Commitment Runs Deep

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 3, 2009

 

 

Important Notice Regarding the Availability of Proxy Materials
for the Stockholder Meeting to be Held on June 3, 2009:

 

Our 2009 Proxy Materials, including the 2009 Proxy Statement and Annual Report on Form 10-K for the fiscal year ended December 31, 2008,
are available at www.proxydocs.com/dvn.

 

 

Commitment Runs Deep

 

TABLE OF CONTENTS

 

 

i

Commitment Runs Deep

 

Devon Energy Corporation
20 North Broadway
Oklahoma City, Oklahoma 73102-8260

 

Proxy Statement

 

Annual Meeting Of Stockholders

 

June 3, 2009

 

We are furnishing you this Proxy Statement in connection with the solicitation of proxies by our Board of Directors to be used at the Annual Meeting and any adjournment thereof. The Annual Meeting will be held on Wednesday, June 3, 2009 at 8:00 a.m. We are first sending this Proxy Statement to our stockholders on or about April 24, 2009.

 

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

 

 

What is the purpose of the Annual Meeting?

 

At our Annual Meeting, stockholders will be asked to:

 

 

Who is entitled to vote?

 

Stockholders as of the close of business on April 6, 2009 (the Record Date) are eligible to vote their shares at the Annual Meeting. As of the Record Date, there were 443,879,648 shares of our common stock outstanding. Each share of common stock is entitled to one vote at the Annual Meeting.

 

How do I vote?

 

You may:

 

 

1

Commitment Runs Deep

 

 

Why did I receive a Notice in the mail regarding the Internet availability of proxy materials this year instead of a full set of proxy materials?

 

This year, in connection with new United States Securities and Exchange Commission (the SEC) rules that allow companies to furnish proxy materials over the Internet, we have sent to most of our stockholders a Notice of Internet Availability of proxy materials instead of a paper copy of the proxy materials. Instructions on how to access the proxy materials over the Internet or to request a paper copy may be found in the Notice. In addition, stockholders may request to receive proxy materials in printed form by mail or electronically by email on an ongoing basis. A stockholder’s election to receive proxy materials by mail or email will remain in effect until the stockholder terminates it.

 

Why didn’t I receive a Notice in the mail regarding the Internet availability of proxy materials?

 

We are providing certain stockholders, including those who have previously requested to receive paper copies of the proxy materials, with paper copies of the proxy materials instead of a Notice. If you would like to reduce the costs incurred by us in mailing proxy materials, you can consent to receive all future proxy materials electronically via email or the Internet. To sign up for electronic delivery, please follow the instructions provided in your proxy materials. When prompted, indicate that you agree to receive or access stockholder communications electronically in the future.

 

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

 

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

 

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

 

The 401(k) Plan Trustee will vote your shares in the 401(k) Plan account in accordance with your instructions. If instructions are not received by May 31, 2009, the shares credited to your account will be voted by the 401(k) Plan Trustee in the same proportion as it votes shares for which it did receive timely instructions.

 

Will each stockholder in our household receive proxy materials?

 

Generally, no. We try to provide only one set of proxy materials to be delivered to multiple stockholders sharing an address unless you have notified us to the contrary. Any stockholder at a shared address may request delivery of single or multiple copies of proxy materials for future meetings by contacting us at Devon Energy Corporation, Attention: Corporate Secretary, 20 North Broadway, Oklahoma City, Oklahoma 73102-8260, email: janice.dobbs@dvn.com or call (405) 235-3611.

 

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

 

Yes.

 

What if I want to change my vote?

 

You may revoke your proxy before it is voted by submitting a new proxy with a later date (by mail, telephone or Internet), by voting at the Annual Meeting, or by filing a written revocation with our Corporate Secretary. Your attendance at the Annual Meeting will not automatically revoke your proxy.

 

2

Commitment Runs Deep

Is my vote confidential?

 

Yes. We have procedures to ensure that regardless of whether stockholders vote by mail, telephone, Internet or in person, all proxies, ballots and voting tabulations that identify stockholders are kept permanently confidential, except as disclosure may be required by federal or state law or as expressly permitted by a stockholder.

 

In addition, special procedures have been established to maintain the confidentiality of shares voted in our 401(k) Plan. None of our employees will have access to voting information for shares in the 401(k) Plan.

 

Who will count the votes?

 

Broadridge will tabulate the votes.

 

What constitutes a quorum?

 

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

 

How many votes will be required to approve a proposal?

 

Election of Directors at the Annual Meeting will be by a plurality of votes cast at the Annual Meeting. Votes may be cast in favor of the election of each Director nominee or withheld.

 

Our Corporate Governance Guidelines and Bylaws contain a Director Resignation Policy which provides that any nominee for Director in an uncontested election who receives a greater number of votes “withheld” from his or her election than votes “for” such election must submit his or her offer of resignation to the Governance Committee of the Board of Directors within 90 days from the date of the election. The Governance Committee will consider all of the relevant facts and circumstances and recommend to the Board the action to be taken with respect to such offer of resignation.

 

With respect to other matters, the affirmative vote of the holders of a majority of the shares, present in person or by proxy, and entitled to vote at the Annual Meeting, is required to take any other action.

 

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

 

Can brokers who hold shares in street name vote those shares with respect to the election of Directors if they have received no instructions?

 

We believe that brokers who are members of the New York Stock Exchange (the NYSE) and hold common stock in street name for customers, but have not received instructions from a beneficial owner, have the authority under the rules of the NYSE to vote those shares with respect to the election of Directors.

 

How will you treat abstentions and broker non-votes?

 

We will:

 

 

3

Commitment Runs Deep

 

Who pays the solicitation expenses?

 

We will bear the cost of solicitation of proxies. Proxies may be solicited by mail or personally by our Directors, officers or employees, none of whom will receive additional compensation for such solicitation. We have retained Georgeson Inc. to assist in the solicitation of proxies at an estimated cost of $9,000, plus reasonable expenses. Those holding shares of common stock of record for the benefit of others, or nominee holders, are being asked to distribute proxy soliciting materials to, and request voting instructions from, the beneficial owners of such shares. We will reimburse nominee holders for their reasonable out-of-pocket expenses.

 

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

 

We will announce preliminary voting results at the Annual Meeting, and we will publish final results in our quarterly report on Form 10-Q for the second quarter of 2009 which will be filed with the SEC. You may obtain a copy of this and other reports free of charge at www.devonenergy.com, or by contacting our Investor Relations Department at (405) 552-4570 or the SEC at (800) 732-0330 or www.sec.gov.

 

Will your independent auditors be available to respond to stockholder questions?

 

Yes. The Audit Committee of the Board of Directors has approved KPMG LLP to serve as our independent auditors for the year ending December 31, 2009. Representatives of KPMG LLP are expected to be present at the Annual Meeting. They will have an opportunity to make a statement, if they desire to do so, and will be available to respond to stockholder questions.

 

Where can I reach you?

 

Our mailing address is:

 

Devon Energy Corporation

20 North Broadway

Oklahoma City, Oklahoma 73102-8260

 

Our telephone number is:

 

(405) 235-3611

 

 

4

Commitment Runs Deep

 

Pursuant to provisions of our Restated Certificate of Incorporation, as amended, and Bylaws, the Board of Directors shall consist of not less than three nor more than 20 Directors. Currently, the Board is comprised of nine Directors. Our Restated Certificate of Incorporation and Bylaws provide for three classes of Directors. These three classes of Directors currently serve staggered three-year terms, with Class I having two Directors, Class II having four Directors and Class III having three Directors. Effective with the 2011 Annual Meeting, Directors shall be elected annually. The four nominees for Director in Class II, to be elected at this Annual Meeting of Stockholders, will be elected to serve a two-year term. Directors in Class I, to be elected at the 2010 Annual Meeting, will be elected to serve a one-year term. All Directors to be elected at the 2011 Annual Meeting, and thereafter, will be elected for a one-year term.

 

The Board of Directors has nominated for re-election incumbent Directors in Class II, Robert L. Howard, Michael M. Kanovsky, J. Todd Mitchell and J. Larry Nichols, whose terms expire at the Annual Meeting. Effective March 11, 2009, David A. Hager resigned from his position as a Class III Director to become an officer of the Company. The terms of each Director nominee will expire at the Annual Meeting in the year 2011. Nominees will serve until their successors are elected and qualified.

 

The Board of Directors recommends a vote “FOR” each of the nominees for election to the Board of Directors.

 

It is the intention of the persons named in the proxy to vote proxies “FOR” the election of the four nominees unless they are instructed otherwise. In the event that any of the nominees should fail to stand for election, the persons named in the proxy intend to vote for substitute nominees designated by the Board of Directors, unless the Board of Directors reduces the number of Directors to be elected. Proxies cannot be voted for a greater number of persons than the number of nominees named.

 

5

Commitment Runs Deep

 

 

6

Commitment Runs Deep

 

Pursuant to provisions of our Restated Certificate of Incorporation, as amended, and the Bylaws, the Board of Directors appointed Robert A. Mosbacher, Jr. as a Class III Director of the Company, subject to ratification by the stockholders, to fill the vacancy caused by the resignation of David A. Hager. Mr. Mosbacher will serve until his successor is elected and qualified.

 

If his appointment is ratified at this Annual Meeting of Stockholders, Mr. Mosbacher will serve a two-year term to expire at the Annual Meeting in the year 2011, which is the remainder of the term of the Class III directorship previously held by David A. Hager.

 

The Board of Directors recommends a vote “FOR” the ratification of the appointment of Robert A. Mosbacher, Jr. as a Director of the Company.

 

It is the intention of the persons named in the proxy to vote proxies “FOR” the ratification of the director appointment unless they are instructed otherwise.

 

7

Commitment Runs Deep

 

 

 

8

Commitment Runs Deep

 

 

Our Board of Directors met six times in 2008. All Directors attended 75% or more of the total meetings of the Board of Directors and Committees on which they served. We require a majority of our Directors be in attendance at our Annual Meetings of Stockholders. All Directors attended the 2008 Annual Meeting.

 

The Board is governed by the laws of the State of Delaware, our Restated Certificate of Incorporation, as amended, Bylaws, Corporate Governance Guidelines, Charters of the Board’s standing committees and various federal laws. Copies of the following governance documents are available at www.devonenergy.com and in print to any stockholder upon request:

 

 

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

 

Also, on our website is information on our Environmental, Health and Safety Initiatives, and our Corporate Responsibility Report.

 

The Board of Directors has a standing Audit Committee, Compensation Committee, Dividend Committee, Governance Committee and Reserves Committee. The following table shows the current membership of each committee, each committee’s functions, and the number of meetings each committee held in 2008:

 

9

Commitment Runs Deep

 

 

10

Commitment Runs Deep

 

 

In accordance with our Corporate Governance Guidelines, the Board considered transactions and relationships between each Director or any member of the Director’s immediate family and us, our subsidiaries and affiliates. The Board has affirmatively determined that each of the current Directors, with the exception of our Chairman and CEO, J. Larry Nichols, and our President, John Richels, is an independent Director as defined by the standards for director independence established by applicable laws, rules, and listing standards, including, without limitation, the standards for independent directors established by the NYSE and the SEC, have no material relationship with us that would interfere with the exercise of independent judgment and, therefore, is independent under our Corporate Governance Guidelines and standards established by the NYSE.

 

 

The Board has a Lead Director whose primary responsibility is to preside over the executive session of the Board meeting in which Mr. Nichols, Mr. Richels and other members of management do not participate. The Lead Director also performs other duties that the Board may from time to time delegate to assist the Board in the fulfillment of its responsibilities. In 2008, the Lead Director presided over four executive sessions of the Board.

 

Thomas F. Ferguson has served as our Lead Director since 2008 and will serve in that position until a successor is named by the Board of Directors.

 

 

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

 

 

A Management Director may be contacted by:

 

 

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

 

 

During 2008, the Compensation Committee was comprised of three independent Non-Management Directors with no interlocking relationships as defined by the SEC.

 

 

We have adopted a Code of Business Conduct and Ethics that applies to all of our Directors, officers and employees. The Code of Business Conduct and Ethics is posted at www.devonenergy.com. The Code of Business Conduct and Ethics describes our policies and standards for protecting our integrity and provides guidance to our Directors, officers and employees in recognizing and properly resolving any ethical and legal issues that may be encountered while conducting our business. The Code of Business Conduct and Ethics serves as a reference for all directors, officers and employees in fulfilling their responsibility to conduct business in a legal and ethical manner. Any waiver of any provisions of the Code on behalf of an executive officer or director may only be approved by the Board of Directors or a committee designated by the Board of Directors. It is the policy of the Audit Committee to review the terms and substance of any potential related party transaction for purposes of determining whether a waiver to the Code of Business Conduct and Ethics should be granted.

 

Our Audit Committee reviews information relating to relationships involving each of our Non-Management Directors to determine if the Director meets all independence standards. The Board confirms the independence of each such Director upon receiving the Audit Committee recommendation.

 

Since the beginning of 2008 there have been no “related person transactions” as defined by applicable SEC regulations.

 

 

11

Commitment Runs Deep

 

Under our Corporate Governance Guidelines, Non-Management Director compensation is determined annually by the Board of Directors acting upon the recommendation of the Governance Committee. Directors who are also our employees receive no additional compensation for serving as a Director. The following table shows compensation for Non-Management Directors for 2008:

 

 

 

 

 

12

Commitment Runs Deep

 

The following is a schedule of annual retainers and meeting fees for Non-Management Directors in effect during 2008:

 

 

All Non-Management Directors are reimbursed for out-of-pocket expenses incurred while serving as a Director.

 

In June 2008, our Non-Management Directors were granted an annual award of 3,000 stock options and 2,000 shares of restricted stock under our 2005 Long-Term Incentive Plan. Stock and option awards to Non-Management Directors are granted immediately following each Annual Meeting. Options vest on the date of grant and are granted at an exercise price equal to the closing price of our common stock on that date. Unexercised options will expire eight years from the date of grant. With respect to restricted stock awards, 25% of each award vests on each anniversary of the date of grant. Cash dividends on shares of restricted stock are paid at the same times and in the same amounts as on other shares of our common stock.

 

13

Commitment Runs Deep

 

 

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

 

The Governance Committee is responsible for proposing qualified candidates to serve on the Board of Directors, and reviews with the Board special director qualifications, taking into account the composition and skills of the entire Board, and specifically ensuring a sufficient number of the members of the Board are financially literate. The Governance Committee will consider nominees recommended by stockholders and will give appropriate consideration in the same manner as given to other nominees. Stockholders who wish to submit director nominees for election at our 2010 Annual Meeting of Stockholders may do so by submitting in writing such nominee’s name in compliance with the procedures required by our Bylaws, to the Governance Committee of the Board of Directors, Attention: Chairman, c/o Office of the Corporate Secretary, Devon Energy Corporation, 20 North Broadway, Oklahoma City, Oklahoma 73102-8260. Pursuant to our Bylaws, stockholders may nominate a person for election or re-election as a director by delivering a timely notice to our Corporate Secretary at the address above. Please see “Submission of Stockholder Proposals and Nominees” for a discussion of the deadlines for delivering such notice. The stockholder’s notice must contain:

 

 

The Board will take reasonable steps to ensure that a diverse group of qualified candidates are in the pool from which the nominees for the Board are chosen. The Governance Committee may, at its discretion, seek third-party resources to assist in the process and will make final director candidate recommendations to the Board. The basic qualifications, which are identified in our Corporate Governance Guidelines, that the Governance Committee looks for in a director are:

 

 

Following election to the Board, the Corporate Governance Guidelines provide for:

 

 

14

Commitment Runs Deep

 

 

The Governance Committee also plays a leadership role in shaping the Company’s corporate governance. It undertakes an annual corporate governance self-assessment, consisting of a thorough review of the Company’s corporate governance practices. The Governance Committee reviews the Company’s practices and best practices followed by other companies. The goal is to maintain a corporate governance framework for the Company that is effective and functional and that fully addresses the interests of the Company’s stakeholders. The Governance Committee determined that the Company operates under many corporate governance best practices. The Governance Committee may from time to time recommend enhanced corporate governance standards to the Board. The Board voted to approve these standards which are reflected in:

 

 

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

 

With the Company’s fundamental corporate governance practices firmly in place and annually evaluated, the Governance Committee is prepared to respond quickly to new regulatory requirements and emerging best practices. The Governance Committee intends to continue to require an annual evaluation of the effectiveness of the Board and its Committees and an annual self-assessment of the performance and effectiveness by each member of the Board to enable the Company to maintain its position at the forefront of corporate governance best practices.

 

John A. Hill, Chairman

Michael M. Kanovsky

Mary P. Ricciardello

 

 

15

Commitment Runs Deep

 

The Board of Directors maintains an Audit Committee which is comprised of four independent Directors. The Board and the Audit Committee believe that the Audit Committee’s current membership satisfies the rules of the NYSE that govern audit committee composition, including the requirement that audit committee members all be independent directors as that term is defined under the listing standards of the NYSE. Also, for purposes of complying with the listing standards of the NYSE, the Board has determined that Michael M. Kanovsky’s simultaneous service on the audit committees of more than three public companies does not impair his ability to effectively serve on the Company’s Audit Committee. The Audit Committee operates under a written charter approved by the Board of Directors. The Charter is available at www.devonenergy.com.

 

The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the preparation of the financial statements and the establishment and maintenance of the system of internal controls. This system is designed to provide reasonable assurance regarding the achievement of objectives in the areas of reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations. In fulfilling its oversight responsibilities, the Audit Committee reviewed with management internal controls over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board and the audited financial statements in the Annual Report. This review included a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.

 

In fulfilling its duties during 2008, the Audit Committee:

 

 

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors, and the Board has approved, that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 for filing with the SEC. The Audit Committee has approved KPMG LLP as the Company’s independent auditors for the year ending December 31, 2009.

 

Thomas F. Ferguson, Chairman

Michael M. Kanovsky

J. Todd Mitchell

Mary P. Ricciardello

 

 

16

Commitment Runs Deep

 

Under the terms of its Charter, the Audit Committee approves the fees we pay our independent auditors. For the years ended December 31, 2008 and December 31, 2007, we paid the following fees to KPMG LLP:

 

		2008				2007
Audit fees		$	3,419,000			$	3,719,000
Audit related fees			371,000				275,000
Tax fees			386,000				205,000
All other fees			—				—
		$	4,176,000			$	4,199,000

 

Audit fees include services for the audits of the financial statements and the effective operation of our internal controls over financial reporting. Audit related fees consisted principally of audits of financial statements of certain affiliates and subsidiaries and certain accounting consultation. Tax fees consisted of tax compliance and tax consulting fees. The Audit Committee has considered whether the provisions of audit related services and tax services are compatible with maintaining KPMG LLP’s independence and has determined the auditors’ independence is not impaired.

 

All of the 2008 and 2007 audit and non-audit services provided by KPMG LLP were approved by the Audit Committee. The non-audit services which were approved by the Audit Committee were also reviewed to ensure compatibility with maintaining the auditors’ independence.

 

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

 

 

17

Commitment Runs Deep

 

In 2004, The Board of Directors established a Reserves Committee comprised of three independent Directors. The Reserves Committee operates under a charter approved by the Board of Directors and is available at www.devonenergy.com. The Reserves Committee oversees, on behalf of the Board, the evaluation and reporting process of the Company’s oil, gas and natural gas liquids reserves data. Management and our independent engineering consultants have the primary responsibility for the preparation of the reserves reports. In fulfilling its oversight responsibilities, the Reserves Committee reviewed with management the internal procedures relating to the disclosure of reserves in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, having regard to industry practices and all applicable laws and regulations. In fulfilling its duties during 2008, the Reserves Committee has:

 

 

In reliance on the reviews and discussions referred to above, the Reserves Committee recommended to the Board of Directors, and the Board has approved, that the reserves information be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 for filing with the SEC.

 

David A. Hager, Chairman ⁽¹⁾

Robert L. Howard

J. Todd Mitchell

 

 

 

18

Commitment Runs Deep

 

 

 

We depend on the performance of highly-trained, experienced and committed executive officers who have the skills, education, experience and personal qualities necessary to lead an oil and gas business. In the uncertainty and volatility of the current economic climate, we believe our executive compensation programs should continue to attract and retain effective leaders in what is still a competitive market for personnel with proven track records in the oil and gas industry. At the same time, our programs will continue to adapt to unexpected industry developments and volatility in the commodities markets.

 

This Compensation Discussion and Analysis (CD&A) describes the overall executive compensation approach at the Company and specifically discusses total compensation for the following named executive officers:

 

 

In addition to the term “named executive officers,” we will use one other term in this CD&A to identify a group of our senior level managers. The term “senior executive officers” refers to Messrs. Nichols and Richels as well as our executive vice presidents. Six employees, including Messrs. Hadden and Smette, were executive vice presidents at the end of 2008. Mr. Hadden left the Company in March 2009.

 

We include Mr. Heatly as a named executive officer because the SEC requires us to provide information about the compensation of the principal financial officer of the Company. Because Mr. Heatly was not a senior executive officer in 2008, his compensation arrangements are more in line with other non-senior executive officers.

 

Overview

 

The Company has a two-pronged operating strategy, which includes:

 

 

We believe that this operating strategy requires a compensation philosophy that recognizes near-term operational and financial success as well as decision making that supports long-term value creation. For these reasons, our executive compensation program is designed to strike the appropriate balance between the near-term and the long-term.

 

The goals of the program are to:

 

 

 

19

Commitment Runs Deep

The following table gives a broad overview of the elements of our executive compensation program, including the description and purpose of each element and the market guidelines we target. In each case, the market guidelines refer to an element’s relative value within a group of industry peer companies for comparable executive roles (see further discussion below under “Benchmarking”).

 

 

For senior executive officers, we generally target total direct compensation, which we define as the aggregate of base salary, annual cash bonus and long-term incentive awards, between the 50^th and 75^th percentiles of the peer group. The most recent data available to the Company in 2008 indicated that its total direct compensation for named executive officers ranged from the 50^th to approximately the 75^th percentile at that time.

 

Balancing Compensation for Near-Term and Long-Term Performance

 

To reinforce the goals of achieving both near-term results and long-term shareholder value, the Company provides senior executive officers both annual cash bonuses and long-term incentive awards. We believe that properly allocating these compensation elements is critical in motivating senior executive officers to carry out our two-pronged operating strategy. Overall, the value of a senior executive officer’s total compensation is weighted in favor of long-term incentives.

 

20

Commitment Runs Deep

Compensation Weighted Toward Performance-Based Compensation

 

We believe that the proportion of an employee’s total direct compensation that varies based on performance should increase as the scope of an employee’s ability to influence our results increases. Since senior executive officers have the greatest influence over our results, a significant portion of their overall compensation consists of cash bonuses and long-term incentive awards that are “at risk.” In 2008, for example, approximately 90% of the estimated value of the total direct compensation of our Chief Executive Officer was at risk. The estimated value of the total direct compensation at risk in 2008 for all other named executive officers ranged from approximately 80% to 85% of their total direct compensation.

 

Our process for reviewing and determining the compensation for named executive officers involves the Compensation Committee of the Board of Directors (the “Committee”), senior executive officers of the Company and an independent compensation consultant. The roles of these individual parties are described further in the following sections.

 

Role of the Committee and Senior Executive Officers

 

The Committee establishes our executive compensation philosophy and administers the overall executive compensation program. The Committee operates under a written charter approved by the Board of Directors. The Charter is available at www.devonenergy.com.

 

Each year, the Committee conducts an individual, in-depth interview of each senior executive officer to discuss the officer’s analysis of the Company’s performance for the year and the performance within his area of responsibility. We believe this is a unique practice among compensation committees and a highly effective tool in the Committee’s oversight of the executive compensation process. In addition, the CEO and the President discuss with the Committee their evaluation of each senior executive officer’s performance, role, development, and potential to take on greater or different responsibilities. The CEO and President then make recommendations to the Committee for changes to compensation for senior executive officers. Neither the CEO nor the President makes any recommendation to the Committee regarding his own compensation.

 

The Committee considers the CEO’s and the President’s recommendations, the Committee’s own review of competitive market data, the Company’s recent performance, the Committee’s interviews with senior executive officers, the independent compensation consultant’s input, and the Company’s compensation philosophy. The Committee then determines whether to accept the CEO’s and the President’s recommendations of compensation for senior executive officers, and in a closed session without any senior executive officer present, sets the CEO’s and the President’s compensation.

 

Compensation decisions are further discussed in the “Compensation Decisions in 2008” section below.

 

Role of the Compensation Consultant

 

For the 2008 compensation process, the Committee retained the services of an independent compensation consulting firm, Hewitt Associates LLC (the “Compensation Consultant”), to evaluate the competitiveness of our programs and assist with executive compensation program design. The Committee did not direct the particular manner or method in which the Compensation Consultant would perform these services. The Committee has the final authority to hire and terminate the Compensation Consultant, and the Committee evaluates the performance of the Compensation Consultant annually. The Company’s Board of Directors has a policy that prohibits the Compensation Consultant from providing other services to the Company, or its management, without prior review and approval by the Committee. During the 2008 compensation process, the Compensation Consultant provided no services to the Company or its management other than the services described in this CD&A.

 

21

Commitment Runs Deep

Benchmarking

 

To successfully compete for executive talent, the Committee, working with the Compensation Consultant, annually compares the compensation of its executives against the compensation of similarly-situated executives at peer companies. The Company establishes a peer group consisting of oil and gas and energy services companies with similar revenue levels and asset and market values as the Company. The Company also considers the enterprise value of companies — calculated as the market value of a company plus (i) long-term debt and preferred stock, minus (ii) cash and cash equivalents — in establishing a peer group. The Committee believes these metrics are appropriate for determining peers because they provide a reasonable point of reference for comparing executives with similar positions and responsibilities.

 

For 2008, the Committee approved a peer group consisting of the 21 companies listed below:

 

Anadarko Petroleum Corporation*
Apache Corporation*
Baker Hughes Incorporated
Chesapeake Energy Corporation*
Chevron Corporation*
ConocoPhillips*
Dominion Resources, Inc.
El Paso Corporation
EnCana Corporation*
EOG Resources, Inc.*
Halliburton Company
Hess Corporation*
Marathon Oil Corporation*
Murphy Oil Corporation*
Nabors Industries Ltd.
Occidental Petroleum Corporation*
Schlumberger Limited
Tesoro Corporation
Transocean Inc.
Valero Energy Corporation
The Williams Companies, Inc.

 

The companies designated with an asterisk (*) are included in a subset of peer companies focused on oil and gas exploration and production (E&P). The Committee referred to compensation from these peers to evaluate industry-specific executive roles.

 

The Committee’s benchmarking analysis consists of all components of total direct compensation, including base salary, annual bonus and long-term incentives. The Compensation Consultant collected and summarized compensation data from the Proxy Statements of the peer group and the Compensation Consultant’s proprietary databases. The compensation data are typically from the prior year. Thus, when setting current compensation, the Committee works with the Compensation Consultant to adjust the data to account for known or expected changes in the market between the effective date of the data and the current date. Additionally, the Committee typically excludes from its benchmarking analysis those companies whose compensation far exceeds the compensation found at a majority of the peer group.

 

Tally Sheets and Review of Personal Use of Corporate Aircraft

 

The Committee annually reviews tally sheets for named executive officers, including potential payments under various termination scenarios. Further detail can be found in the “Potential Payments Upon Termination or Change In Control” section of this Proxy Statement. The Committee also reviews both IRS and SEC calculations in connection with the valuation of personal use of the corporate aircraft.

 

The Committee has determined that the amounts reflected in these reviews are reasonable and consistent with the Company’s compensation philosophy. The Committee has noted that in the case of personal use of the corporate aircraft, the values for named executive officers were significantly less than those reported by our peer companies.

 

Succession Planning

 

The Company has a robust succession planning process to ensure the development of executive talent for the near and long term. The process and progress are reviewed with the Committee and the Board of Directors on an annual basis.

 

22

Commitment Runs Deep

 

Overview

 

We use several different compensation elements in our executive compensation program for the purpose of addressing both near-term and long-term value creation for the Company. As described earlier, the primary components of our executive compensation program are:

 

 

The design of each compensation element is described further in the sections that follow.

 

Base Salary

 

The Committee reviews and approves, on an annual basis, the base salaries of our named executive officers. We consider a competitive base salary vital to ensuring the continuity of our management. The following factors are considered when establishing base salaries for the named executive officers:

 

 

We believe that our ability to achieve our objectives depends in large part on employing an executive leadership team that has a combination of significant industry experience and longevity with the Company. In order to attract and retain such executives, their base salaries must be competitive with the base salaries of senior executive officers of peer companies with whom we compete for executive personnel. We believe that targeting base salaries at or slightly above the market median enables us to compete successfully and allows us to emphasize variable compensation appropriately.

 

Annual Cash Bonus

 

The Committee annually considers cash bonus awards for our named executive officers. The Committee believes that executives’ cash bonuses should reflect the near-term operating, strategic, and financial performance and current decision-making that affects long-term shareholder value. In that regard, bonuses awarded by the Committee are intended to be competitive with the market while rewarding named executive officers for:

 

 

To that end, in determining the appropriate bonus amounts, the Committee considers recent Company performance, each named executive officer’s individual performance during the year, competitive market conditions, historical practices, incentive awards for others in the Company, and our compensation philosophy. The Committee does not assign target or maximum cash bonus award levels to the named executive officers.

 

When evaluating recent Company performance, the Committee considers, among other things, our performance in relation to goals approved by the Board of Directors at the beginning of the year. These goals cover a number of both quantitative and qualitative areas, such as growing our oil and gas production and reserves, adhering to capital and operating budgets, delivering shareholder returns, improving environmental, health and safety performance, and enhancing our strategies for

 

23

Commitment Runs Deep

cultivating leadership talent. The Committee does not assign any specific weight to any particular performance goal nor is any specific weight assigned to the performance goals in the aggregate.

 

In addition to considering the Company’s quantitative and qualitative performance goals set at the beginning of the year, the Committee also takes into account market and economic trends and forces, extraordinary internal and market-driven events, unanticipated developments, and other extenuating circumstances. In short, the Committee exercises a comprehensive approach in determining the amount of annual cash bonuses for named executive officers.

 

While our approach to annual bonuses is not formulaic, it is methodical and purposeful. We have considered the relative merits of a non-formulaic approach to paying annual bonuses versus a formulaic approach. We have concluded that the present non-formulaic approach leads to the creation of a highly-effective, nimble management team that is evaluated on its ability to be flexible in addressing changing market and industry conditions while executing the Company’s overall business strategy. We think the Company’s recent and long-term performance demonstrate that this flexible approach works well.

 

Long-Term Incentives

 

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

 

The Committee approves long-term incentive awards to named executive officers at the year-end Committee meeting in December. The Committee does not backdate stock option grants and does not time the grant of awards in coordination with the release of material nonpublic information.

 

We establish long-term incentive target values for each level of responsibility within the Company, including the named executive officers. In analyzing the value of long-term incentives awarded to our executives, the Committee takes into account:

 

 

Our long-term incentive awards consist of stock options and restricted stock. Stock option awards give senior executive officers the right to purchase common stock of the Company at a specified price within a specified period of time. Restricted stock awards are grants of our common stock that will only be earned by a senior executive officer when the restrictions lapse. For the stock options awarded in 2008, 20% of the stock options immediately vested and became exercisable on the grant date. An additional 20% of each grant vests and becomes exercisable on each of the first four anniversaries of the original grant. With respect to restricted stock awards made in 2008, 25% of each award vests on each of the first four anniversary dates of the original grant. Except as noted elsewhere in this CD&A, senior executive officers generally forfeit awards if they are not employed by the Company at the time the awards vest.

 

The vesting schedule of our awards provides a strong incentive for our senior executive officers to continue service with the Company for an extended period. Moreover, the long-term interests of our senior executive officers and our shareholders align in that both groups are rewarded when our common stock appreciates in value over time. This is particularly true with respect to stock options, because senior

 

24

Commitment Runs Deep

executive officers only stand to gain from their receipt of stock options if our common stock appreciates in value.

 

Stock Ownership

 

While we encourage executives to own and hold our stock, we have not adopted any specific executive stock ownership criteria. We periodically review the number of shares owned by our executives and note that they generally maintain ownership levels we believe align their interests with those of shareholders. For additional detail on the stock owned by our named executive officers, please refer to the Security Ownership of Management table on page 50.

 

Retirement Benefits

 

Our named executive officers are entitled to participate in the following retirement benefits:

 

 

For additional information on the Defined Benefit Plan and the SRIP and the present values of the accumulated benefits of our named executive officers under each plan, please refer to the Pension Benefits for the Year Ended December 31, 2008, section on page 37 and the Pension Benefits Table on page 38.

 

Other Benefits

 

We provide senior executive officers with perquisites on a limited basis. For example, Messrs. Nichols and Richels may make personal use of our aircraft on a limited basis; however, their use of our aircraft has been infrequent. Additionally, personal use of our aircraft by other officers may be appropriate if there is a health-related or other emergency reason, the flight coincides with a business-related flight or there is some other urgent matter that requires the executive’s attendance.

 

Post-Termination or Change in Control Benefits

 

We maintain employment agreements with each of our named executive officers with the exception of Mr. Heatly, with whom we have a severance agreement. These agreements give each named executive officer certain additional compensation if his employment is involuntarily terminated other than for cause or if the executive voluntarily terminates his employment for good reason, as those terms are defined in the relevant agreements. Also, in these situations, the applicable named executive officer fully vests in any unvested long-term incentive awards.

 

If a named executive officer, other than Mr. Heatly, is terminated within two years of a change in control, the executive is also entitled to an additional three years of service credit and age in determining entitlement to retiree medical benefits and SRIP benefits. If Mr. Heatly is terminated within two years of a change in control, he is entitled to an additional two years of service credit and age in determining his entitlement to retiree medical benefits.

 

25

Commitment Runs Deep

As noted above, Mr. Heatly was not a senior executive officer in 2008. Accordingly, his post-termination arrangements are more in line with other non-senior executive officers.

 

Post-termination and change in control benefits are typical in the oil and gas industry and necessary in order to compete for executive talent. Please refer to the Potential Payments Upon Termination or Change In Control section on page 41 for more information.

 

As discussed in the “Compensation Process” section of this CD&A, the Committee considers the following factors in making annual compensation decisions for the named executive officers:

 

 

In 2008, the Committee also considered the current economic environment, the volatility in U.S. financial markets and the unique dynamics of the oil and gas industry.

 

The Committee noted that certain of the Company’s total compensation opportunities for named executive officers trailed the median values offered by the subset of its E&P industry peers. In particular, the compensation for Mr. Nichols trailed the Company’s intended benchmarks at a time when the Company had performed well relative to internal and external financial, operating and shareholder return benchmarks.

 

Base Salary

 

A November 2008 review of the benchmarking data indicated that base salaries for the named executive officers would generally meet the Company’s market objective on an overall basis, with some shortfalls to target when measured on an individual basis. Individual salaries ranged from slightly below the median to above the 75th percentile of the benchmarking data. The Committee also determined that in the current economic environment the Company should take a conservative approach to fixed costs. Therefore, with the exception of Mr. Heatly, who is not a senior executive officer, the Committee froze salaries for named executive officers in 2009.

 

Please refer to the Summary Compensation Table for further information on the base salaries of named executive officers.

 

Annual Cash Bonus

 

Overall in 2008, the Committee is of the view that the Company achieved key operational and other successes in a challenging economic environment. In its evaluation, the Committee noted the following metrics related to Company performance:

 

 

The Committee also noted that the Company did not meet its budget goals in the areas of lease operating expenses and general and administrative expenses.

 

26

Commitment Runs Deep

In its evaluation of the Company’s performance relating to stakeholders, business processes and learning and people, the Committee noted that the Company met the following goals:

 

 

The Committee conducted a thorough evaluation of each named executive officers’ performance, including the individual interviews described above. Among the named executive officers for whom it made bonus determinations, the Committee determined that each had made significant contributions to the Company’s overall results. As previously noted, the Committee does not determine the bonus for Mr. Heatly.

 

The 2008 benchmarking indicated that bonuses paid to the named executive officers for 2007 performance generally met the Company’s market objective on an overall basis, with individual bonuses approximating the 75^th percentile of the benchmarking data.

 

Based on the Committee’s evaluation of the Company’s performance in 2008 and other factors that it considers when making annual cash bonus decisions (described in “Annual Cash Bonus” under the “Overview of Executive Compensation Elements in 2008” section of this CD&A), the following cash bonuses were awarded to the named executive officers:

 

 

Please refer to the Summary Compensation Table for further information on the annual cash bonuses of named executive officers.

 

Long-Term Incentives

 

For 2008, the Committee made grants of long-term incentive awards to named executive officers in the form of stock options and restricted stock that vest as described in the CD&A section titled “Overview of Executive Compensation Elements Used in 2008.” As was the case in 2007, approximately one-half of the total award value was granted in options, and one-half of the award value was granted in restricted stock. We continue to believe this combination promotes shareholder value creation as well as executive stock ownership and retention.

 

Benchmarking conducted in 2008 indicated that the value of long-term incentives awarded to the named executive officers in 2007 generally fell within the Company’s market objective on an overall basis, with some shortfalls to target when measured on an individual basis. Individual long-term incentive opportunities ranged from below median to approximately the 75^th percentile of peers.

 

 

27

Commitment Runs Deep

Based on the 2008 benchmarking results and other factors that it considers when making long-term incentive grant decisions (described in “Long-Term Incentives” under the “Overview of Executive Compensation Elements in 2008” section of this CD&A), the Committee approved the following grants during its year-end meeting:

 

 

The number of shares underlying the long-term incentive grants awarded to each named executive officer was greater than that of the prior year. The Committee believed this decision was appropriate based on the long-term value created by the addition of significant production and reserve potential in emerging natural gas plays.

 

For additional detail on the Company’s long-term incentive award grants in 2008, please refer to the Summary Compensation Table and the Grants of Plan-Based Awards Table.

 

In 2008, the Company, with the approval of the Committee, modified the equity-based long-term incentives for our senior executive officers, including the named executive officers. The new arrangements provide that each senior executive officer who meets certain years-of-service and age criteria may be selected upon retirement to continue to vest in outstanding equity-based grants in accordance with the vesting dates established in the original grants so long as he agrees to certain covenants to protect Devon’s business. With the modification, the Company’s treatment of equity at retirement is now consistent with competitive practices for senior executives in our industry.

 

The modification results in earlier expense recognition when a senior executive officer meets the years-of-service and age criteria as existing grants must be expensed at that time rather than at a later date when the grants actually vest. At the time the modification was made, certain senior executive officers had already met the years-of-service and age criteria, which resulted in the recognition of approximately $27 million of equity-based compensation expense in the second quarter of 2008. This expense would have been recognized in future reporting periods if the modification had not been made and the senior executive officers had continued their employment with the Company.

 

Changes to Other Programs

 

In 2008, the Committee reviewed the current vesting period of the SRIP in relation to comparable plans in the marketplace. Based on the market data and the immaterial present value financial impact of the change, the Committee approved an amendment to the SRIP to change the vesting schedule from 10 years to five years.

 

The Committee made no other material changes to its executive compensation programs in 2008.

 

Material Differences in Compensation Decisions for Named Executive Officers

 

Mr. Nichols’ compensation for 2008 was higher than that of other named executive officers primarily because of his seniority, his long tenure with the Company, his status as a founder of the Company, the compensation levels of comparable executives of other companies against whom his compensation is benchmarked and his greater influence over and responsibility for the entire Company (as opposed to a distinct division or function). In addition, Mr. Nichols’ compensation recognized his leadership role with respect to matters affecting the oil and gas industry generally.

 

Mr. Richels’ total compensation was higher than that of other named executive officers, except for Mr. Nichols, primarily because of his seniority, experience and stature in the industry, his reporting relationship to the CEO, the compensation levels of comparable executives of other companies against whom his

 

28

Commitment Runs Deep

compensation is benchmarked and his greater influence over and responsibility for the entire Company (as opposed to a distinct division or function). In addition, Mr. Richels’ compensation recognized the increased leadership role he has taken with respect to the day-to-day operations of the Company.

 

Mr. Hadden’s and Mr. Smette’s total compensation levels reflected their roles and responsibilities as the respective heads of the Company’s exploration and production and midstream and marketing divisions, their individual contributions to the Company and the officer team, and compensation levels for similar positions at our peer companies.

 

Conclusion

 

In summary, after evaluating all of the considerations reviewed by the Committee, including the current economic climate, the Committee believes the compensation delivered to the named executive officers for 2008 is reasonable and appropriate. Further, the Committee believes the total executive compensation program does not encourage executives to take unnecessary or excessive risk.

 

Section 162(m) of the Internal Revenue Code (the “Code”) disallows, with certain exceptions, a federal income tax deduction for compensation over $1,000,000 paid to the Chief Executive Officer or any other named executive officer except the Chief Financial Officer. One exception applies to “performance-based compensation” paid pursuant to shareholder- approved employee benefit plans (essentially, compensation that is paid only if the individual’s performance meets pre-established objective performance goals using performance measures approved by our shareholders).

 

Although we have generally attempted to structure executive compensation so as to preserve deductibility, we also 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 Code. A portion of the payments made under our current annual cash compensation program are not deductible in accordance with the provisions of Section 162(m). However, the Committee has determined that the benefit of enhanced flexibility in program design outweighs the value of the lost deduction.

 

A minor portion of the stock options we granted to our executives are incentive stock options, which allow the executives to defer the payment of certain taxes upon exercise of the options and provide for the characterization of certain gains as long-term capital gains.

 

Section 422 of the Code limits the amount of incentive stock options that may vest for any one employee each year. Section 422 provides that, to the extent the aggregate fair market value of stock with respect to which incentive stock options become exercisable each year exceeds $100,000, such stock options will be treated as nonqualified stock options. We take this $100,000 limit into consideration when granting incentive stock options to our executives, so that their incentive stock options will not be re-characterized as nonqualified stock options.

 

 

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Robert L. Howard, Chairman

David A. Hager ⁽¹⁾

John A. Hill

 

 

29

Commitment Runs Deep

 

The following table and accompanying footnotes summarize the compensation attributed to our named executive officers for the years ended December 31, 2008, 2007 and 2006, including the compensation cost related to the stock and option awards granted in 2004 through 2008 (no unusual increase of stock and option awards were granted in 2008), that are reported as compensation expense in Devon’s 2008 Consolidated Financial Statements computed in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS 123(R)). The effect of accelerated expensing of certain stock and option awards on the 2008 compensation totals is more fully described in footnote 1 of the following table. The named executive officers are our Chief Executive Officer, our principal financial officer and our three most highly compensated executive officers (other than our CEO and principal financial officer) for the year ended December 31, 2008.

 

 

 

 

30

Commitment Runs Deep

 

 

31

Commitment Runs Deep

 

 

32

Commitment Runs Deep

 

 

 

33

Commitment Runs Deep

 

The following table shows the number of shares covered by exercisable and unexercisable options and unvested restricted stock awards owned by our named executive officers on December 31, 2008.