipient is required to include in income with respect to the shares, subject to the deduction limitations described below. If a Section 83(b) election is made within 30 days after the date the Restricted Stock is received, the recipient will recognize ordinary income at the time of receipt of the Restricted Stock and the Company will be entitled to a corresponding deduction equal to the fair market value (determined without regard to applicable restrictions) of the shares at the time less the amount paid, if any, by the recipient for the Restricted Stock. If a Section 83(b) election is made, no additional income will be recognized by the recipient upon the lapse of restrictions on the Restricted Stock, but, if the Restricted Stock is subsequently forfeited, no deduction will be allowed to the recipient with respect to the forfeiture. Dividends paid to a recipient holding restricted stock before the expiration of the restriction period will be additional compensation taxable as ordinary income to the recipient, unless the recipient made an election under Section 83(b). Subject to the deduction limitations described below, the Company generally will be entitled to a corresponding tax deduction equal to the dividends includable in the recipient’s income as compensation. If the recipient has made a Section 83(b) election, the dividends will be dividend income rather than additional compensation to the recipient.
 
If the restrictions on an award of Restricted Stock are not of a nature that the shares are both subject to a substantial risk of forfeiture and not freely transferable, within the meaning of Section 83 of the Internal Revenue Code, the recipient will recognize ordinary income for federal income tax purposes at the time of the award in an amount equal to the fair market value of the shares of Restricted Stock on the date of the award, less any amount paid therefor. The Company will be entitled to a deduction at that time in an amount equal to the amount the recipient is required to include in income with respect to the shares, subject to the deduction limitations described below.
 
Limitations on the Company’s Compensation Deduction.  Section 162(m) of the Internal Revenue Code limits the deduction that the Company may take for otherwise deductible compensation payable to certain officers of the Company to the extent that compensation paid to any such officer for the year exceeds $1.0 million, unless the


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compensation is performance-based. Compensation attributable to a stock option or stock appreciation right is deemed to satisfy the requirements for performance-based compensation if (1) the grant or award is made by a compensation committee composed of two or more outside directors; (2) the plan under which the option or right is granted states the maximum number of shares with respect to which options or rights may be granted during a specified period to any employee; and (3) under the terms of the option or right, the amount of compensation the employee could receive is based solely on an increase in the value of the stock after the date of the grant or award. The 1992 Plan has been designed to enable awards of Options and SARs granted by the committee to qualify as performance-based compensation for purposes of Section 162(m) of the Internal Revenue Code.
 
Our Board unanimously recommends that stockholders vote FOR the approval of the proposed amendment to our 1992 Plan.
 
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
 
The following tabulation sets forth, as of March 10, 2009, the shares of common stock beneficially owned by each director, each named executive officer listed in the Summary Compensation Table included in this proxy statement, and all directors and named executive officers as a group.
 
                 
    Common Stock Beneficially Owned(1)  
    Number of
    Percent of
 
Name
  Shares(2)(3)     Class  
 
Director
               
Jeffrey L. Berenson
    38,858       0.02 %
Michael A. Cawley
    49,475 (4)     0.03  
Edward F. Cox
    31,534 (7)     0.02  
Charles D. Davidson
    1,209,058 (5)     0.70  
Thomas J. Edelman
    2,423,861 (6)     1.40  
Eric P. Grubman
    4,058        
Kirby L. Hedrick
    70,034       0.04  
Scott D. Urban
    21,792       0.01  
William T. Van Kleef
    54,034       0.03  
Named Executive Officer (excluding any director named above)
               
Rodney D. Cook
    86,399       0.05  
Susan M. Cunningham
    261,834       0.15  
David L. Stover
    237,942       0.14  
Chris Tong
    163,992       0.09  
All directors and named executive officers as a group (13 persons)
    4,652,871 (4)(5)     2.68 %
 
 
(1) Unless otherwise indicated, all shares are directly held with sole voting and investment power.
 
(2) Includes shares not outstanding but subject to options that are currently exercisable (or that will become exercisable on or before May 9, 2009), as follows: Mr. Berenson — 14,851 shares; Mr. Grubman — 0 shares; Mr. Cawley — 46,651 shares; Mr. Cox — 11,651 shares; Mr. Davidson — 992,085 shares; Mr. Edelman — 287,465 shares; Mr. Hedrick — 61,651 shares; Mr. Urban — 14,168 shares; Mr. Van Kleef — 22,851 shares; Mr. Cook — 48,173 shares; Ms. Cunningham — 213,498 shares; Mr. Stover — 159,756 shares; and Mr. Tong — 110,454 shares.
 
(3) Includes restricted stock awards not currently vested, as follows: Mr. Berenson — 1,559 shares; Mr. Cawley — 1,559 shares; Mr. Cox — 1,559 shares; Mr. Davidson — 155,429 shares; Mr. Edelman — 1,559 shares; Mr. Grubman — 4,058 shares; Mr. Hedrick — 1,559 shares; Mr. Urban — 1,559 shares; Mr. Van Kleef — 1,559 shares; Mr. Cook — 33,177 shares; Ms. Cunningham — 36,409 shares; Mr. Stover — 67,524 shares; and Mr. Tong — 35,122 shares.


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(4) Mr. Cawley is one of 12 trustees of The Samuel Roberts Noble Foundation, Inc. (the “Foundation”). The Foundation holds of record 1,577,166 shares of our common stock. As with other corporate action, the voting of the shares held by the Foundation requires a majority vote of its trustees at a meeting at which a quorum of trustees is present. Where there are multiple trustees of a company and a majority vote is required for corporate action, no individual trustee is deemed to have beneficial ownership of securities held by such company. Accordingly, the 1,577,166 shares held of record by the Foundation are not reflected in Mr. Cawley’s beneficial ownership of common stock.
 
(5) Includes shares indirectly held in a qualified 401(k) Plan, as follows: Mr. Davidson — 3,248 shares.
 
(6) Includes 1,100,000 shares held under deferred compensation plans.
 
(7) Includes 12,000 shares held by spouse.


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EXECUTIVE COMPENSATION
 
COMPENSATION DISCUSSION AND ANALYSIS
 
The first part of our Compensation Discussion and Analysis, entitled Compensation Considerations in the Current Environment, discusses how our executive compensation program operates in the current economic environment. The second part, entitled Overview of Our Executive Compensation Program, discusses the elements and provides an analysis of our executive compensation program. The third part includes a presentation of executive compensation in tabular form.
 
Compensation Considerations in the Current Environment
 
Our Compensation Committee evaluated and set 2008 executive compensation in the context of the Company’s operational performance, the current global economic environment and the recent decline in the oil and natural gas commodity market. In this difficult environment, we believe that our 2008 compensation program is balanced and reasonable. Our goal is to link compensation strongly to performance through the use of financial incentives that are tied to the Company’s operational and financial performance. We do not use highly leveraged incentives that might encourage adverse short-term behavior, but instead strive to incentivize consistent, longer-term performance and achievement of strategic objectives.
 
We recognize that value-creating performance by a group of executives does not always translate immediately into appreciation in our stock price, particularly in periods of economic stress and commodity price declines. Our Compensation Committee considered the impact that recent global economic and commodity market declines have had on our stock price. It is the committee’s belief that the Company made exceptional progress on a number of strategic objectives during 2008, significantly enhancing the future value of the Company.
 
Performance during 2008 was a one of extreme contrasts. We reported record net income of $1.4 billion and record discretionary cash flow of $2.4 billion. We also saw record annual daily production, up eight percent from 2007. We replaced 147% of our production (before adjustment of reserves for year-end prices), and had the most successful exploration effort in the Company’s history with significant discoveries in West Africa, Israel, and the deepwater Gulf of Mexico. In contrast to this excellent operational and financial performance, our stockholder return for the year was a negative 37.5%. Although this was within the median range of our peer group and the Standard & Poor’s 500, it was disappointing to experience such a sudden loss in stockholder value given our operational and financial performance. Over the longer term, we ranked third among our peer group in total stockholder return for the three-year period 2006 through 2008 at 24.9%. Taking these factors into account, we reduced the payout versus target of our 2008 Short Term Incentive Plan award compared to 2007 by an average of 31.5% for executive officers other than the CEO. The CEO’s payout was reduced approximately 45% compared to 2007.
 
Overview of Our Executive Compensation Program
 
Our executive compensation program is overseen by our Compensation Committee, with input from our management and outside compensation consultants.
 
Compensation Program Oversight
 
Role of Compensation Committee
 
The purpose of our Compensation Committee is set out in detail in the committee’s charter but generally is to:
 
  •  review and approve our goals and objectives relating to CEO compensation, evaluating our CEO’s performance based on those goals and objectives and determining and approving our CEO’s compensation level based on that evaluation;
 
  •  make recommendations to our Board with respect to non-CEO executive officer compensation; and


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  •  produce an annual report on executive compensation as required by the SEC to be included, or incorporated by reference, in our proxy statement or other applicable SEC filings.
 
The committee also serves an important role in setting the overall compensation philosophy, goals and objectives of the Company.
 
Our Board has delegated authority to our Compensation Committee to determine and approve (1) our compensation philosophy, (2) the compensation of our non-CEO executive officers, and (3) equity-based compensation applicable to non-executive-officer employees.
 
Membership
 
Our Board appoints our Compensation Committee members and Chair, and these appointees continue to be members until their successors are elected and qualified or until their earlier resignation or removal. Any member of our Compensation Committee may be removed, with or without cause, by our Board. Our Governance Committee, after consultation with our Lead Independent Director, makes recommendations to our Board with respect to the appointment of Board members to all of its committees considering, in the case of our Compensation Committee, criteria such as experience in compensation matters, familiarity with our management and other key personnel, understanding of public company compensation issues, time availability necessary to fulfill committee responsibilities and independence and other regulatory requirements. No member of our Compensation Committee participates in any of our employee compensation programs, and our Board has determined that none of our Compensation Committee members has any material business relationship with us.
 
Independence
 
We believe that these membership criteria are met by Kirby L. Hedrick, Jeffrey L. Berenson and Edward F. Cox, who currently serve on our Compensation Committee and did so throughout 2008. Each has been determined by our Board to meet the NYSE standards for independence, to be a “Non-Employee Director” as defined in Rule 16b-3 under the Exchange Act, and to be an “outside director” as defined for purposes of Section 162(m) of the Internal Revenue Code.
 
Meetings
 
Our Compensation Committee’s meeting schedule is determined annually and meeting agendas are based on an annual calendar of recurring agenda items approved by the committee. The meeting agendas may include additional items as determined by the committee in its discretion, and the committee may also hold special meetings. Committee meeting agendas are reviewed by our Lead Independent Director and approved by the committee Chair. Our Compensation Committee held seven meetings during 2008.
 
Delegation of Authority
 
In an effort to minimize the need for special meetings of our Compensation Committee to address routine compensation matters involving non-executive-officer employees, the committee has delegated limited authority to our CEO to (1) grant stock options and restricted stock to new hires for employment inducement purposes, (2) approve cash retention payments, and (3) make adjustments related to change of control severance plan participation resulting from organizational changes affecting employees not participating in the Change of Control Severance Plan for Executives. Actions taken by our CEO under these delegations are required to be reported to our Compensation Committee at its next regularly scheduled meeting and the committee reviews the appropriateness of the delegation on an annual basis.
 
Role of Management
 
Our CEO and our Vice President — Human Resources generally attend Compensation Committee meetings and provide input to the committee with respect to executive compensation, key job responsibilities, performance objectives and compensation trends. They also coordinate with our compensation consultant to ensure that committee requests regarding executive compensation matters are addressed. We believe that our CEO and Vice


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President — Human Resources are best qualified to support the committee in these areas given their understanding of our business and personnel, compensation program and competitive environment. In this supporting role they may provide information and recommendations relevant to establishing performance measures, weightings, targets, and similar items that affect compensation, including that of our CEO and other executive officers, and may request that our Compensation Committee schedule special meetings to address executive compensation matters as appropriate. Our CEO is closely involved in assessing the performance of our executive officers, and advising our Compensation Committee in that regard. Our CEO and Vice President — Human Resources may also communicate directly with our compensation consultant in this supporting role. Our Compensation Committee is not obligated to accept our management’s recommendations with respect to executive compensation matters, and meets in executive session to discuss such matters outside of the presence of our management. During 2008, the committee held four executive sessions.
 
Role of Compensation Consultant
 
Our Compensation Committee may retain, at our expense, independent compensation consultants it deems advisable to assist it in executive compensation matters. The committee meets with the compensation consultants, with and outside the presence of our management, to review findings based on market research regarding executive compensation and considers those findings in determining and making adjustments to our executive compensation program.
 
The committee retained Towers Perrin as its independent compensation consultant for purposes of reviewing our 2008 executive compensation program and providing comparative market data on compensation practices and programs based on an analysis of our peer companies and other factors. The committee further reviewed its compensation consultant needs in January 2009, considering Towers Perrin’s past performance and its familiarity with our executive compensation program and the compensation programs of our peer companies and sector, the benefits of retaining the same consultant compared to those of engaging a different consultant, and independence taking into account that of the total approximate $81,000 we paid to Towers Perrin in 2008, approximately $66,000 represented consulting services in the area of executive compensation. Based on this review, our Compensation Committee found Towers Perrin to be independent and retained Towers Perrin as its compensation consultant for 2009.
 
Towers Perrin also provided compensation consulting services to our Governance Committee in 2008, and in 2009 continues to assist it in reviewing and determining fees and equity compensation paid or awarded, as the case may be, to our non-employee directors.
 
Other Compensation Considerations
 
Compensation Peer Group
 
When making compensation decisions, we also look at the compensation of our CEO and other executive officers relative to that paid to similarly-situated executives at companies that we consider to be our peers — this is often referred to as “benchmarking.” We consider benchmarking data in determining executive officer base salary, our short term incentive plan target bonus percentage factors, equity grant levels and the overall structure of our compensation program. We believe, however, that a benchmark should be just that — a point of reference for measurement — but not the determinative factor for our executives’ compensation. Because comparative compensation information is just one of the several analytic tools that are used in setting executive compensation, our Compensation Committee has discretion in determining the nature and extent of its use. Further, given the limitations associated with comparative pay information for setting individual executive compensation, the committee may decide to not use comparative compensation information at all in the course of making compensation decisions.
 
Our Compensation Committee established our current peer group of companies in 2008, which consists of larger and smaller publicly traded oil and gas exploration and production companies that have similar operating and financial characteristics. With the assistance of our CEO and our compensation consultant, as appropriate, our Compensation Committee reviews the composition of the peer group annually to ensure that companies remain


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relevant for comparative purposes. After review in January 2009, our Compensation Committee retained the same compensation peer group from 2008. Our compensation peer group, therefore, consists of:
 
     
• Anadarko Petroleum Corp. 
  • Newfield Exploration Company
• Apache Corp. 
  • Noble Energy, Inc.
• Cabot Oil & Gas Corporation
  • Pioneer Natural Resources Company
• Chesapeake Energy Corp. 
  • Plains Exploration and Production Company
• Devon Energy Corp. 
  • Range Resources Corporation
• EOG Resources, Inc. 
  • Southwestern Energy Company
• Forest Oil Corp. 
  • XTO Energy Inc.
• Murphy Oil Corp.
   
 
We believe that this group of companies continues to be representative of the sector in which we operate, and was chosen for a variety of reasons including each of the companies’ market size and geographic scope of operations, the nature and relative complexity of their businesses and the roles and responsibilities of their executive officers.
 
Internal Pay Equity
 
When making executive compensation decisions, our Compensation Committee analyzes total compensation with a focus on base salary, short term incentive plan and long term incentive plan elements. To facilitate this analysis, our CEO and Vice President — Human Resources work with our compensation consultant to provide the committee comparative compensation information in these areas for each executive officer, along with summary information on post-employment compensation trends, benefits and other relevant factors. This information is compiled in written report format and includes recent publicly available information and other market data, as well as tally sheets detailing the base salary, short term incentive plan and long term incentive plan elements. We believe that this information provides our Compensation Committee with a sufficient basis to evaluate executive officer compensation by presenting a comprehensive review of compensation data on each executive officer and the opportunity for related discussion with our compensation consultant.
 
While comparisons to compensation levels at companies in our compensation peer group are helpful in assessing the overall competitiveness of our executive compensation program, we believe that our program must also be internally consistent and equitable. In its review of total compensation, our Compensation Committee considers the relationship between our CEO’s total compensation and that of our other executive officers. The committee has not adopted a formal policy regarding internal pay equity, but in 2008 concluded that CEO compensation was equitable compared to that of our Chief Operating Officer (COO) and other named executive officers in recognition of the CEO’s broad responsibility and accountability for the Company’s strategy and operations, compliance and controls, investor relations and role as Chairman of the Board of Directors. The 2008 total compensation of the COO was likewise found to be equitable compared to that of the next named executive officer in recognition of the COO’s broad responsibility for the Company’s worldwide exploration and production operations, our Compensation Committee’s views on that position relative to the other named executive officer positions and the fact that two of the other named executive officers report directly to the COO. The Compensation Committee likewise concluded that the compensation of our other named executive officers was equitable in light of their respective roles, responsibilities and reporting relationships.
 
Objectives of Our Executive Compensation Program
 
Our executive compensation program is designed to incentivize consistent, longer-term performance and achievement of strategic objectives in a manner that will:
 
  •  compensate employees for the value of their contributions;
 
  •  provide total compensation that is flexible enough to respond to changing market conditions and that also aligns compensation levels with performance; and
 
  •  provide total compensation that will attract, motivate and retain individuals of high quality and support a long-standing internal culture of loyalty and dedication to our interests.


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We believe that linking executive compensation to Company performance is in the best interest of our stockholders and, as an individual’s level of responsibility increases, a greater portion of total compensation should be at risk and the mix of total compensation should be weighted more heavily in favor of incentive-based compensation including equity-linked compensation. As performance goals are met or exceeded, resulting in increased value to stockholders, our executive officers should be rewarded commensurately. Our Compensation Committee believes that our 2008 executive compensation program fulfilled these objectives.
 
Elements of Our Executive Compensation Program
 
Our executive compensation program consists of four principal elements: base salary, a short-term incentive plan, a long-term incentive plan and post-employment compensation. The following is a discussion of each of these elements and their respective roles in our compensation program.
 
Base Salary
 
Base salary provides a cash foundation for our total compensation program that helps us attract and retain individuals of high quality. Our Compensation Committee believes that base salaries for executive officers should be competitive with comparable positions in peer companies to allow us to attract and retain such individuals. The policy of our Compensation Committee generally is to establish base salary levels that approximate the market median. Competitive information is obtained through oil and gas industry compensation surveys and other analyses conducted by our compensation consultant. Our Compensation Committee analyzes this information and makes appropriate annual adjustments. Based on the results of market data provided by Towers Perrin regarding 2008 executive compensation, adjustments were made in 2008 to certain executive officers’ base salaries to more closely approximate the market median.
 
Short-Term Incentive Plan
 
Our short-term incentive plan (“STIP”) is a performance-based annual incentive bonus plan that is payable in cash and available to all of our full-time employees, including executive officers. It provides a performance-based incentive beyond base salary that is designed to motivate performance and compensate employees for the value of their annual contributions. In addition, given its annual nature and discretionary component, the STIP has flexibility to respond to changing market conditions.
 
The target STIP bonus for an employee is the employee’s base salary at year-end multiplied by the percentage factor assigned to the employee’s salary classification. Target bonus percentage factors range from 6 to 100%, with factors of 100% for the CEO and from 75% to 90% for the other named executive officers, with the differences primarily attributable to each officer’s respective scope of responsibility within the Company. Payout under the plan may range from 0 to 2.5 times the aggregate target bonus pool for all employees.
 
In January of each year, our Compensation Committee approves annual STIP performance-based measures, including their relative weighting and specific targets, in addition to a discretionary component to be determined by the committee as discussed below. The measures, weighting and targets are communicated to our executive officers at that time. The 2008 measures approved by our Compensation Committee on January 21, 2008 accounted for 50% of the STIP formula and consisted of quantitative targets for proved reserve additions, production, controllable unit costs, and discretionary cash flow. Discretionary cash flow is a non-GAAP financial measure that is calculated by adding back depreciation, depletion, amortization and various other non-cash expense items to net income.
 
Our Compensation Committee approves the target for each performance measure after considering prior year financial and operational results, the Board-approved budget, planned projects and capital spending plans for the upcoming year. Our Compensation Committee also considers that the achievement of those targets can be significantly affected by availability of labor and equipment, acquisitions and sales, weather, product demand and pricing, competition and other industry conditions that cannot be determined with certainty at the time the targets are set. This is particularly true in the current economic and commodity price environment. We believe that our targets are set aggressively in light of these variables and require achievement of significant performance.


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The targets for the annual STIP performance measures may include certain adjustments that are not normally included in publicly reported results. For instance, the production target is significantly reduced from reported production by discounting gas volumes sold at a lower price in Equatorial Guinea. In addition, any significant acquisitions or divestitures are excluded when considering performance against the production and discretionary cash flow targets. Also, the reserve target is adjusted at the end of the year to reflect actual capital expenditures and the discretionary cash flow target excludes deferred taxes. Including these adjustments, the targets for 2008 were 120.7 million barrels of oil equivalent for proved reserve additions, 187.2 thousand barrels oil equivalent per day for production, the 50th percentile relative to compensation peer group for controllable unit costs for the 12-month period ending September 30, 2008 and $1.72 million in discretionary cash flow. The first three targets were weighted 14% each and the discretionary cash flow target was weighted 8%. The remaining 50% is the discretionary component determined by the Compensation Committee.
 
Payout curves were approved for each measure at the time targets were set, ranging from a factor of 0 to 2.5, with a 1.0 factor at each target. The Company’s 2008 performance exceeded the targets for production, controllable unit costs and discretionary cash flow, but fell short of the target for proved reserve additions due to commodity price-related revisions. Our Compensation Committee reviewed information provided by management on actual performance for each measure as applied to the measure’s payout curve to determine the bonus factor for that measure. Each bonus factor was then multiplied by the weighting for its respective measure, with the sum of the four bonus factors, as adjusted for weighting, yielding the performance-based STIP component.
 
The discretionary component, which accounted for the remaining 50% of the 2008 STIP formula, was determined by our Compensation Committee based on the committee’s review of overall Company performance, including other performance-based measures such as exceptional exploration results, strong operational performance after adjusting for the impact of Hurricane Ike, average relative stockholder return versus peers, and the negative annual stockholder return.
 
The sum of the performance-based and discretionary components was applied to the Company’s aggregate target bonus pool to determine our total bonus amount to be paid. This amount was then allocated between executive officers and other employees. In the case of executive officers, the Committee considered the performance of the CEO as measured against operational and financial goals submitted by the CEO earlier in the year, as well as the CEO’s assessment of the performance of the other executive officers as measured against goals each submitted earlier in the year for his or her business unit or organization, and allocated the pool based on that assessment of individual performance and each executive officer’s respective target bonus percentage factor. A cash payout under the plan based on the Company’s 2008 performance occurred in February 2009.
 
The 2009 performance-based measures and specified targets were approved by our Compensation Committee on January 26, 2009 and communicated to our executive officers. Our Compensation Committee elected to retain the same four performance-based measures used in 2008 with the same relative weighting, but different specified targets. We believe that the approved targets for 2009 will be appropriately difficult to achieve since they will be affected by many of the same challenges and uncertainties as described above. While those targets are disclosed above in the context of historical 2008 performance, we believe that the disclosure of 2009 targets would result in competitive harm to us and are therefore omitted since (1) we are engaged in a highly competitive business, (2) we may pursue opportunities in areas without first publicly disclosing our intention to do so and (3) disclosure of these targets might enable our competitors to determine our strategic areas of interest and priorities throughout the year. We also do not believe that the disclosure of 2009 targets is material to an understanding of our 2008 executive compensation program as covered by this proxy statement.
 
Long-Term Incentive Plan
 
Our long-term incentive plan (“LTIP”) was approved by our Compensation Committee and adopted by our Board on January 27, 2004 and is primarily an equity-linked plan that is available to our executive officers and certain other key employees determined on an annual basis. It is designed to attract, motivate and retain individuals of high quality by:
 
  •  providing competitive long-term incentive compensation opportunities;


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  •  rewarding outstanding achievement by those who can most directly affect our performance and instill a sense of business ownership; and
 
  •  aligning the interests of our employees with those of our stockholders so as to maximize long-term stockholder value creation.
 
Under our LTIP, which was effective January 1, 2004, grants or awards of stock options, restricted stock and performance units were made in 2004, 2005 and 2006. The stock options and restricted stock were granted under our 1992 Plan, which was approved by our stockholders in 1992 and most recently amended in 2007. The 1992 Plan permits the use of nonqualified stock options, with or without stock appreciation rights, and restricted stock. Pursuant to the 1992 Plan, stock options may be granted for a period of up to ten years at fair market value, as defined in the 1992 Plan, on the date of grant and upon such terms and conditions, consistent with the provisions of the plan, as are specified by our Compensation Committee at the time of grant. Restricted stock may be granted by our Compensation Committee subject to such terms and conditions as may be set by the committee. Restricted stock granted under the LTIP in 2004, 2005 and 2006 generally vests after three years, provided that certain performance goals are satisfied during the relevant three-year performance period; specifically, that total stockholder return over that period must be at or above the 25th percentile of total stockholder return for our compensation peer group as defined at the time of the grant. In January 2009, our Compensation Committee reviewed the Company’s performance for the three-year performance period covered by the restricted stock granted in 2006, confirming that the relevant performance goal necessary for vesting had been achieved.
 
Performance units awarded under our LTIP in 2004, 2005 and 2006 vest and are paid out in cash at the end of the three-year period following the date of the award based on the levels of achievement of certain performance goals during the three-year period. Performance units have a target value of $1.00 per unit with a maximum payout of $2.00 per unit. Our Compensation Committee established the performance goals and target award levels prior to the beginning of each performance period. For 2006 awards with a three-year performance period ending December 31, 2008, the performance goals were growth in reserves and production per share, both debt-adjusted, and total stockholder return, in each case relative to our compensation peer group as defined at the time of the award. The payout of performance units awarded in 2006 will be determined at a meeting of our Compensation Committee in April 2009. Subject to final audit and approval by our Compensation Committee, the preliminary estimate of payout for the units awarded in 2006 is $1.78 per unit, which was used in making the estimate shown in the compensation tables. This estimate is based on the Company achieving the highest stockholder return, the highest debt-adjusted production growth per share and fifth highest debt-adjusted reserve growth per share over the three-year period relative to the compensation peer group.
 
In January 2007, and with information regarding competitive compensation practices from Towers Perrin, our Compensation Committee reviewed the effectiveness of the LTIP structure in light of our LTIP and compensation program objectives. Based on that review, our Compensation Committee concluded that a combination of stock options and time-vested restricted stock would reduce plan complexity and more effectively meet our compensation program objectives. Accordingly, our Compensation Committee suspended the granting of performance-based restricted stock and performance units under the LTIP in 2007, and began making 1992 Plan grants of stock options that vested ratably over a three-year period and restricted stock that did not vest until the end of the third year. In January 2009 our Compensation Committee made grants of stock options on the same terms but, in order to facilitate grant administration while encouraging retention consistent with our compensation program objectives, began making 1992 Plan grants of restricted stock that time-vested 20% after year one, an additional 30% after year two and the remaining 50% after year three.
 
Approval of Grants
 
Stock options and shares of restricted stock are granted to our executive officers under our 1992 Plan. Our Compensation Committee approves all such grants, which are determined based on input from the CEO and market data provided by our compensation consultant. Grants for the CEO and other executive officers are approved by our Compensation Committee and discussed with our Board, outside the presence of the CEO or other executive officers. In approving such grants, our Compensation Committee also assesses the reasonableness of grant levels


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considering the Company’s relative performance versus our compensation peer group on measures such as total stockholder return, debt-adjusted per share growth in reserves and production versus our compensation peer group, executive officer total compensation and internal pay equity.
 
The regular Board and Compensation Committee meeting schedule for the upcoming year is set in April of the prior year, with regular Board meetings held in January, April, July, October and December. Our Compensation Committee meetings are usually held the day before each Board meeting. The timing of these meetings is not determined by executive officers and is usually in advance of the announcement of earnings. We do not time the release of material non-public information for the purpose of affecting the values of executive compensation. Our Compensation Committee may be aware of approximate earnings results at the time of making equity grant decisions, but it does not adjust the size or timing of grants to reflect possible market reaction.
 
Generally, annual stock option and restricted stock grants are approved at the January meeting of our Compensation Committee. Stock options and restricted stock are granted annually on February 1 (or the preceding business day if February 1 falls on a Saturday, Sunday or holiday). It is our policy to make grants to executive officers and other employees at the same time. However, specific grants of stock options or restricted stock may be approved at other regular or special meetings to recognize the completion of a significant transaction, a change in an employee’s responsibility or a specific achievement, or as an inducement to, or for the retention of, employment. No such special grants were made to executive officers in 2008. We communicate grants to executive officers and other employees shortly after the date of approval, in accordance with our customary human resource practices.
 
Terms of Grants
 
Stock option grants represent the right to purchase shares of our common stock over a period of up to ten years at fair market value, as defined in the 1992 Plan, on the date of grant and upon such terms and conditions, consistent with the provisions of the plan, as are specified by our Compensation Committee at the time of grant. The 1992 Plan defines “fair market value” for grant purposes as the average of the reported high and low trading price of our common stock on the NYSE on the date of grant (or if there was no reported sale on such date, on the last preceding date on which any reported sale occurred). We believe that this method of determining fair market value is neutral to the use of the closing price of our common stock and provides a valid representation of fair market value. Therefore, consistent with the terms of our 1992 Plan, we continue to grant stock options on this basis.
 
Stock Ownership
 
We encourage, but do not require, stock ownership by our executive officers and directors. We also do not require our executive officers and directors to hold a substantial portion of their equity awards until they retire from service. Historically, our executive officers have received periodic grants of shares of restricted stock and stock options under our 1992 Plan, consistent with the objectives of our executive compensation program, providing them with meaningful equity ownership in the Company and allowing them to demonstrate their commitment as stockholders in the Company. We periodically review stock ownership by our executive officers and directors and believe that they generally maintain shares sufficiently significant in value to align their interests with those of our stockholders. If circumstances change, we will review whether stock ownership or holding requirements are appropriate.
 
Post-Employment Compensation
 
Our post-employment compensation is provided under qualified and non-qualified defined benefit plans, qualified and non-qualified defined contribution plans, and either individual change of control agreements or, alternatively, a change of control plan. Through its various components, our post-employment compensation facilitates our efforts to retain individuals of high quality and support a long-standing internal culture of loyalty and dedication to our interests.
 
 
Qualified Defined Benefit Plan
 
Our qualified defined benefit plan (“Retirement Plan”) provides employees originally hired prior to May 1, 2006, which includes our named executive officers, with retirement income benefits commencing upon retirement


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after attaining the normal retirement age of 65 or upon early or deferred vested retirement after attaining age 55 and completing 5 years of vesting service. Early retirement reductions apply if retirement benefits are commenced prior to age 65. The amount of an employee’s monthly Retirement Plan benefit will depend upon the employee’s final average monthly compensation, age and the number of his or her years of credited service (which is limited to a maximum of 30 years). Monthly Retirement Plan benefits commencing upon retirement after attaining the normal retirement age of 65 are calculated using the greater of the following two formulas:
 
       
Formula 1
   
Formula 2
1.25% × final average monthly
compensation × years of credited service (up to 30) + 0.50% × final average monthly compensation that exceeds Social Security covered compensation × years of credited service (up to 30)
    2% × final average monthly compensation × years of credited service (up to 20)
 
 
Final average monthly compensation generally means the employee’s average monthly compensation from the Company for the 60 consecutive months prior to retirement that results in the highest average monthly compensation for the employee. The compensation taken into account for Retirement Plan purposes includes the employee’s salary and STIP payment. The annual amount of compensation that can be taken into account for Retirement Plan purposes is limited by the Internal Revenue Code. This annual compensation limit was $230,000 for 2008 and is $245,000 for 2009. The maximum annual benefit that may be paid to an employee under our Retirement Plan is also limited by the Internal Revenue Code. This maximum annual benefit was $185,000 for 2008 and is $245,000 for 2009.
 
Our Compensation Committee reviewed our Retirement Plan in 2006 and concluded that an enhanced defined contribution plan would be better aligned with our compensation program objectives because it would offer employees more investment choices, be portable and be more cost-effective to the Company. Accordingly, beginning on May 1, 2006, our Retirement Plan was closed to new participants and new employees became eligible to instead receive an enhanced Company contribution in the qualified defined contribution plan described below. Employees originally hired prior to May 1, 2006, which include all of our named executive officers, continue to accrue benefits under the Retirement Plan.
 
We amended our Retirement Plan effective January 1, 2008 to allow existing plan participants to elect to receive a lump-sum distribution upon separation from service. Lump sums are calculated using Internal Revenue Service mandated rates.
 
Non-Qualified Defined Benefit Plan
 
Our non-qualified defined benefit plan (“Restoration Plan”) is an unfunded plan that provides the benefits under the Retirement Plan’s benefit formula that cannot be provided by the Retirement Plan because of the annual compensation and annual benefit limitations applicable to the Retirement Plan under the Internal Revenue Code. The amount of an employee’s monthly Restoration Plan benefit will depend upon the employee’s final average monthly compensation, age and the number of his or her years of credited service (which is limited to a maximum of 30 years). Existing plan participants were allowed to make a one-time election prior to January 1, 2008 to receive plan benefits in a lump sum payment upon separation from service, as permitted by the transition relief provisions of Internal Revenue Code Section 409A. Restoration Plan benefits are calculated using the same methodology utilized for our Retirement Plan. Employees originally hired prior to May 1, 2006, which include all of our named executive officers, continue to accrue benefits under the Restoration Plan.
 
Qualified Defined Contribution Plan
 
Our qualified defined contribution plan (“Thrift Plan”) allows employees to make pre-tax contributions to the plan out of their basic compensation. For the purposes of the Thrift Plan, basic compensation generally means cash compensation, including overtime but excluding incentive payments, bonuses, allowances and other extraordinary remuneration. The amount of an employee’s basic compensation taken into account under the Thrift Plan cannot


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exceed the Internal Revenue Code limit, which was $230,000 for 2008 and is $245,000 for 2009. The annual contribution made by an employee to the Thrift Plan cannot exceed 50% of his or her basic compensation and is limited to a maximum contribution amount specified under the Internal Revenue Code (which for 2008 was $15,500 and is $16,500 for 2009, plus a catch-up contribution of $5,000 for 2008 and $5,500 for 2009 for employees who are at least 50 years of age). An employee’s pre-tax contributions (other than catch-up contributions) made to the Thrift Plan are matched by the Company on a dollar-for-dollar basis up to 6% of the employee’s basic compensation. In addition, beginning in 2006, the Company makes the following age-weighted contribution to the Thrift Plan for each participant whose initial employment date with the Company is on or after May 1, 2006 (which does not include any of our named executive officers) and who is employed by or on authorized leave of absence from the Company on the last day of the calendar year (or whose retirement, permanent disability or death occurred during such year while employed by or on authorized leave of absence from the Company):
 
                     
      Contribution Percentage
      Contribution Percentage
 
      for Portion of Basic
      for Portion of Basic
 
      Compensation Below
      Compensation Above
 
Age of Participant     the FICA Taxable Wage Base       the FICA Taxable Wage Base  
Under 35
      4 %       8 %
At least 35 but under 48
      7 %       10 %
At least 48
      9 %       12 %
 
 
The contributions made to our Thrift Plan by or for a participant are credited to accounts maintained for such participant under the plan. The amounts credited to a participant’s accounts are invested at the direction of the participant in various investment fund options available under the Thrift Plan, including investment in shares of our common stock. The amounts credited to a participant’s accounts that are attributable to his or her pre-tax contributions are immediately 100% vested. Amounts attributable to the Company’s matching contributions become 34% vested upon the completion of one year of service, 67% vested upon the completion of two years of service, and 100% vested upon the completion of three years of service. The amounts attributable to the Company’s age-weighted contributions become vested after three years of service. The amounts credited to a participant’s accounts become distributable upon the participant’s termination of employment with the Company, and certain amounts are available for loans, hardship distributions and in-service withdrawals.
 
Non-Qualified Deferred Compensation Plan
 
Our non-qualified deferred compensation plan (“Deferred Compensation Plan”) allows executive officers, and certain other employees, to save for retirement in a tax-effective way at minimal cost to us. Under the Deferred Compensation Plan, participants are allowed to defer portions of their salary and bonus and to receive certain matching contributions that would have been made to our Thrift Plan if the Thrift Plan had not been subject to Internal Revenue Code compensation and contribution limitations. Under this unfunded program, amounts deferred by the participant are credited annually with interest at a rate equal to the greater of 125% of the 120-month rolling average of 10-year U.S. Treasury Notes or the 120-month rolling average of the prime rate as published in The Wall Street Journal.
 
Change of Control Arrangements
 
We have adopted change of control arrangements for our executive officers and certain other employees. These arrangements are intended to preserve morale and productivity and encourage retention in the face of the disruptive impact of an actual or rumored change of control of the Company. Based on information provided by Towers Perrin, we believe that these arrangements are common practice and align our executive officer interests with those of our stockholders by enabling our executive officers to consider corporate transactions that are in the best interest of stockholders without undue concern over whether the transactions may jeopardize their continued employment.
 
A change of control will be deemed to have occurred under our change of control arrangements if any of the following events occurs:
 
  •  individuals who constituted our Board on January 1, 2008 (or such other date as may be specified in individual change of control agreements) (“Incumbent Board”) cease to constitute at least 51% of the Board,


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  provided that any individual whose election was approved by a vote of at least a majority of the directors of the Incumbent Board will be considered a member of the Incumbent Board;
 
  •  our stockholders approve a reorganization, merger or consolidation whereby the persons who were stockholders immediately prior to the reorganization, merger or consolidation do not immediately thereafter own at least 51% of the voting shares of the new entity;
 
  •  our stockholders approve a liquidation or dissolution of the Company or a sale of all or substantially all of our assets to a non-related party; or
 
  •  a new person or entity becomes the owner of at least 25% of our outstanding common stock or voting power in the Company.
 
We believe that these change of control events are an accurate depiction of circumstances that could reasonably be expected to result in a material change in the leadership and direction of the Company, creating uncertainties among employees and executive officers in such areas as the continuity of management, continued employment opportunities, and our ability to execute existing programs.
 
All of our change of control arrangements include provisions regarding severance benefits that our executive officers and certain other employees may be entitled to receive if they are terminated within two years following a change of control of the Company. Under these arrangements, if a named executive officer is terminated for any reason (other than for cause, disability or death) within two years after a change of control, we will then pay or provide the following to that named executive officer:
 
  •  all unpaid salary and expenses;
 
  •  a lump sum equal to a multiple of his or her annual cash compensation (made up of annual salary and bonus) ranging from 2.5 times to 2.99 times;
 
  •  an amount equal to his or her pro-rata target bonus for the then-current year;
 
  •  life, disability, medical and dental insurance benefits, upon his or her written request, ranging among named executive officers from 30 to 36 months or such shorter period until the executive obtains substantially equivalent coverage from a subsequent employer;
 
  •  the vesting of his or her stock options and restricted stock; and
 
  •  reimbursement for reasonable fees up to $15,000 for out-placement employment services.
 
If we terminate the named executive officer for cause, no benefit is payable to, or with respect to, that named executive officer under our change of control arrangements. A termination for cause may only be made by the affirmative vote of a majority of the members of our Board.
 
Our change of control arrangements also provide for a tax gross-up payment to the named executive officer that will fully offset the effect of (1) any excise tax imposed by Section 4999 of the Internal Revenue Code upon the benefits payable under such arrangements (or under any other Company plan, arrangement or agreement), and (2) any federal, state or local income tax or additional Section 4999 excise tax that is attributable to the tax gross-up payment.
 
Our change of control arrangements include a plan or, in the alternative, individual change of control agreements. Specifically, on October 24, 2006, our Board approved a Change of Control Severance Plan for Executives (“Executive Change of Control Plan”), which became effective on that date. The plan covers our executive officers and certain key employees, provided that they are not already party to pre-existing change of control agreements with us. All of our named executive officers, except Mr. Cook, are parties to pre-existing change of control agreements and therefore may not participate in the plan at this time. Mr. Cook currently participates in our Executive Change of Control Plan.


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Severance Benefit Plan
 
Our Severance Benefit Plan (“Severance Benefit Plan”) is an unfunded plan that provides for severance benefits to eligible employees, including our executive officers, in certain instances based upon years of completed service. The severance benefits are comprised of:
 
  •  a cash payment of two weeks of pay for every year of completed service, with a minimum of 12 weeks of pay and a maximum of 52 weeks of pay;
 
  •  a pro-rated STIP payment based on the number of months of employment during the calendar year of termination;
 
  •  six months of reduced-rate contributions under our medical and dental plans; and
 
  •  twelve weeks of coverage under our employee assistance plan.
 
Perquisites:  We do not consider perquisites to be a principal element of executive compensation. In 2008, certain of our executive officers received non-material personal benefits in the form of club membership dues reimbursement.
 
Other Compensation Matters
 
Health and Welfare Programs
 
We offer a number of other benefits to our executive officers pursuant to benefit programs that provide for broad-based employee participation. These benefit programs include medical, dental and vision insurance, long-term disability (“LTD”) and short-term disability insurance, life and accidental death and dismemberment (“AD&D”) insurance, health and dependent care flexible spending accounts, relocation/expatriate programs and services, educational assistance, employee assistance and certain other benefits.
 
Indemnification Agreements
 
We have entered into an indemnification agreement with each of our non-employee directors and our executive officers. These agreements provide for us to indemnify such persons against certain liabilities that may arise by reason of their status or service as directors or executive officers and to advance their expenses incurred as a result of a proceeding as to which they may be indemnified. We also cover such persons under a directors’ and officers’ liability insurance policy that we choose, in our discretion, to maintain. These indemnification agreements are intended to provide indemnification rights to the fullest extent permitted under applicable law and are in addition to any other rights the individual may have under our Certificate of Incorporation, By-laws and applicable law. We believe these indemnification agreements enhance our ability to attract and retain knowledgeable and experienced executive officers and non-employee directors.
 
Tax and Accounting Considerations
 
Under Section 409A of the Internal Revenue Code, amounts deferred for an executive officer under a nonqualified deferred compensation plan may be included in gross income when vested and subject to a 20% or more additional federal tax, unless the plan complies with certain requirements related to the timing of deferral election and distribution decisions. Effective January 1, 2009, our Board approved the amendment of the following compensatory plans and arrangements in which our named executive officers participate to comply with recently issued Section 409A final regulations: the Restoration Plan and the Deferred Compensation Plan.
 
Section 162(m) of the Internal Revenue Code may limit our ability to deduct annual compensation in excess of $1,000,000 that is paid to our CEO and other named executive officers, unless that compensation is “performance-based compensation” within the meaning of Section 162(m) and the regulations promulgated thereunder. We believe that all of the stock options granted under the 1992 Plan qualify as performance-based compensation and therefore are not subject to the deduction limitation of Section 162(m). However, the salary and STIP payouts paid to our executive officers, certain restricted stock awards, and certain payments provided for under our change of control arrangements with the named executive officers are not exempt from this deduction limit.
 
Section 280G of the Internal Revenue Code limits our ability to deduct amounts paid to certain disqualified individuals, including our executive officers, that are treated as excess parachute payments. Excess parachute payments are also subject to an excise tax payable by the recipient of such payment. Parachute payments are


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payments that are contingent on a change in the ownership or effective control of the Company or in the ownership of a substantial portion of our assets, and they become excess parachute payments with respect to a disqualified individual to the extent that the total amount of the parachute payments made to such individual exceeds a certain threshold amount. Examples of the types of payments that could give rise to parachute payments are the accelerated vesting of stock options and restricted stock upon a change of control and severance payments made upon a termination of employment in connection with a change of control.
 
Although we consider tax deductibility in the design and administration of our executive officer compensation plans and programs, we believe that there are circumstances where our interests are best served by maintaining flexibility in the way compensation is provided, even if it results in the non-deductibility of certain compensation under the Internal Revenue Code.
 
Rules under generally accepted accounting principles determine the manner in which we account in our financial statements for grants of equity-based compensation to our employees. Our accounting policies for equity-based compensation are further discussed in Notes to Consolidated Financial Statements, Footnotes 2 and 13, of our 2008 Form 10-K.
 
REPORT OF THE COMPENSATION, BENEFITS
AND STOCK OPTION COMMITTEE
ON EXECUTIVE COMPENSATION
 
The following report of the Compensation, Benefits and Stock Option Committee of the Board of Directors shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to the SEC’s proxy rules, except for the required disclosure in this proxy statement, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934 (“Exchange Act”), and the information shall not be deemed to be incorporated by reference into any filing made by the Company under the Securities Act of 1933 or the Exchange Act.
 
The Compensation, Benefits and Stock Option Committee has reviewed the Compensation Discussion and Analysis contained in this Proxy Statement and discussed this disclosure with management. Based on this review and discussions with management, the Compensation, Benefits and Stock Option Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 for filing with the SEC.
 
March 23, 2009
 
Compensation, Benefits and
Stock Option Committee
 
Kirby L. Hedrick, Chair
Jeffrey L. Berenson
Edward F. Cox


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Summary Compensation Table
 
The following table sets forth certain summary information concerning the compensation earned by our CEO and Chief Financial Officer and each of our three most-highly compensated executive officers other than the CEO and Chief Financial Officer (collectively, the “named executive officers”) during 2006, 2007 and 2008.
 
                                                                                           
                                                      Change in
                 
                                                      Pension Value
                 
                                                      and Non-
                 
                                              Non-Equity
      Qualified
                 
                              Stock
      Option
      Incentive Plan
      Deferred
      All Other
         
Name and
            Salary
              Awards
      Awards
      Compensation
      Compensation
      Compensation
      Total
 
Principal Position     Year       ($)(1)       Bonus($)       ($)(2)       ($)(3)       ($)(4)       Earnings($)(5)       ($)(6)       ($)  
Charles D. Davidson
      2008       $ 1,025,000               $ 2,394,739       $ 2,322,850       $ 4,354,359       $ 889,986       $ 70,908       $ 11,057,842  
President and Chief
      2007         1,025,000                 1,464,932         1,762,478         3,821,192         804,352         67,901         8,945,855  
Executive Officer
      2006         966,676                 666,574         1,080,668         3,378,625         561,828         64,380         6,718,751  
                                                                                           
Chris Tong
      2008         433,333                 510,588         497,348         1,015,599         121,071         28,331         2,606,270  
Senior Vice President
      2007         410,419                 483,330         574,967         979,545         103,617         26,585         2,578,463  
and Chief Financial Officer
      2006         385,420                 292,657         380,552         775,559         81,510         24,971         1,940,669  
                                                                                           
David L. Stover
      2008         556,250                 866,927         790,063         1,362,707         199,415         22,687         3,798,049  
Executive Vice President
      2007         495,836                 414,624         468,358         1,333,932         133,883         36,681         2,883,314  
and Chief Operating Officer
      2006         416,671                 160,392         233,659         1,098,591         85,170         33,262         2,027,745  
                                                                                           
Susan M. Cunningham
      2008         428,333                 526,654         517,115         1,092,242         156,030         16,106         2,736,480  
Senior Vice President —
      2007         408,335                 337,659         390,682         990,301         111,311         15,460         2,253,748  
Exploration
      2006         385,420                 167,964         249,118         760,857         104,529         17,246         1,685,134  
                                                                                           
Rodney D. Cook(7)
      2008         350,000                 472,958         392,692         697,510         243,559         29,105         2,185,824  
Senior Vice President — International
                                                                                         
                                                                                           
 
(1) Reflects salary earned in the year indicated. Certain of our named executive officers deferred a portion of their base salaries under our Deferred Compensation Plan:
 
                               
            Percentage of
    Amount
Name     Year     Salary Deferred     Deferred
Charles D. Davidson
      2008         45 %     $ 461,250  
        2007         45 %       461,252  
        2006         45 %       435,004  
                               
Chris Tong
      2008         20 %       86,667  
        2007         20 %       82,084  
        2006         20 %       77,084  
                               
David L. Stover
      2008         0 %        
        2007         5 %       24,792  
        2006         5 %       20,834  
                               
Rodney D. Cook
      2008         10 %       35,000  
                               
 
(2) Reflects the compensation expense recognized in our financial statements for the fiscal year indicated for restricted stock granted under our 1992 Plan. Compensation expense was computed in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”). A discussion of the assumptions used in calculating these values may be found in Note 13 to our financial statements in the Form 10-K for the year ended December 31, 2008, as filed with the SEC. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. Dividends payable on the restricted stock were accounted for under SFAS 123(R). Shares granted in 2006 vest on February 1, 2009 if specified performance goals related to total stockholder return are satisfied. Performance goals are satisfied if total stockholder return is at or above the 25th percentile of the total stockholder return for our compensation peer group as defined at the time of grant. Shares granted in 2007 and 2008 will vest on the third anniversary of the grant date. The vesting of these shares is not contingent upon the satisfaction of any performance goals. See the Grants of Plan Based Awards table for information on restricted stock granted in 2008.


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(3) Reflects the compensation expense recognized in our financial statements for the fiscal year indicated for nonqualified stock options granted under our 1992 Plan. Compensation expense was computed in accordance with SFAS 123(R). A discussion of the assumptions used in calculating these values may be found in Note 13 to our financial statements in the Form 10-K for the year ended December 31, 2008, as filed with the SEC. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. Options represent the right to purchase shares of common stock at a price per share equal to fair market value on the date of grant. Options will vest ratably over three years in equal installments (33.33%) on the first, second and third anniversaries of the date of grant. Vesting of these options is not contingent upon the satisfaction of any performance goals, although none of the options may be exercised before the first anniversary (absent a change of control of the Company) or after the tenth anniversary of the date of grant. See the Grants of Plan Based Awards table for information on stock options granted in 2008.
 
(4) Reflects payments under our STIP based on the achievement of certain performance goals during the year indicated and payout of performance units previously awarded under our LTIP. STIP awards earned during the year indicated were paid or deferred in February of the following year, and performance unit awards under the LTIP cover the three-year performance period ending on December 31st of the year indicated, as follows:
 
                               
                  Performance
Name     Year     STIP Payout     Units Payout(a)
Charles D. Davidson
      2008       $ 1,435,000       $ 2,919,359  
        2007         2,600,000         1,221,192  
        2006         2,562,500         816,125  
                               
Chris Tong
      2008         417,188         598,411  
        2007         656,268         323,277  
        2006         649,965         125,594  
                               
David L. Stover
      2008         764,296         598,411  
        2007         1,010,655         323,277  
        2006         977,262         121,329  
                               
Susan M. Cunningham
      2008         493,831         598,411  
        2007         667,024         323,277  
        2006         599,717         161,140  
                               
Rodney D. Cook
      2008         432,437         265,073  
                               
 
  (a)  The payout amount indicated for the three-year period ending December 31, 2008 is an estimate only; actual payout will be determined at a meeting of our Compensation Committee in April 2009.


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(5) Reflects during the year indicated: (a) the aggregate increase in actuarial present value of the named executive officer’s benefits under our Retirement Plan and our Restoration Plan; and (b) the above-market Deferred Compensation Plan earnings, as follows:
 
                               
            Increase in
    Deferred
            Retirement and
    Compensation
Name     Year     Restoration Plans(a)     Earnings(b)
Charles D. Davidson
      2008       $ 795,515       $ 94,471  
        2007         749,258         55,094  
        2006         467,766         94,062  
                               
Chris Tong
      2008         115,404         5,667  
        2007         100,860         2,757  
        2006         78,688         2,822  
                               
David L. Stover
      2008         191,411         8,004  
        2007         129,041         4,842  
        2006         77,117         8,053  
                               
Susan M. Cunningham
      2008         156,030          
        2007         111,311          
        2006         104,529          
                               
Rodney D. Cook
      2008         242,326         1,233  
                               
 
  (a)  Beginning of year values for calculating the aggregate increase in actuarial present value reflect a 6.50% discount rate; end of year values reflect a 6.00% discount rate for the Retirement Plan and a 6.25% discount rate for the Restoration Plan. Present values are based on the same actuarial assumptions and measurement dates disclosed in Note 12 to our financial statements in the Form 10-K for the year ended December 31, 2008, as filed with the SEC, except that for purposes of the present value calculations participants are assumed to work until age 65 and commence their benefits at that time.
 
  (b)  Earnings in 2008 based on the difference between the plan crediting rate of 6.81% and 120% of the annual long-term Applicable Federal Rate as of September 2007 (6.13%); earnings in 2007 based on the difference between the plan crediting rate of 6.82% and 120% of the annual long-term Applicable Federal Rate as of September 2006 (6.27%); earnings in 2006 based on the difference between the plan crediting rate of 6.90% and 120% of the annual long-term Applicable Federal Rate as of September 2005 (5.43%).
 
(6) All other compensation includes:
 
                                                                       
                  Deferred
                       
                  Compensation
                       
            Thrift Plan
    Plan
                       
            Matching
    Matching
    Club
    Insurance
    Holiday
    Physical 
 Name     Year     Contributions     Contributions     Memberships     Premiums     Bonus     Examinations 
Charles D. Davidson
      2008       $ 13,800       $ 47,700       $ 6,743       $ 2,508       $ 157       $  
        2007         13,500         48,000         3,964         2,280         157          
        2006         13,200         44,800         3,964         2,280         136          
                                                                       
Chris Tong
      2008         13,800         12,200                 2,174         157          
        2007         13,500         11,125                 1,824         136          
        2006         13,200         9,925                 1,710         136          
                                                                       
David L. Stover
      2008         13,800                 6,222         2,508         157          
        2007         13,500         16,250         4,608         2,166         157          
        2006         13,200         11,800         4,516         1,710         136         1,900  
                                                                       
Susan M. Cunningham
      2008         13,800                         2,149         157          
        2007         13,500                         1,824         136          
        2006         13,200                         1,710         136         2,200  
                                                                       
Rodney D. Cook
      2008         13,800         7,200         6,192         1,756         157          
                                                                       


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As reflected in the table above, the salary received by each of our named executive officers as a percentage of their respective total compensation during the year indicated was as follows:
 
                     
            Percentage
            of Total
Name     Year     Compensation
Charles D. Davidson
      2008         9.3 %
        2007         11.5 %
        2006         14.4 %
                     
Chris Tong
      2008         16.6 %
        2007         16.0 %
        2006         19.9 %
                     
David L. Stover
      2008         14.7 %
        2007         17.2 %
        2006         20.6 %
                     
Susan M. Cunningham
      2008         15.7 %
        2007         18.2 %
        2006         22.9 %
                     
Rodney D. Cook
      2008         16.0 %
                     
 
(7) Rodney D. Cook became an executive officer in 2008 and was determined to be a named executive officer for that year.
 
Grants of Plan Based Awards
 
The table below sets forth information regarding grants of plan-based awards made to our named executive officers during 2008.
 
                                                                                                                                   
                                                            All Other
    All Other
           
                                                            Stock
    Option
           
                  Estimated Future Payouts
    Estimated Future Payouts
    Awards:
    Awards:
    Exercise
     
                  Under Non-Equity Incentive
    Under Equity Incentive
    Number of
    Number of
    or Base
    Grant Date
                  Plan Awards     Plan Awards     Shares of
    Securities
    Price of
    Fair Value
                          Stock or
    Underlying
    Option
    of Stock and
      Approval
    Grant
    Units
    Threshold
    Target
    Max
    Threshold
    Target
    Max
    Units (#)
    Options (#)
    Awards
    Option
Name     Date(1)     Date(1)     Granted     ($)     ($)     ($)     (#)     (#)     (#)     (2)     (3)     ($/Sh)(4)     Awards(5)
Charles D. Davidson
      1/21/2008         2/1/2008                                                                 48,459         125,200       $ 72.94       $ 6,079,915  
                                                                                                                                   
                                                                                                                                   
Chris Tong
      1/21/2008         2/1/2008                                                                 10,709         27,669         72.94         1,343,625  
                                                                                                                                   
                                                                                                                                   
David L. Stover
      1/21/2008         2/1/2008                                                                 23,126         59,749         72.94         2,901,508  
                                                                                                                                   
                                                                                                                                   
Susan M. Cunningham
      1/21/2008         2/1/2008                                                                 11,465         29,622         72.94         1,438,472  
                                                                                                                                   
                                                                                                                                   
Rodney D. Cook
      1/21/2008         2/1/2008                                                                 10,269         18,780         72.94         1,130,818  
 
 
(1) Awards were approved at our January 2008 Compensation Committee meeting; grants were effective and priced February 1, 2008.
 
(2) Represents the shares of restricted stock granted under our 1992 Plan in 2008. The shares will vest on February 1, 2011. Dividends declared on shares of restricted stock are accrued during the three-year restricted period. Accrued dividends will be paid upon vesting of restricted shares. Dividends accrued during 2008 as follows: Mr. Davidson — $31,983; Mr. Tong — $7,068; Mr. Stover — $15,263; Ms. Cunningham — $7,567; and Mr. Cook — $6,778.
 
(3) Represents grant of nonqualified stock options under our 1992 Plan. Options represent the right to purchase shares of common stock at the price per share (equal to fair market value on the date of grant) indicated in the table. Options will vest ratably over three years in equal installments (33.33%) on the first, second and third anniversaries of the date of grant.
 
(4) Exercise price at “fair market value” is defined in our 1992 Plan as the average of the reported high and low trading price of our common stock on the NYSE on the date of grant. The closing price of our common stock on February 1, 2008 was $73.51.
 
(5) Reflects grant date fair value of restricted stock and nonqualified stock options granted to our named executive officers on February 1, 2008 determined pursuant to SFAS 123(R). Dividends payable on restricted stock awards are accounted for under SFAS 123(R). A discussion of the assumptions used in calculating these values


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may be found in Note 13 to our financial statements in the Form 10-K for the year ended December 31, 2008, as filed with the SEC. Grant date fair value of stock options reported above is as follows: Mr. Davidson — $2,545,316; Mr. Tong — $562,511; Mr. Stover — $1,214,697; Ms. Cunningham — $602,215; and Mr. Cook — $381,797. Grant date fair value of restricted stock reported above is as follows: Mr. Davidson — $3,534,599; Mr. Tong — $781,114; Mr. Stover — $1,686,810; Ms. Cunningham — $836,257; and Mr. Cook — $749,021.
 
2008 Compensation of CEO
 
Our Compensation Committee, with input from our other directors, evaluates Mr. Davidson’s performance, with that evaluation supporting the determination of Mr. Davidson’s compensation level. The Company’s key results during 2008 under Mr. Davidson’s leadership include:
 
  •  record net income of $1.4 billion;
 
  •  record discretionary cash flow of $2.4 billion;
 
  •  replacement of 147% of our production (before adjustment of reserves for year-end prices);
 
  •  significant exploration success with discoveries in West Africa, Israel and the deepwater Gulf of Mexico;
 
  •  stockholder return for the 2008 fiscal year of negative 37.5%, falling within the median range of our compensation peer group and the Standard & Poor’s 500; and
 
  •  achievement of various other project and performance milestones.
 
Stockholder return represents the change in capital value of our common stock for the period indicated, plus dividends, expressed as a percentage.
 
Mr. Davidson earned a total salary of $1,025,000 in 2008. Mr. Davidson did not receive a base salary increase in 2008. Based on the results of Towers Perrin’s review of 2008 executive compensation, our Compensation Committee determined that Mr. Davidson’s salary was appropriate based on the market median for his position relative to our compensation peer group giving consideration to the scope and nature of our operations.
 
Mr. Davidson received a total STIP payment of $1,435,000 in February 2009, based on our Compensation Committee’s review of overall performance of the Company for the 2008 fiscal year, as well as Mr. Davidson’s performance, as measured against operational and financial goals for 2008 that he submitted earlier in the year. Mr. Davidson’s STIP payment for 2008 performance decreased approximately 45% compared to 2007.
 
Mr. Davidson was granted awards under our LTIP of 125,200 stock options and 48,459 shares of restricted stock on February 1, 2008, based in part on market data from Towers Perrin and considering our performance against our compensation peer group and Mr. Davidson’s leadership performance.
 
We believe that Mr. Davidson’s compensation level is consistent with the objectives of our compensation program, provides an appropriate mix of salary and incentive compensation, rewards leadership performance by Mr. Davidson that has produced some key results by the Company in 2008 and provides motivation for the future achievement of short-term and long-term goals necessary to stockholder value creation. We also believe that it is internally consistent and equitable compared to our other executive officers in recognition of Mr. Davidson’s broad responsibility and accountability for the Company’s strategy and operations, compliance and controls, investor relations and role as Chairman of the Board of Directors.
 
2008 Compensation of Other Named Executive Officers
 
In determining the compensation of Messrs. Tong and Stover, Ms. Cunningham, and Mr. Cook for 2008, our Compensation Committee considered their respective roles, responsibilities and reporting within the Company; their respective contributions to the overall performance of the Company; the performance of their respective business units or organizations; comparisons to our compensation peer group; and internal pay equity.
 
Based on the results of Towers Perrin’s review of 2008 executive compensation, our Compensation Committee determined that an increase in base salary for each of our named executive officers was appropriate to more closely


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approximate market median for their respective positions relative to our compensation peer group giving consideration to the scope and nature of our operations. Effective August 1, 2008, Mr. Stover’s base salary was increased to $600,000, Mr. Tong’s base salary was increased to $445,000, Ms. Cunningham’s base salary was increased to $440,000, and Mr. Cook’s base salary was increased to $385,000.
 
After reviewing the overall performance of the Company for the 2008 fiscal year and the contributions to that performance of each non-CEO named executive officer and his or her respective business unit or organization, our Compensation Committee approved the following STIP payments: Mr. Tong — $417,188; Mr. Stover — $764,296; Ms. Cunningham — $493,831; and Mr. Cook — $432,437. The STIP payments for 2008 performance for Mr. Tong, Mr. Stover and Ms. Cunningham decreased approximately 36%, 24%, and 26%, respectively, compared to 2007. We believe that these STIP payments are appropriate in light of the Company’s performance in 2008 and reflect the relative contributions of these executive officers.
 
On February 1, 2008, Messrs. Tong and Stover, Ms. Cunningham and Mr. Cook were granted awards of stock options under our LTIP of 27,669, 59,749, 29,622, and 18,780, respectively. On that same date, Messrs. Tong, Stover, Ms. Cunningham and Mr. Cook were awarded 10,709, 23,126, 11,465 and 10,269 shares of restricted stock, respectively. Our Compensation Committee considered the Company’s performance against our compensation peer group plus individual performance in determining the level of these grants. These grants were also based on market data from Towers Perrin regarding our compensation program and appropriate long-term incentive grant levels in light of compensation peer group practices.


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Outstanding Equity Awards at Fiscal Year-End
 
The following table sets forth certain information with respect to restricted stock and stock options held by our named executive officers as of December 31, 2008.
 
                                                                                           
                  Equity
                            Equity
     
                  Incentive
                            Incentive
     
                  Plan Awards:
                      Market
    Plan
    Equity Incentive
                  Number of
                Number of
    Value
    Awards:
    Plan Awards:
      Number of
    Number of
    Securities
                Shares or
    of Shares
    Number of
    Market or Payout
      Securities
    Securities
    Underlying
                Units of
    or Units of
    Unearned
    Value of Unearned
      Underlying
    Underlying
    Unexercised
                Stock
    Stock
    Shares, Units or
    Shares, Units or
      Unexercised
    Unexercised
    Unearned
    Option
    Option
    Held That
    Held That
    Other Rights
    Other Rights That
      Options (#
    Options (#
    Options
    Exercise
    Expiration
    Have Not
    Have Not
    That Have Not
    Have Not Vested
Name     Exercisable)     Unexercisable)     (#)     Price ($)     Date     Vested (#)     Vested ($)(7)     Vested (#)     ($)(7)
Charles D. Davidson
      160,000                         $ 18.9375         10/2/2010         58,262 (5)     $ 2,867,656         17,181 (6)     $ 845,649  
        120,000                             21.6050         1/29/2011         48,459 (8)       2,385,152                      
        154,000                             16.2700         2/1/2012                                          
        150,000                             17.6825         2/1/2013                                          
        86,580                             22.2325         2/1/2014                                          
        58,852                             29.8700         2/1/2015                                          
        21,550                             32.7925         5/16/2015                                          
        12,000                             41.4650         8/1/2015                                          
        51,971         25,986 (1)                 45.9400         2/1/2016                                          
        54,706         109,412 (2)                 53.4150         2/1/2017                                          
                  125,200 (3)                 72.9400         2/1/2018                                          
 
Chris Tong
      39,700                           29.8800         1/3/2015         11,700 (5)       575,874         3,522 (6)       173,353  
        15,580                             29.8700         2/1/2015         10,709 (8)       527,097                      
        8,000                             41.4650         8/1/2015                                          
        10,653         5,327 (1)                 45.9400         2/1/2016                                          
        10,986         21,971 (2)                 53.4150         2/1/2017                                          
                  27,669 (3)                 72.9400         2/1/2018                                          
 
David L. Stover
      15,000                           20.0350         12/16/2012         17,257 (5)       849,390         3,522 (6)       173,353  
        40,000                             17.6825         2/1/2013         23,126 (8)       1,138,262                      
        12,872                             22.2325         2/1/2014                                          
        15,580                             29.8700         2/1/2015                                          
        8,000                             41.4650         8/1/2015                                          
        10,653         5,327 (1)                 45.9400         2/1/2016                                          
        16,204         32,406 (2)                 53.4150         2/1/2017                                          
                  59,749 (3)                 72.9400         2/1/2018                                          
 
Susan M. Cunningham
      20,000                           20.9250         4/23/2011         12,231 (5)       602,010         3,522 (6)       173,353  
        54,000                             16.2700         2/1/2012         11,465 (8)       564,307                      
        50,000                             17.6825         2/1/2013                                          
        17,094                             22.2325         2/1/2014                                          
        15,580                             29.8700         2/1/2015                                          
        8,000                             41.4650         8/1/2015                                          
        10,653         5,327 (1)                 45.9400         2/1/2016                                          
        11,485         22,970 (2)                 53.4150         2/1/2017                                          
                  29,622 (3)                 72.9400         2/1/2018                                          
 
Rodney D. Cook
      432                             22.2325         2/1/2014         10,195 (5)       501,798         4,560 (6)       224,443  
        4,224                             29.8700         2/1/2015         10,269 (8)       505,440                      
        4,719         2,359 (1)                 45.9400         2/1/2016                                          
        16,667         8,333 (4)                 38.3400         6/16/2016                                          
        6,756         13,512 (2)                 53.4150         2/1/2017                                          
                  18,780 (3)                 72.9400         2/1/2018                                          
 
 
(1) Stock options vested February 1, 2009.
 
(2) 50% of stock options vested February 1, 2009; and 50% of stock options vest February 1, 2010.
 
(3) 331/3% of stock options vested February 1, 2009; 331/3% of stock options vest February 1, 2010; and 331/3% of stock options vest February 1, 2011.
 
(4) Stock options vest June 16, 2009.
 
(5) Restricted stock vests February 1, 2010.
 
(6) Restricted stock vested February 1, 2009 as performance goals were satisfied. The performance goals for determining vesting are described in this proxy statement under the heading “Long-Term Incentive Plan.”


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(7) Market value based on December 31, 2008 closing price of $49.22.
 
(8) Restricted stock vests February 1, 2011.
 
Stock Option Exercises and Stock Vesting
 
The following table sets forth certain information with respect to vesting of restricted stock and the exercise of stock options held by our named executive officers during fiscal year 2008.
 
                                         
      Option Awards
           
            Stock Awards
      Number of Shares
           
      Acquired on
    Value Realized on
    Number of Shares
    Value Realized on
Name     Exercise (#)     Exercise ($)     Acquired on Vesting (#)     Vesting ($)(4)
Charles D. Davidson
                          26,700       $ 2,186,183  
                                         
Chris Tong(1)
      10,300       $ 741,786         23,176         1,808,457  
                                         
David L. Stover
                          7,176         523,417  
                                         
Susan Cunningham(2)
      20,000         1,632,016         7,176         523,417  
                                         
Rodney Cook(3)
      10,000         813,901         862         62,874  
                                         
 
(1) Mr. Tong exercised and sold stock options under 10b5-1 trading plans in 2008 as follows: 5,000 shares on May 23, 2008 with an exercise price of $29.88; 5,000 shares on June 6, 2008 with an exercise price of $29.88; and 300 shares on July 2, 2008 with an exercise price of $29.88. Fair market value at the time of exercise and sale ranged from $101.14 to $104.50.
 
(2) Ms. Cunningham exercised and sold 20,000 stock options with an exercise price of $20.925 on May 19, 2008. Fair market value at the time of exercise and sale ranged from $102.31 to $102.96.
 
(3) Mr. Cook exercised and sold stock options in 2008 as follows: 4,000 shares on May 21, 2008 with an exercise price of $22.2325 and 6,000 shares on May 21, 2008 with an exercise price of $21.605. Fair market value at the time of exercise and sale ranged from $103.04 to $103.63.
 
(4) Shares of restricted stock granted to our named executive officers on February 1, 2005 and August 1, 2005 vested on February 1, 2008 as performance goals were satisfied. The performance goals for determining vesting are described in this proxy statement under the heading “Long-Term Incentive Plan.” Income recognized on vesting is based on the average of the high and low trading price of our common stock on February 1, 2008 ($72.94). Shares of restricted stock granted to Mr. Davidson (8,700) on May 16, 2005 vested on May 16, 2008. Income recognized on the vesting of Mr. Davidson’s restricted shares on May 16, 2008 is based on the average of the high and low trading prices of our common stock on May 16, 2008 ($100.375). Shares of restricted stock granted to Mr. Tong (16,000) on January 3, 2005 vested on January 3, 2008. Income recognized on the vesting of Mr. Tong’s restricted shares on January 3, 2008 is based on the average of the high and low trading prices of our common stock on January 3, 2008 ($80.315). Vesting of Messrs. Davidson and Tong’s shares was not contingent upon on the satisfaction of any performance goals. Dividends that accrued on the shares of restricted stock during the restricted periods were paid in 2008 as follows: Mr. Davidson — $25,137; Mr. Tong — $19,931; Mr. Stover — $6,171; Ms. Cunningham — $6,171; and Mr. Cook — $741.


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Pension Benefits
 
The amounts reported in the table below reflect the present value of accumulated benefits as of December 31, 2008 for the named executive officers under our Retirement Plan and Restoration Plan. The estimates assume that benefits are received in the form of a ten-year certain and life annuity.
 
                                     
            Number of
           
            Years of
    Present Value of
    Payments During
            Credited
    Accumulated
    Last Fiscal Year
Name     Plan Name     Service(1)     Benefit ($)(2)     ($)
Charles D. Davidson
    Retirement Plan       8       $ 253,586       $ 0  
      Restoration Plan       8         2,660,598         0  
                                     
Chris Tong
    Retirement Plan       4         85,986         0  
      Restoration Plan       4         243,516         0  
                                     
David L. Stover
    Retirement Plan       6         118,859         0  
      Restoration Plan       6         388,958         0  
                                     
Susan M. Cunningham
    Retirement Plan       8         171,649         0  
      Restoration Plan       8         439,127         0  
                                     
Rodney D. Cook
    Retirement Plan       28         443,259         0  
      Restoration Plan       28         565,446         0  
                                     
 
(1) Messrs. Davidson and Stover, Ms. Cunningham and Mr. Cook are fully vested in their retirement benefits. Due to plan changes made effective January 1, 2008, all vested employees are eligible for immediate commencement and can elect an unlimited lump sum option for their Retirement Plan benefits. For the Restoration Plan benefit, participants previously elected to receive their benefit as either an annuity or lump sum, and elected specific timing of receiving their benefits. Mr. Tong elected to receive an annuity from the Restoration Plan and Messrs. Davidson and Stover, Ms. Cunningham and Mr. Cook elected to receive a lump sum from the Restoration Plan. Mr. Davidson and Ms. Cunningham elected to receive their Restoration Plan benefits upon separation of service and Messrs. Tong, Stover and Cook elected to receive their Restoration Plan benefits at the later of age 55 or separation of service. The following annuity and lump sum amounts would be payable to our named executive officers from our Retirement Plan and Restoration Plan effective January 1, 2009:
 
                                                   
            Retirement
    Restoration
    Retirement
    Restoration
      Age at
    Plan Monthly
    Plan Monthly
    Plan
    Plan
Name     12/31/2008     Annuity     Annuity     Lump Sum     Lump Sum
Charles D. Davidson
      58.83       $ 2,536         N/A       $ 404,959       $ 4,414,554  
                                                   
Chris Tong
      52.33         N/A         N/A         N/A         N/A  
                                                   
David L. Stover
      51.17         562         N/A         141,887         399,949(a)  
                                                   
Susan M. Cunningham
      53.00         856         N/A         201,486         538,617  
                                                   
Rodney D. Cook
      51.58         6,115         N/A         1,110,251         899,320(a)  
                                                   
 
(a) Not payable until the later of separation of service or attainment of age 55. An actuarially equivalent amount will be payable at that time.
 
(2) Represents the actuarial present value of the accumulated pension benefits as of December 31, 2008 under our Retirement Plan and Restoration Plan. Present values are based on the same actuarial assumptions and measurement dates utilized in our Form 10-K filing for the year ended December 31, 2008.


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Nonqualified Deferred Compensation Table
 
The following table sets forth certain information with respect to contributions made to our Deferred Compensation Plan by our named executive officers during fiscal year 2008.
 
                                                   
                              Aggregate
         
      Executive
      Registrant
      Aggregate
      Withdrawals/
         
      Contributions in
      Contributions in
      Earnings
      Distributions in
      Aggregate Balance at
 
Name     Last FY ($)(1)       Last FY ($)(2)       in Last FY ($)(3)       Last FY       Last FYE ($)(4)  
Charles D. Davidson
    $ 3,061,250       $ 47,700       $ 925,415       $ 0       $ 14,640,324  
                                                   
Chris Tong
      283,547         12,200         55,639         0         924,802  
                                                   
David L. Stover
      202,131         0         78,338         0         1,213,139  
                                                   
Susan M. Cunningham
      0         0         0         0         0  
                                                   
Rodney D. Cook
      35,000         7,200         12,034         0         209,496  
                                                   
 
(1) Mr. Davidson deferred 100% of the STIP payment he earned in 2007 (otherwise paid in 2008) ($2,600,000) and 45% ($461,250) of base salary in 2008. Mr. Tong deferred 30% of the STIP payment he earned in 2007 (paid in 2008) ($196,880) and 20% ($86,667) of base salary in 2008. Mr. Stover deferred 20% of the STIP payment he earned in 2007 (paid in 2008) ($202,131). Mr. Cook deferred 10% ($35,000) of base salary in 2008.
 
(2) Represents matching contributions of 100% of the first 6% of base salary deferred, to the extent not matched in our Thrift Plan.
 
(3) Interest is paid at the greater of 125% of the 120-month rolling average of the 10-year Treasury Note, or the 120-month rolling average of the Prime Rate. Interest paid in 2008 is based on Prime Rate average of 6.81%, compounded monthly.
 
(4) All named executive officers are 100% vested in these balances.
 
The matching contributions and a portion of the interest earnings credited to the Deferred Compensation Plan accounts of our named executive officers are reflected in the “All Other Compensation” and the “Change in Pension Value” columns of the Summary Compensation Table above, respectively.
 
Potential Payments and Benefits Upon Termination of Employment
 
The tables below estimate the amount of compensation payable to each of our named executive officers upon voluntary and involuntary termination of employment, termination following a change of control and in the event of disability or death, in each case effective as of December 31, 2008. The actual amount of compensation payable to each of our named executive officers can only be determined at the time of his or her separation from the Company.
 
Payments Made Upon Termination
 
Upon termination of employment for reasons other than disability, death or in connection with a change of control, each named executive officer is entitled to receive amounts earned during his or her term of employment. Such amounts include:
 
  •  amounts credited under our Deferred Compensation Plan;
 
  •  unused vacation pay; and
 
  •  amounts accrued and vested under our Retirement Plan and Restoration Plan.
 
Payments Made Upon Retirement
 
In the event of the retirement of a named executive officer, in addition to the items identified above, the named executive officer:
 
  •  will have until the earlier of (1) the fifth anniversary of his or her retirement date or (2) the expiration of the remainder of the outstanding ten-year option term, to exercise all stock options that are vested as of his or her retirement date;


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  •  may be entitled to receive a prorated share of outstanding unvested restricted stock and performance unit awards at such time as any performance criteria associated with the awards is satisfied;
 
  •  may elect to continue to participate in our medical and dental plans at subsidized retiree rates until he or she reaches age 65 (continued coverage for medical and dental benefits for the named executive officer’s dependents may also be elected at subsidized retiree rates); and
 
  •  may continue to receive life insurance coverage until the attainment of age 65 at subsidized premium rates.
 
Payments Made Upon Death or Disability
 
In the event of the death or disability of a named executive officer, in addition to the benefits listed under the headings “Payments Made Upon Termination” and “Payments Made Upon Retirement” above, the named executive officer or his or her named beneficiary will receive benefits under our disability plan or payments under our life insurance plan, as appropriate.
 
Payments Made Upon a Change of Control
 
We have entered into change of control arrangements with each of our named executive officers. If a named executive officer’s employment is terminated within two years after a change of control of the Company, he or she may be entitled to receive certain severance benefits pursuant to the terms of his or her change of control arrangement. These benefits are described above more fully in this proxy statement under the heading “Change of Control Arrangements.”
 
Charles D. Davidson
 
The following table shows the potential payments to Mr. Davidson, President, CEO and Chairman of our Board, in the event of his termination of employment as of December 31, 2008.
 
                                                   
                  Involuntary Termination or
           
                  Termination Without Cause
           
      Voluntary
    Involuntary
    in Connection With a
           
Executive Benefits and
    Termination on
    Termination on
    Change of Control on
    Disability on
     
Payments Upon Separation     12/31/2008(1)     12/31/2008(1)     12/31/2008     12/31/2008(1)     Death on 12/31/2008 
Compensation:
                                                 
Severance
              (8)     $ 9,640,258 (9)                
STIP Payments
      (2)       (2)       1,025,000 (9)       (2)       (2)
Stock Options
                      85,234 (10)                
Restricted Stock
    $ 845,649 (3)     $ 845,649 (3)       6,098,456 (11)     $ 6,098,456 (3)     $ 6,098,456 (3)
                                                   
Benefits and Perquisites:
                                                 
Retirement Plans
      4,819,513 (4)       4,819,513 (4)       4,819,513 (4)       4,579,708 (15)       2,508,918 (17)
Deferred Compensation Plan
      (5)       (5)       (5)       (5)       (5)
Health & Welfare Benefits
      27,241 (6)       27,241 (6)       27,898 (12)       27,241 (6)        
Disability Income
                              (16)        
Life Insurance Benefits
                                      1,000,000 (18)
Excise Tax & Gross-Up
                      5,100,000 (13)                
Accrued Vacation Pay
      (7)       (7)       (7)       (7)       (7)
Employment Services
                      15,000 (14)                
                                                   
TOTAL
    $ 5,692,403       $ 5,692,403       $ 26,811,359       $ 10,705,405       $ 9,607,374  
                                                   
 
(1) Mr. Davidson was eligible for early retirement as of December 31, 2008. Upon his termination of employment he will be entitled to retiree benefits under all of our benefit plans.
 
(2) Mr. Davidson would not be entitled to a STIP payment for 2008 in the event of his termination of employment on December 31, 2008, other than in the event of a change of control. Employees must be employed on the STIP payment date (February 2009) in order to receive payment.
 
(3) As a retiree, or due to termination as a result of disability or death, Mr. Davidson or his named beneficiary may be entitled to a prorated portion of all unvested performance-based restricted stock awards. The prorated portion of these awards will only vest at the end of each restricted period if the performance goals for that period have been satisfied. The prorated portion is based on the number of months of service completed by Mr. Davidson during the restricted period. Value is based on the closing price of our common stock on December 31, 2008 ($49.22). We have assumed that the performance goals will be satisfied and 100% of the


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restricted shares awarded in 2006 (17,181 shares) will vest in 2009. All unvested shares of restricted stock with time-based vesting provisions (58,262 shares in 2007 and 48,459 shares in 2008) will be forfeited upon retirement, unless the Board, in its discretion, takes action to accelerate the vesting of these shares. All unvested shares of restricted stock with time-based vesting provisions will vest in the event of termination of employment as a result of death or disability as follows: 2007 award — 58,262 shares will vest; and 2008 award — 48,459 shares will vest. Value is based on the closing price of our common stock on December 31, 2008 ($49.22).
 
(4) Reflects the total lump sum payable to Mr. Davidson under our Retirement Plan and Restoration Plan as of January 1, 2009. Due to plan changes made effective January 1, 2008, all employees are eligible for immediate commencement of benefits upon separation from service and can elect a lump sum payment of their accrued Retirement Plan benefits. Based on a December 31, 2008 termination date, Mr. Davidson’s monthly age 65 retirement benefits from our Retirement Plan would be $4,076. If Mr. Davidson commences his retirement benefits immediately following termination on December 31, 2008, his monthly benefits from our Retirement Plan, reduced for early retirement, would be $2,536. For the Restoration Plan benefit, participants previously elected to receive their benefit as either an annuity or lump sum, and elected specific timing of receiving their benefits. Mr. Davidson elected to receive a lump sum from the Restoration Plan upon separation of service. The lump sum payable to Mr. Davidson from our Restoration Plan based on a December 31, 2008 termination date is $4,414,554.
 
(5) Mr. Davidson would not be entitled to any additional benefit under our Deferred Compensation Plan in the event of his termination of employment other than the vested amount included in the table following Note 18.
 
(6) Reflects the present value of expected future medical and dental benefits that will be paid by the Company in connection with Mr. Davidson’s participation in the medical and dental plans as a retiree. Assumptions used for this calculation are the same assumptions disclosed in Note 12 to our financial statements in the Form 10-K for the year ended December 31, 2008, as filed with the SEC, for post-retirement calculations.
 
(7) Mr. Davidson is entitled to six weeks of paid vacation each calendar year. Unused vacation does not carry over from year to year. We have assumed for purposes of this table that Mr. Davidson used all of his vacation during 2008 and would therefore not be entitled to payment for any unused vacation in the event of his termination on December 31, 2008. In the event of termination during the year, all amounts of unused vacation would be paid based on Mr. Davidson’s salary.
 
(8) Mr. Davidson is not a party to any agreement that provides for a severance payment absent termination of employment following a change of control. However, our Severance Benefit Plan provides for a severance payment in certain instances based upon years of completed service. If Mr. Davidson is entitled to a severance payment under the plan, he would receive two weeks of pay for every year of completed service, plus a prorated STIP payment based on his STIP target percentage (100%) for a total payment of $1,340,385.
 
(9) We entered into a Change of Control Agreement with Mr. Davidson that provides for severance benefits in the event that Mr. Davidson’s employment terminates within two years after a change of control of the Company. Under Mr. Davidson’s Change of Control Agreement, if Mr. Davidson is terminated following a change of control (other than termination by the Company for cause or by reason of death or disability), he is entitled to receive a lump sum severance payment equal to 2.99 times his annual cash compensation. Cash compensation for purposes of calculating severance is the sum of annual base salary and the greater of target bonus for the current year and the average STIP paid for the three years prior to the change of control. Mr. Davidson is also entitled to a prorated STIP payment based on his termination date in the year of the change of control.
 
(10) Vesting of stock options accelerates in the event of a change of control. Represents the difference between the exercise price of each stock option and the closing price of our common stock on December 31, 2008 ($49.22) on all unvested stock options held by Mr. Davidson as of December 31, 2008.
 
(11) Vesting of restricted stock accelerates in the event of a change of control. Represents the value of all restricted stock held by Mr. Davidson on December 31, 2008 based on the closing price of our common stock on December 31, 2008 ($49.22).
 
(12) Mr. Davidson’s Change of Control Agreement provides for continued medical, dental, life, AD&D, and LTD benefits for a period of 36 months following a change of control. The value reflected is the total estimated cost to us to provide these benefits. Mr. Davidson is also entitled to continue his medical and dental coverage


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following this 36-month period as a participant in our retiree medical plan at subsidized premium rates as discussed above. The value reflected also includes the present value of the expected future medical and dental benefits that will be paid by us in connection with Mr. Davidson’s participation in the retiree medical plan following the 36-month period.
 
(13) Mr. Davidson is entitled to a gross-up payment for any excise tax due in connection with a change of control pursuant to Internal Revenue Code Sections 280G and 4099. The estimated gross-up payment for Mr. Davidson based on a December 31, 2008 change of control and the closing price of our common stock on December 31, 2008 of $49.22 is $5,100,000.
 
(14) Mr. Davidson’s Change of Control Agreement provides for reimbursement for reasonable fees up to $15,000 for out-placement employment services.
 
(15) In the event of Mr. Davidson’s termination of employment due to permanent and total disability, his age 65 retirement benefits from our Retirement Plan and Restoration Plan will be calculated as if he had continued to work until age 65. The value reflected represents the actuarial present value of Mr. Davidson’s age 65 benefits based on a disability date of December 31, 2008. The calculation is based on Mr. Davidson’s final average compensation as of his date of disability. Upon commencement of his benefits at age 65, Mr. Davidson’s monthly benefit from our Retirement Plan and Restoration Plan would be $61,598. In the event that Mr. Davidson elects to immediately commence his retirement benefits, the amounts payable will be as described in Note 4 above.
 
(16) Our LTD benefits are fully insured through CIGNA. Eligibility for benefits is determined by CIGNA only after the employee’s termination of employment because of a medical condition. Benefits pay at 60% of monthly income, capped at $15,000 per month.
 
(17) In the event of Mr. Davidson’s death while an active employee, his named beneficiary is entitled to a death benefit under our Retirement Plan and Restoration Plan. The death benefit payable in the event of his death on December 31, 2008 is $2,508,918. This lump sum payment was calculated based on the same actuarial assumptions utilized in our Form 10-K filing for the year ended December 31, 2008 and the GAR 1994 mortality tables as required by our Retirement Plan and Restoration Plan. The accrued death benefit was reduced for early commencement.
 
(18) We provide group term life insurance coverage equal to two times base salary, capped at $1,000,000.
 
In addition to the payments Mr. Davidson may receive upon the termination of his employment, he will continue to hold stock options that were vested immediately prior to his termination. Mr. Davidson also will be entitled to receive the vested balance of his contributions to our Deferred Compensation Plan. The table below shows the vested benefits that Mr. Davidson has accumulated as of December 31, 2008 and the benefits he will receive as a result of his termination of employment on that date. We refer to the combined amounts as the total “walk-away” amount:
 
                                                   
                  Involuntary Termination or
           
                  Termination Without Cause
           
      Voluntary
    Involuntary
    in Connection With a
           
      Termination on
    Termination on
    Change of Control on
    Disability on
    Death on
      12/31/2008     12/31/2008     12/31/2008     12/31/2008     12/31/2008 
Vested Benefits as of December 31, 2008:
                                                 
Stock Options(1)
    $ 22,056,167       $ 22,056,167       $ 22,056,167       $ 22,056,167       $ 22,056,167  
Deferred Compensation Plan
      14,640,324         14,640,324         14,640,324         14,640,324         14,640,324  
Performance Units(2)
      2,919,359         2,919,359         2,919,359         2,919,359         2,919,359  
                                                   
Total Vested Benefits
    $ 39,615,850       $ 39,615,850       $ 39,615,850       $ 39,615,850       $ 39,615,850  
                                                   
Benefits and Payments Upon Separation:
      5,692,403         5,692,403         26,811,359         10,705,405         9,607,374  
                                                   
Total “Walk-Away” Value
    $ 45,308,253       $ 45,308,253       $ 66,427,209       $ 50,321,255       $ 49,223,224  
                                                   
 
(1) Represents the difference between the exercise price of each stock option and the closing price of our common stock on December 31, 2008 ($49.22) on all stock options vested and exercisable as of December 31, 2008.
 
(2) Reflects estimated payout of performance units awarded to Mr. Davidson under our LTIP in 2006 (1,641,196 units). The performance period for determining payout level of these units ended on December 31,


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2008. In the event of Mr. Davidson’s termination of employment, he will still be entitled to payment based on the Company’s actual level of achievement against stated performance goals. Actual payout will be determined at a meeting of our Compensation Committee in April 2009.
 
Chris Tong
 
The following table shows the potential payments to Mr. Tong, Senior Vice President and Chief Financial Officer of the Company, in the event of his termination of employment as of December 31, 2008.
 
                                                   
                  Involuntary Termination or
           
                  Termination Without Cause
           
      Voluntary
    Involuntary
    in Connection With a
           
Executive Benefits and
    Termination on
    Termination on
    Change of Control on
    Disability on
    Death on
Payments Upon Separation     12/31/2008     12/31/2008     12/31/2008     12/31/2008     12/31/2008 
Compensation:
                                                 
Severance
              (7)     $ 2,548,684 (8)                
STIP Payments
      (1)       (1)       333,750 (8)       (1)       (1)
Stock Options
                      17,473 (9)                
Restricted Stock
      (2)       (2)       1,276,324 (10)     $ 1,276,324 (14)     $ 1,276,324 (15)
                                                   
Benefits and Perquisites:
                                                 
Retirement Plans
      (3)       (3)       (3)       1,151,225 (15)       129,784 (17)
Deferred Compensation Plan
      (4)       (4)       (4)       (4)       (4)
Health & Welfare Benefits
      (5)       (5)       41,713 (11)       (5)        
Disability Income
                              (16)        
Life Insurance Benefits
                                      890,000 (18)
Excise Tax & Gross-Up
                      1,300,000 (12)                
Accrued Vacation Pay
      (6)       (6)       (6)       (6)       (6)
Employment Services
                      15,000 (13)                
                                                   
TOTAL
    $       $       $ 5,532,944       $ 2,427,549       $ 2,296,108  
                                                   
 
(1) Mr. Tong would not be entitled to a STIP payment for 2008 in the event of his termination of employment on December 31, 2008, other than in the event of a change of control. Employees must be employed on the STIP payment date (February 2009) in order to receive payment.
 
(2) All unvested shares of restricted stock will be forfeited upon Mr. Tong’s voluntary or involuntary termination of employment on December 31, 2008, including the 2006 award — 3,522 shares; the 2007 award — 11,700 shares; and the 2008 award — 10,709 shares.
 
(3) Mr. Tong is not vested in either our Retirement Plan or our Restoration Plan.
 
(4) Mr. Tong would not be entitled to any additional benefit under our Deferred Compensation Plan in the event of his termination of employment other than the vested amount included in the table following Note 18.
 
(5) Mr. Tong would not be eligible to participate in our retiree medical and dental plans in the event of his termination of employment on December 31, 2008.
 
(6) Mr. Tong is entitled to six weeks of paid vacation each calendar year. Unused vacation does not carry over from year to year. We have assumed for purposes of this table that Mr. Tong used all of his vacation during 2008 and would therefore not be entitled to payment for any unused vacation in the event of his termination on December 31, 2008. In the event of termination during the year, all amounts of unused vacation would be paid based on Mr. Tong’s salary.
 
(7) Mr. Tong is not a party to any agreement that provides for a severance payment absent termination of employment following a change of control. However, our Severance Benefit Plan provides for a severance payment in certain instances based upon years of completed service. If Mr. Tong is entitled to a severance payment under the plan, he would receive two weeks of pay for every year of completed service, plus a prorated STIP payment based on his STIP target percentage (75%) for a total payment of $436,442.
 
(8) We entered into a Change of Control Agreement with Mr. Tong that provides for severance benefits in the event that Mr. Tong’s employment terminates within two years after a change of control of the Company. Under Mr. Tong’s Change of Control Agreement, if Mr. Tong is terminated following a change of control (other than termination by the Company for cause or by reason of death or disability), he is entitled to receive a


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lump sum severance payment equal to 2.5 times his annual cash compensation. Cash compensation for purposes of calculating severance is the sum of annual base salary and the greater of target bonus for the current year and the average STIP paid for the three years prior to the change of control. Mr. Tong is also entitled to a prorated STIP payment based on his termination date in the year of the change of control.
 
(9) Vesting of stock options accelerates in the event of a change of control. Represents the difference between the exercise price of each stock option and the closing price of our common stock on December 31, 2008 ($49.22) on all unvested stock options held by Mr. Tong as of December 31, 2008.
 
(10) Vesting of restricted stock accelerates in the event of a change of control. Represents the value of all restricted stock held by Mr. Tong on December 31, 2008 based on the closing price of our common stock on December 31, 2008 ($49.22).
 
(11) Mr. Tong’s Change of Control Agreement provides for continued medical, dental, life, AD&D, and LTD benefits for a period of 30 months following a change of control. The value reflected is the total estimated cost to us to provide these benefits.
 
(12) Mr. Tong is entitled to a gross-up payment for any excise tax due in connection with a change of control pursuant to Internal Revenue Code Sections 280G and 4099. The estimated gross-up payment for Mr. Tong based on a December 31, 2008 change of control and the closing price of our common stock on December 31, 2008 of $49.22 is $1,300,000.
 
(13) Mr. Tong’s Change of Control Agreement provides for reimbursement for reasonable fees up to $15,000 for out-placement employment services.
 
(14) In the event of termination of employment as a result of disability or death, Mr. Tong or his named beneficiary may be entitled to a prorated portion of all unvested performance-based restricted stock awards. The prorated portion of these awards will only vest at the end of each restricted period if the performance goals for that period have been satisfied. The prorated portion is based on the number of months of service completed by Mr. Tong during the restricted period. Value is based on the closing price of our common stock as of December 31, 2008 ($49.22). We have assumed that the performance goals will be satisfied and 100% of the 2006 restricted shares awarded (3,522 shares) will vest in 2009. All unvested shares of restricted stock with time-based vesting provisions will also vest in the event of Mr. Tong’s termination of employment as a result of death or disability as follows: 2007 award — 11,700 shares will vest; and 2008 award — 10,709 shares will vest. Value is based on the closing price of our common stock on December 31, 2008 ($49.22).
 
(15) In the event of Mr. Tong’s termination of employment due to permanent and total disability, his age 65 retirement benefits from our Retirement Plan and Restoration Plan will be calculated as if he had continued to work until age 65. The value reflected represents the actuarial present value of Mr. Tong’s age 65 benefits based on a disability date of December 31, 2008. The calculation is based on Mr. Tong’s final average compensation as of his date of disability. Upon commencement of his benefits at age 65, Mr. Tong’s monthly benefit from our Retirement Plan and Restoration Plan would be $22,741.
 
(16) Our LTD benefits are fully insured through CIGNA. Eligibility for benefits is determined by CIGNA only after the employee’s termination of employment because of a medical condition. Benefits pay at 60% of monthly income, capped at $15,000 per month.
 
(17) In the event of Mr. Tong’s death while an active employee, his named beneficiary is entitled to a death benefit under the Retirement Plan and Restoration Plan. The death benefit payable in the event of Mr. Tong’s death on December 31, 2008 is $129,784. This lump sum payment was calculated based on the same actuarial assumptions utilized in our Form 10-K filing for the year ended December 31, 2008 and the GAR 1994 mortality tables as required by our Retirement Plan and Restoration Plans. The accrued death benefit was reduced for early commencement.
 
(18) We provide group term life insurance coverage equal to two times base salary, capped at $1,000,000.
 
In addition to the payments Mr. Tong may receive upon the termination of his employment, he will continue to hold stock options that were vested immediately prior to his termination. Mr. Tong also will be entitled to receive the vested balance of his contributions to our Deferred Compensation Plan. The table below shows the vested benefits


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that Mr. Tong has accumulated as of December 31, 2008 and the benefits he will receive as a result of his termination of employment on that date. We refer to the combined amounts as the total “walk-away” amount:
 
                                                   
                  Involuntary Termination or