NOBLE ENERGY, INC.

100 Glenborough Drive

Suite 100

Houston, Texas 77067

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held On April 24, 2007

 

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 24, 2007, at 9:30 a.m., Central Time, at the Company’s offices at 100 Glenborough Drive, Suite 100, Houston, Texas 77067, for the following purposes:

 

 

The Board of Directors has fixed the close of business on March 13, 2007 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 2006 and its financial statements for the fiscal year ended December 31, 2006 are contained in the Company’s 2006 Annual Report on Form 10-K. The Annual Report does not form any part of the material for solicitation of proxies.

 

All stockholders are cordially invited to attend the meeting. Stockholders are urged, whether or not they plan to attend the meeting, to complete, date and sign the accompanying proxy card and to return it promptly in the postage-paid return envelope provided, or, alternatively, to vote their proxy by telephone or the internet according to the instructions on the proxy card. If a stockholder who has returned a proxy attends the meeting in person, the stockholder may revoke the proxy and vote in person on all matters submitted at the meeting.

 

By Order of the Board of Directors of
Noble Energy, Inc.

 

Arnold J. Johnson
Vice President, General Counsel and Secretary

 

Houston, Texas

March 22, 2007

 

NOBLE ENERGY, INC.
100 Glenborough Drive
Suite 100
Houston, Texas 77067

 

PROXY STATEMENT

 

For Annual Meeting of Stockholders

To Be Held On April 24, 2007

 

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 24, 2007, at our offices at 100 Glenborough Drive, Suite 100, Houston, Texas 77067, 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 22, 2007.

 

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 first anniversary of the release date of the previous year’s annual meeting proxy statement; 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 2008 annual meeting must be received by us no later than November 23, 2007.

 

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.

 

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 2007 annual meeting, routine items include the election of directors and the ratification of the appointment of the 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 not be considered part of the voting power present and, therefore, will have no effect on the vote. For purposes of our 2007 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”) and the stockholder proposal requiring the separation of the positions of Chairman of the Board and Chief Executive Officer.

 

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.

 

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;

 

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 $100,000 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 or an immediate family member is a current partner of a firm that is our internal or external auditor; (b) the director is a current employee of such a firm; (c) the director has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice; or (d) the director or an immediate family member was within the

last three years (but is no longer) a partner or employee of such a firm and personally worked on our audit within 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 March 3, 2007, 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 addition to the matters described under the “Certain Transactions” section of this proxy statement) in making its determination that these directors are independent:

 

 

After reviewing these transactions, relationships and arrangements, and after applying the NYSE independence standards described above, our Board affirmatively determined that no material relationship existed that would interfere with the ability of Messrs. Berenson, Cawley, Cox, Hedrick, Smith 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

 

 

Audit Committee

 

 

Compensation, Benefits and Stock Option Committee

 

 

 

Corporate Governance and Nominating Committee

 

 

Corporate Governance Guidelines

 

 

Codes of Business Conduct and Ethics

 

 

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 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: Corporate 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 13, 2007, 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 170,677,575 shares of common stock. Each share of common stock is entitled to one vote.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

 

The following tabulation sets forth, as of March 1, 2007, 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.

 

 

 

 

PROPOSAL I

 

ELECTION OF DIRECTORS

 

As of the date of this proxy statement, our Board consists of eight directors, six 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 are elected by plurality vote of the shares present at our 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 eight persons 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 eight 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 56, 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 59, 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 as a director of the Company since 1995 and our Lead Independent Director since 2001.

 

Edward F. Cox — Mr. Cox, age 60, has been a partner in the law firm of Patterson Belknap Webb & Tyler llp, New York, New York for more than five years and has served as the chair of the firm’s corporate department and as a member of the firm’s management committee. He is chair of the New York League of Conservation Voters’ Education Fund, of the New York Regional Commission on Parks and of the Finance Committee of the Trustees of The State University of New York. Mr. Cox has served as a director of the Company since 1984.

 

Charles D. Davidson — Mr. Davidson, age 57, has served as President and Chief Executive Officer of the Company since October 2000 and has served as Chairman of the Board since April 2001. Prior to October 2000, he served as President and Chief Executive Officer of Vastar Resources, Inc. (“Vastar”) from March 1997 to September 2000 (Chairman from April 2000) and was a Vastar director from March 1994 to September 2000. From September 1993 to March 1997, he served as a Senior Vice President of Vastar. From 1972 to October 1993, he held various positions with ARCO.

 

Thomas J. Edelman — Mr. Edelman, age 56, founded Patina and served as its Chairman and Chief Executive Officer from its formation in 1996 until its May 2005 merger with the Company. He co-founded Snyder Oil Corporation and was its President from 1981 through 1997. From 1980 to 1981, he was with The First Boston Corporation and, from 1975 through 1980, with Lehman Brothers Kuhn Loeb Incorporated. Mr. Edelman serves as Chairman of Bear Cub Investments LLC, President of Lenox Hill Neighborhood House and Trustee and Chair of the Development Committee of The Hotchkiss School. He joined our Board upon completion of our merger with Patina on May 16, 2005.

 

Kirby L. Hedrick — Mr. Hedrick, age 54, served as Executive Vice President over upstream operations for Phillips Petroleum Company from 1997 until his retirement in 2000. Mr. Hedrick was elected to our Board on August 1, 2002.

 

Bruce A. Smith — Mr. Smith, age 63, has served as President and Chief Executive Officer of Tesoro Corporation (“Tesoro”) since 1995 and has served as its Chairman since 1996. Mr. Smith joined Tesoro in 1992. He was elected to our Board on March 6, 2002.

 

William T. Van Kleef — Mr. Van Kleef, age 55, served in executive management positions at 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 90 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). Accordingly, a stockholder’s nominee(s) for director to be presented at our 2008 annual meeting of stockholders must be received by us no later than January 23, 2008.

 

Our Board unanimously recommends that stockholders vote FOR the election of each of its nominees.

 

INFORMATION CONCERNING THE BOARD OF DIRECTORS

 

Our Board held twelve meetings in 2006, consisting of five regular meetings, its annual organizational meeting and six 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/or 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 candidate warrants further consideration, the committee Chair or another member of our Governance Committee will contact the individual. Generally, if the individual expresses a willingness to be considered and to serve on our Board, our Governance Committee will request information from the candidate, 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 Corporate Secretary and received not less than 90 days in advance of our annual stockholder meeting. A stockholder must include the following information with each recommendation for a director nominee:

 

 

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 Bruce A. Smith. 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 nine meetings during 2006. 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 corporate goals and objectives in the areas of: (a) salary and bonus compensation, (b) benefits, and (c) equity-based compensation, as these areas relate to the Chief Executive Officer (“CEO”), evaluating the 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 the CEO’s compensation level based on that evaluation; (2) make recommendations to the 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 a committee 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 the 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 2006. 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; Bruce A. Smith; 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 2006.

 

Environment, Health and Safety Committee — Edward F. Cox, Chair; Charles D. Davidson; Thomas J. Edelman; and Kirby L. Hedrick. The overall purpose of our Environment, Health and Safety Committee is to assist our Board in determining whether we have appropriate policies and management systems in place with respect to environment, health and safety (“EH&S”) matters and to monitor and review compliance with applicable EH&S laws, rules and regulations. Our Environment, Health and Safety Committee held four meetings during 2006.

 

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 2006.

 

Compensation Committee Interlocks and Insider Participation

 

Kirby L. Hedrick, Jeffrey L. Berenson, Edward F. Cox and Bruce A. Smith served on the Compensation Committee for all or part of 2006. There were no Compensation Committee interlocks nor insider (employee) participation during 2006.

 

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, 2007. 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 subsequently amended in 1997, 2000, 2002, 2003 and 2005. At the 2007 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 plan from 18,500,000 shares to 22,000,000 shares (an increase of 3,500,000 shares). Our Board unanimously adopted this amendment on March 3, 2007, 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 plan for stock-based grants as a key element of our compensation program in order to:

 

 

We believe that the success of our compensation program, including the use of stock-based grants under our 1992 Plan, is well-evidenced by the performance of our common stock over the last several years. We led our peer group with an annual stockholder return of 22.5 percent for 2006 and were in the top third of our peer group with an average annual stockholder return of 30.9 percent for the three-year period 2004 through 2006.

 

The use of stock-based grants under our 1992 Plan continues to be a key element of our compensation program. Of the 18,500,000 shares currently authorized for issuance under the 1992 Plan, 2,532,802 shares remain as of March 13, 2007, after February 1, 2007 grants totalling 1,927,273 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 3,500,000, a total of 22,000,000 shares would be available. We believe that this increase would give us the flexibility to continue to make stock-based grants over the next three 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.

 

Our average burn rate for 2004 through 2006 (which is the total number of shares subject to stock-based grants under the 1992 Plan in a given year divided by the total number of shares of our common stock outstanding) was 0.53%. As of the record date, the total number of shares of our outstanding common stock was 170,677,575. Our current dilution (which is the number of shares available for grant under the 1992 Plan plus the outstanding stock options and restricted stock granted under the plan, divided by the total number of shares of our common stock outstanding) is approximately five percent and, with the proposed amendment to our 1992 Plan, our dilution would increase to approximately seven percent.

 

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 D. 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 applicable 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 any recapitalization or merger or otherwise in which the Company is the surviving company, resulting in a stock split-up, combination or exchange of our shares, in which event 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 Securities Exchange Act of 1934, as amended (“Exchange Act”) and (2) Outside Directors as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”), and the regulations promulgated thereunder. Our Compensation Committee meets these requirements and thus administers our 1992 Plan. In doing so, our Compensation Committee determines the grants of Nonqualified Options and awards of Restricted Stock, the terms and provisions of the respective agreements covering the grants or awards and all other decisions concerning the 1992 Plan. Our 1992 Plan provides that the determination of the committee is binding with respect to all questions of interpretation and application of the 1992 Plan and of Nonqualified Options granted or awards of Restricted Stock made thereunder, subject to the express provisions of the 1992 Plan and except as set forth below under “Stock Options and SARs” and “Amendment and Duration of the 1992 Plan.”

 

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 13, 2007, all of our executive officers and approximately 342 other employees participate in the 1992 Plan.

 

Market Value

 

On March 13, 2007, the reported closing price per share of our Common Stock on the NYSE was $56.26.

 

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 percent 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 of the 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 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 expiration 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 during the Restricted Period an individual’s continuous employment terminates for any reason, any Restricted Stock remaining subject to restrictions will be forfeited by the individual and transferred at no cost to the Company; provided, however, that as noted above, the committee has the authority to cancel any or all outstanding restrictions prior to the end of the Restricted Period.

 

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 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 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 million, unless the compensation is performance-based. Compensation attributable to a stock option or SAR 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.

 

PROPOSAL IV

 

STOCKHOLDER PROPOSAL ON INDEPENDENT BOARD CHAIRMAN

 

The owner of approximately 19,772 shares of common stock has advised the Company that it intends to present the following resolution at the annual meeting of stockholders. In accordance with the applicable proxy statement regulations, the proposed resolution and supporting statement, for which the Board of Directors and the Company accept no responsibility, are set forth below. Approval of this proposal would require the affirmative vote of a majority of the outstanding shares of the Company stock present in person or by proxy and entitled to vote at the annual meeting. The Company will provide to any stockholder the name and address of the proposing stockholder upon receiving an oral or written request from such stockholder.

 

Our Board unanimously opposes, and recommends that stockholders vote

AGAINST, the adoption of this stockholder proposal.

 

Resolved:  that Noble Energy, Inc. shareholders recommend that the Board of Directors revise the Corporate Governance Guidelines of the Company to establish a policy of separating the positions of Chairman of the Board of Directors and Chief Executive Officer so that the Chairman of the Board of Directors will be an independent member of the Board, except in explicitly spelled out extraordinary circumstances.

 

Supporting Statement:

 

It is the responsibility of the Board of Directors (“Board”) to protect shareholders’ interest by providing independent and objective oversight of management. Separating the positions of Chairman of the Board of Directors (“Chairman”) and Chief Executive Officer (“CEO”) promotes greater management accountability to shareholders and leads to a more objective evaluation of management.

 

The Chairman controls the flow of information between management and the Board and also is the final determiner of the Board meeting agendas and Board strategies. Consequently, a CEO who also acts as Chairman has great power to influence the information received by the Board. The CEO has a personal interest in conveying information that reflects well on his or her performance. Thus, when the CEO also acts as Chairman, a conflict of interest arises and the CEO may not adequately represent the interests of all shareholders or provide impartial leadership. A non-CEO Chairman, on the other hand, can provide an independent assessment of management, strengthen the Board’s credibility, and improve shareholder confidence in the corporation.

 

An objective and independent Board leader can provide the necessary oversight of management. In light of recent corporate scandals, investors must be able to rely on the Board to provide an impartial review of management and its affairs. Merely requiring that the majority of the Board be independent and establishing a Lead Independent Director are not sufficient to prevent the type of scandal that affected Enron, WorldCom and Tyco. These corporations had a majority of independent directors on the Board when the scandals occurred. Each company also had an insider serving as Chairman. Shareholders cannot derive confidence solely from the fact that a majority of the members of the Board of Directors of a company are independent when the CEO serves as Chairman.

 

Because of this very concern, separating the roles of Chairman and CEO is a growing trend in the effort to reform the way corporations operate. According to a 2003 report in The Corporate Board Member Magazine, hundreds of U.S. companies, including about one-quarter of those listed on Standard & Poor’s 500 stock index, have already split the two positions. Furthermore, a 2004 survey published in McKinsey Quarterly, found that two-thirds of directors favor splitting the Chairman and CEO positions.

 

This proposal would enhance management accountability to shareholders by ensuring that an independent director, rather than a party with a potential conflict of interest, serves as Chairman and controls the information and agenda presented to the Board of Directors.

 

Based on the considerations outlined above, I urge you to vote FOR this proposal.

 

Board of Directors’ Response:

 

At our 2006 annual meeting, the same stockholder proposal was defeated by a substantial margin. The Board strongly endorses the view that one of its primary functions is to protect stockholders’ interests by providing independent and objective oversight of management, including the Chief Executive Officer. However, as we stated last year, the Board does not believe that mandating a particular structure, such as separate Chairman and Chief Executive Officer status, is necessary to achieve independent oversight of management. Rather, the Board believes that the interests of the Company and its stockholders are best served at this time 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 the Company’s governance structure, subject to oversight by the independent members of the Board.

 

The Board believes that it should be free to exercise its judgment to determine who should serve as Chairman at any particular point in time in light of the Company’s then-current and anticipated future circumstances. The proposal submitted by a stockholder of the Company would mandate a particular structure and deprive the Board of its flexibility to organize its functions and conduct its business in the manner it deems in the best interests of the Company and its stockholders.

 

Independent directors make up a substantial majority of the Board.

 

The Board has been, and continues to be, a strong proponent of Board independence. Currently, six of the eight members of the Board are independent directors under the applicable NYSE listing standards and SEC rules. Each director is a full and equal participant in the major strategic, oversight and policy decisions of the Company. While the six independent directors comprise a substantial majority of the Board, the Board’s Audit Committee, Compensation, Benefits and Stock Option Committee and Corporate Governance and Nominating Committee consist entirely of independent directors. Moreover, the Board, and each committee of the Board, has the power to hire independent legal, financial, accounting, or other advisors, as it may deem necessary, without consulting or obtaining the approval of any officer of the Company in advance. The Board believes that this structure provides effective independent oversight of the Company’s management and key issues related to long-range business plans, long-range strategic issues and risks, ethics and integrity.

 

The Lead Independent Director is empowered with specific responsibilities and duties.

 

The Company already has an empowered Lead Independent Director who is elected annually by the non-management directors. The Lead Independent Director’s responsibilities and authority are clearly defined in the Corporate Governance Guidelines posted on the Company’s website and include the following:

 

 

The Board considers the Lead Independent Director to be a key component of the Company’s overall corporate governance structure and believes that this empowered Lead Independent Director provides strong and independent oversight of the Company’s management and business affairs.

 

The fully independent Compensation, Benefits and Stock Option Committee regularly evaluates the performance and compensation of the Chief Executive Officer.

 

The Board strongly endorses the independent review, evaluation and compensation of the Company’s Chief Executive Officer. The Compensation, Benefits and Stock Option Committee, which is comprised entirely of independent directors, annually reviews and approves corporate goals and objectives relevant to the compensation of the Chief Executive Officer, evaluates the performance of the Chief Executive Officer in light of those goals and objectives, and sets the compensation of the Chief Executive Officer based on this evaluation, without the participation of the Chief Executive Officer or other directors, if any, who are members of management.

 

The fully independent Corporate Governance and Nominating Committee is responsible for planning for the succession of the Chief Executive Officer.

 

The Board’s Corporate Governance and Nominating Committee conducts an annual review on succession planning (including policies regarding succession in the event of an emergency), evaluating potential successors to the Chief Executive Officer. The Governance Committee also conducts a similar annual review of succession planning for other Company officer positions.

 

Independent directors meet separately in executive sessions on a regular basis.

 

An executive session of the independent directors without management is scheduled at each regularly scheduled meeting of the Board. These sessions take place outside the presence of the Chief Executive Officer or any other Company employee. The Lead Independent Director presides at these executive sessions, which allows the independent directors the opportunity to separately consider management performance and broader matters of strategic significance to the Company.

 

Recent data indicates that the vast majority of the largest U.S. public companies do not have a separate chairman and chief executive officer.

 

Shearman & Sterling llp’s 2006 Trends in the Corporate Governance Practices of the 100 Largest US Public Companies reports that a vast majority of the 100 largest publicly listed U.S. companies have a single person serving as both the chairman and chief executive officer and that only 6% maintain a policy requiring separation of the two positions.

 

Likewise, 9 of the Company’s 13 peer group companies for 2006 had a single person serving as both the chairman and CEO according to the most recent proxy statements and other available SEC filings. Furthermore, only two of the 13 peer group companies had an independent chairman and no member of the Company’s peer group had a policy requiring the appointment of an independent board chairman.

 

The interests of the Company and its stockholders have been well-served by the current Chairman and Chief Executive Officer.

 

The Chief Executive Officer bears primary responsibility for managing the Company’s business day to day. As such, the Board believes that the Chief Executive Officer is the person in the best position to ensure that key business issues and stakeholder interests are brought to the Board’s attention. In addition, the Lead Independent Director may request the inclusion of specific agenda items for Board meetings as is stipulated in the Company’s Corporate Governance Guidelines.

 

The Board believes that the Company is strengthened by the chairmanship of Mr. Charles D. Davidson, who provides strategic, operational, and technical expertise, vision and a proven ability to lead the Company to the successes it has experienced. Under Mr. Davidson’s leadership, the Company has continued to reflect solid growth and increasing profits. The Board believes that under present circumstances the interests of the Company and its stockholders are best served by the leadership and direction of Mr. Davidson as Chief Executive Officer and Chairman.

 

For the foregoing reasons, the Board unanimously opposes, and recommends that stockholders vote AGAINST, the adoption of the stockholder proposal.

 

SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

 

The following tabulation sets forth, as of March 1, 2007, the shares of common stock beneficially owned by each director, each named executive officer listed in the Summary Compensation Table included elsewhere in this proxy statement, and all directors and named executive officers as a group.

 

 

 

 

EXECUTIVE COMPENSATION

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Oversight of Executive Compensation Program

 

Our executive compensation program is overseen by our Compensation Committee, with input from our management and outside compensation consultants.

 

Role of the Compensation Committee

 

The purposes of our Compensation Committee are to:

 

 

Our Board has delegated authority to the Compensation Committee to determine and approve (1) our compensation philosophy, (2) the annual salary, bonus, equity-based compensation and other benefits applicable to our executive officers, and (3) equity-based compensation applicable to non-executive-officer employees.

 

Our Board appoints our Compensation Committee members and Chair, and these appointees continue to be members until their successors are elected and qualified or until their earlier resignation or removal. Any member of our Compensation Committee may be removed, with or without cause, by our Board. Our Governance Committee, after consultation with our Lead Independent Director, makes recommendations to our Board with respect to the appointment of Board members to all of its committees considering, in the case of our Compensation Committee, criteria such as experience in compensation matters, familiarity with our management and other key personnel, understanding of public company compensation issues, time availability necessary to fulfill committee responsibilities and independence and other regulatory requirements. No member of our Compensation Committee participates in any of our employee compensation programs, and our Board has determined that none of our Compensation Committee members has any material business relationship with us.

 

We believe that Kirby L. Hedrick, Jeffrey L. Berenson and Edward F. Cox, who currently serve on our Compensation Committee, satisfy these criteria. Messrs. Hedrick and Cox served on the committee throughout 2006 and to-date. Our Board appointed Mr. Berenson to our Compensation Committee on April 25, 2006 in connection with its annual review of committee assignments. Bruce A. Smith served on our Compensation Committee from January 1, 2006 through the date of Mr. Berenson’s appointment. Each member of our Compensation Committee has been determined by our Board to meet the NYSE standards for independence, to be a “Non-Employee Director” as defined in Rule 16b-3 under the Exchange Act, and to be an “outside director” as defined for purposes of Section 162(m) of the Internal Revenue Code.

 

Our Compensation 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. All Compensation Committee meeting agendas are reviewed by our Lead Independent Director and approved by the committee Chair. Special meetings may also be held by the committee. Our Compensation Committee held seven meetings during 2006.

 

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 grant stock options, restricted stock and, prior to the 2007 grant year, performance unit awards to non-

executive-officer new hires for employment inducement purposes. Grants made by the CEO under these delegations are required to be reported to our Compensation Committee at its next regularly scheduled meeting.

 

Our Compensation Committee charter was last revised and approved by our Board on January 23, 2007. A copy is attached to this proxy statement as Appendix B and can also be obtained free of charge from our website, www.nobleenergyinc.com, by written request to us at the address appearing on the first page of this proxy statement to the attention of our Corporate Secretary or by calling (281) 872-3100.

 

Role of Management

 

Our CEO and Senior Vice President for Business Administration generally attend Compensation Committee meetings and provide input to the committee with respect to executive compensation, key responsibilities, performance objectives and compensation trends, and coordinate with the Company’s compensation consultant to ensure that committee requests regarding executive compensation are addressed. Our Compensation Committee also meets in executive session to discuss executive compensation matters outside of the presence of our management.

 

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 2006 executive compensation program and providing comparative market data on compensation practices and programs based on an analysis of our peer companies and other factors. For 2006, Towers Perrin provided these services to the Compensation Committee with respect to (1) determining base salaries for executive officers, (2) setting performance goals and determining award payouts under our short-term incentive plan and (3) setting performance goals and determining grants under our long-term incentive plan. Towers Perrin continues to advise the Compensation Committee in 2007.

 

Towers Perrin also provided similar services to our Governance Committee in 2006 to assist it with respect to reviewing and determining fees and equity compensation paid or awarded, as the case may be, to our non-employee directors.

 

Compensation Peer Group

 

To ensure that our executive compensation program is competitive, our Compensation Committee works with its compensation consultant to evaluate and compare certain elements of total compensation against a peer group of similar publicly traded oil and gas exploration and production companies (“Compensation Peer Group”). Our Compensation Peer Group consists of larger and smaller companies in our industry that have similar operating and financial characteristics. The companies comprising our Compensation Peer Group in 2006, prior to certain industry consolidation and activity in 2006, were: Anadarko Petroleum Corp., Apache Corp., Burlington Resources Inc., Chesapeake Energy Corp., Devon Energy Corp., EOG Resources, Inc., Forest Oil Corp., Houston Exploration Company, Kerr-McGee Corp., Murphy Oil Corp., Newfield Exploration Company, Noble Energy, Inc., Pioneer Natural Resources Company, Pogo Producing Company, Stone Energy Corp., Vintage Petroleum Inc. and XTO Energy Inc.

 

The Compensation Peer Group is periodically reviewed and revised by our Compensation Committee, in conjunction with advice from our compensation consultant. In January 2007, the Compensation Peer Group was revised, given industry consolidation and activity in 2006, to consist of: Anadarko Petroleum Corp., Apache Corp., Cabot Oil & Gas Corporation, Chesapeake Energy Corp., Devon Energy Corp., EOG Resources, Inc., Forest Oil Corp., Murphy Oil Corp., Newfield Exploration Company, Noble Energy, Inc., Pioneer Natural Resources Company, Plains Exploration and Production Company, Pogo Producing Company, Range Resources Corporation, Southwestern Energy Company and XTO Energy Inc.

 

Objectives of Our Executive Compensation Program

 

Our executive compensation program is designed to reward performance measured against performance goals and supports our long-term growth strategy, which is focused on value creation for our stockholders. The objectives of our executive compensation program are to:

 

 

We believe that linking executive compensation to Company performance is in the best interest of our stockholders. As performance goals are met or exceeded, resulting in increased value to stockholders, our executive officers should be rewarded commensurately. We believe that our 2006 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. In determining the amount and significance of each of these four principal elements, we believe that:

 

 

The following is a discussion of each of the four principal elements of our executive compensation program:

 

Base Salary:  Base salary for executive officer positions is determined principally by competitive factors. Our Compensation Committee believes that base salaries for executive officers should be competitive with comparable positions in peer companies and obtains competitor information 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. The policy of our Compensation Committee generally is to establish base salary levels that in aggregate approximate market median. Based on the results of market data provided by Towers Perrin regarding 2006 executive compensation, adjustments were made in 2006 to certain executive officers’ base salaries to more closely approximate market median.

 

Short-Term Incentive Plan:  Our short-term incentive plan (“STIP”) is a performance-based annual incentive bonus plan available to all of our full-time employees, including executive officers. The target 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 percent, with factors of 100 percent for the CEO and either 75 or 85 percent for the other named executive officers, with the differences primarily attributable to each officer’s level of experience and scope of responsibility within the Company.

 

In January of each year, our Compensation Committee sets annual STIP performance-based measures, including their relative weighting and specified targets, in addition to a discretionary component to be determined by the committee as discussed below. The performance-based measures, weighting and specified targets are communicated to our executive officers at that time. The 2006 performance-based measures approved by our Compensation Committee on January 23, 2006 accounted for 50% of the STIP formula and consisted of

discretionary cash flow, proved reserve additions, production, and controllable unit costs. Discretionary cash flow is composed of net income, adding back depreciation, depletion and amortization and various other non-cash expense items. The specified targets were determined by considering prior year results, current and projected activity and other competitive factors involving our industry.

 

The discretionary component, which accounted for the remaining 50% of the 2006 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 annual stockholder return compared to that of our Compensation Peer Group.

 

In January of each year, our Compensation Committee assesses the overall performance of the Company for the prior fiscal year, considering input from the CEO, including the appropriate achievement factors to that year’s performance measures and specified targets, and determines the discretionary component. Payout under the plan based on the Company’s 2006 performance occurred in February 2007.

 

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 available to our executive officers and certain other key employees determined on an annual basis. Its objectives are to:

 

 

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 amended in 1997, 2000, 2002, 2003 and 2005. The 1992 Plan permits the use of different types of stock-based grants or awards: nonqualified stock options, with or without stock appreciation rights, and restricted 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. Restricted stock may be granted by our Compensation Committee subject to such terms and conditions as may be specified by the committee. Restricted stock granted under the LTIP in 2004, 2005 and 2006 will generally vest after three years, provided that certain performance goals are achieved during the relevant three-year performance period; specifically, that total stockholder return over that period meets or exceeds the 25th percentile of our Compensation Peer Group at the time of grant. In January 2007, our Compensation Committee reviewed the Company’s performance for the three-year performance period covered by the restricted stock granted in 2004, confirming that the relevant performance goal necessary for vesting had been achieved.

 

Performance units awarded under our LTIP in 2004, 2005 and 2006 will vest and be paid out in cash at the end of the three-year period following the date of the award if specific predetermined performance goals are satisfied. For 2006, the performance goals were growth in reserves and production per share, both debt-adjusted, and total stockholder return relative to our Compensation Peer Group. Performance units have a target value of $1.00 per unit with a maximum payout of $2.00 per unit. Our Compensation Committee establishes the performance goals and target award levels prior to the beginning of each performance period. At the end of each performance period, cash payouts are determined based on the level of achievement of the goals. The payout of performance units awarded in 2004 was determined by the Compensation Committee and occurred in early 2007.

 

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 the LTIP 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 most effectively meet the LTIP objectives. Accordingly, for the 2007 grants, the Compensation Committee suspended the making of performance criteria grants under the LTIP and made 1992 Plan grants of stock options and time-vested restricted stock.

 

Equity Granting Practices

 

Stock options and shares of restricted stock are granted to our executive officers under our 1992 Plan. The Compensation Committee approves all such grants, which are determined based on input from the CEO and market data provided by the compensation consultant. Grants for the executive officers and the CEO are approved by our Compensation Committee and discussed with our Board, outside the presence of the CEO or other executive officers.

 

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. At the time of making stock option and restricted stock grant decisions, our Compensation Committee may be aware of approximate earnings results, 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 nearest business day if February 1 falls on a Saturday, Sunday or holiday), effective and priced on that date. 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 made 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 retention of, employment. No such special grants were made to executive officers in 2006. We communicate grants to executive officers and other employees shortly after the date of approval, in accordance with our customary human resource practices.

 

Stock option grants represent the right to purchase shares of our common stock over a period of up to ten years at fair market value, as defined in the 1992 Plan, on the date of grant and upon such terms and conditions, consistent with the provisions of the plan, as are specified by our Compensation Committee at the time of grant. The 1992 Plan defines “fair market value” for grant purposes as the average of the reported high and low trading price of our common stock on the NYSE on the date of grant (or if there was no reported sale on such date, on the last preceding date on which any reported sale occurred). We believe that this method of determining fair market value is neutral to the use of the closing price of our common stock and provides a valid representation of fair market value. Therefore, consistent with the terms of our 1992 Plan, we continue to grant stock options on this basis.

 

Our Compensation Committee has not delegated to the CEO any of its authority to grant stock options or restricted stock to executive officers. However, as noted above, it has delegated limited authority to the CEO to grant stock options, restricted stock and, prior to the 2007 grant year, performance unit awards to non-executive-officer new hires for employment inducement purposes.

 

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.

 

Qualified Defined Benefit Plan

 

Our qualified defined benefit plan (“Retirement Plan”) provides employees, including our executive officers, with retirement income benefits commencing upon retirement after attaining the normal retirement age of 65 or upon early or deferred vested retirement after attaining age 55 and completing 5 years of vesting service. Early retirement reductions apply if retirement benefits are commenced prior to age 65. The amount of an 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 are limited to a maximum of 30 years). Monthly Retirement

Plan benefits commencing upon retirement after attaining the normal retirement age of 65 are calculated using the greater of the following two formulas:

 

 

Final average monthly compensation generally means the 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 $220,000 for 2006 and is $225,000 for 2007. 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 $175,000 for 2006 and is $180,000 for 2007.

 

With information regarding competitive compensation practices from Towers Perrin, during 2006 our Compensation Committee reviewed our Retirement Plan in light of costs, competitive considerations and other available post-employment compensation arrangements. Based on that review, our Compensation Committee concluded that an enhanced defined contribution plan better addresses our current needs. Accordingly, beginning on May 1, 2006, our Retirement Plan was closed to new participants and new employees became eligible to participate in the qualified defined contribution plan described below with an enhanced Company contribution. Employees hired prior to May 1, 2006, which include all of our current executive officers, continue to accrue benefits under the Retirement Plan.

 

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 are limited to a maximum of 30 years). Restoration Plan benefits are calculated using the same methodology utilized for our Retirement Plan. Employees hired prior to May 1, 2006, which include all of our current 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 exceed the Internal Revenue Code limit, which was $220,000 for 2006 and is $225,000 for 2007. 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 2006 was $15,000, plus a $5,000 catch-up contribution for employees who are at least 50 years of age, and for 2007 is $15,500, plus a catch-up contribution of $5,000 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 and who is employed by or on authorized leave of absence from

the Company on the last day of the calendar year (or whose retirement, permanent disability or death occurred during such year while employed by or on authorized leave of absence from the Company):

 

 

The contributions made to our Thrift Plan by or for a participant are credited to accounts maintained for such participant under the plan. The amounts credited to a 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. 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 occur:

 

 

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 an 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 executive officer:

 

 

If we terminate the executive officer for cause, no benefit is payable to, or with respect to, that 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 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, however, are parties to pre-existing change of control agreements and therefore may not participate in the plan at this time.

 

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:

 

 

Because all of our named executive officers are parties to pre-existing change of control agreements, they are not eligible to receive severance benefits under our Severance Benefit Plan in the event of a change of control of the Company.

 

Perquisites:  We do not consider perquisites to be a principal element of executive compensation. In 2006, certain of our executive officers received non-material personal benefits in the following circumstances: a club membership and an executive physical examination.

 

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 insurance (“AD&D”), 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 indemnification rights statutes in the State of Delaware 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

 

Section 162(m) of the Internal Revenue Code limits our ability to deduct annual compensation in excess of $1,000,000 that is paid to our CEO or any other of our 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 bonuses paid to our executive officers, certain restricted stock and performance units awards, and certain payments provided for under our change of control agreements with the executive officers are not exempt from this deduction limit.

 

Section 280G of the Internal Revenue Code limits our ability to deduct amounts paid to certain disqualified individuals, including our executive officers, that are treated as excess parachute payments. Excess parachute payments are also subject to an excise tax payable by the recipient of such payment. Parachute payments are payments that are contingent on a change in the ownership or effective control of the Company or in the ownership of a substantial portion of our assets, and they become excess parachute payments with respect to a disqualified individual to the extent that the total amount of the parachute payments made to such individual exceeds a certain threshold amount. Examples of the types of payments that could give rise to parachute payments are the accelerated vesting of stock options and restricted stock upon a change of control and severance payments made upon a termination of employment in connection with a change of control.

 

We consider tax deductibility in the design and administration of our executive officer compensation plans and programs. However, we believe that it is in the best interests of the Company and its stockholders that we retain flexibility and discretion to make compensation awards, whether or not deductible, when such awards are consistent with the strategic goals of the Company.

 

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 9, of our 2006 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, 2006 for filing with the SEC.

 

March 22, 2007

 

Compensation, Benefits and

Stock Option Committee

 

Kirby L. Hedrick, Chair

Jeffrey L. Berenson

Edward F. Cox

Summary Compensation Table

 

The following table sets forth certain summary information concerning the compensation earned by our CEO and Chief Financial Officer and each of our three most-highly compensated executive officers other than the CEO and Chief Financial Officer (collectively, “named executive officers”) during 2006.

 

 

 

 

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 2006 was as follows: Mr. Davidson — 14.4%; Mr. Tong — 19.9%; Mr. Stover — 20.6%; Mr. Bullington — 21.6%; and Ms. Cunningham — 22.9%.

 

Grants of Plan Based Awards

 

The table below sets forth information regarding grants of plan-based awards made to our named executive officers during 2006.

 

 

 

2006 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. Among the Company’s 2006 accomplishments under Mr. Davidson’s leadership were:

 

 

Mr. Davidson earned a total salary of $966,676 in 2006, which reflects an increase in base salary from $925,000 to $1,025,000 effective August 1, 2006. Based on the results of Towers Perrin’s review of 2006 executive compensation, our Compensation Committee determined that this increase was appropriate to more closely approximate market median for Mr. Davidson’s 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 $2,562,500 in February 2007, based on our Compensation Committee’s review of overall performance of the Company for the 2006 fiscal year, as well as Mr. Davidson’s performance as measured by predetermined operational and financial goals for 2006, considering the Company’s 2006 accomplishments under Mr. Davidson’s leadership.

 

Mr. Davidson was granted awards under our LTIP of 77,957 stock options, 17,181 shares of restricted stock and 1,641,196 performance units on February 1, 2006, 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 resulted in significant accomplishments by the Company in 2006 and provides motivation for the future achievement of short-term and long-term goals necessary to stockholder value creation.

 

2006 Compensation of Other Named Executive Officers

 

In determining the compensation of Messrs. Tong, Stover and Bullington and Ms. Cunningham for 2006, our Compensation Committee compared their relative achievements against the performance goals established for each of them at the beginning of the year. Our Compensation Committee also evaluated each of their respective contributions to the overall performance of the Company, as well as the performance of their respective business units.

 

Based on the results of Towers Perrin’s review of 2006 executive compensation, our Compensation Committee determined that an increase in base salary for each of our named executive officers was appropriate to more closely approximate market median for their respective positions relative to our Compensation Peer Group giving consideration to the scope and nature of our operations. Effective August 1, 2006, the base salary of Mr. Stover was increased to $475,000 and the base salaries of Messrs. Tong and Bullington and Ms. Cunningham were increased to $400,000.

 

After reviewing the overall performance of the Company for the 2006 fiscal year and the contributions to that performance of each non-CEO named executive officer and his or her respective business unit, our Compensation Committee approved the following STIP payments: Mr. Tong — $649,965; Mr. Stover — $977,262; Mr. Bullington — $619,376; and Ms. Cunningham - $599,717. The STIP payments for 2006 performance for these named executive officers increased approximately 62%, 139%, 76% and 65%, respectively, over 2005. In each case, the STIP payment amounts were determined based on an evaluation of Company, business and individual performance, as relevant, against the performance goals established at the beginning of the year for each named executive officer. We believe that these STIP payments are appropriate in light of the Company’s performance in 2006 and reflect the relative contributions of these executive officers.

 

On February 1, 2006, Messrs. Tong and Stover and Ms. Cunningham were each granted awards under our LTIP of 15,980 stock options, 3,522 shares of restricted stock and 336,413 performance units. On that same date, Mr. Bullington was granted awards of 14,488 stock options, 3,193 shares of restricted stock and 305,014 performance units. 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.

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, 2006.

 

 

 

 

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 2006.

 

 

 

Pension Benefits

 

The amounts reported in the table below reflect the present value of accumulated benefits as of December 31, 2006 for the named executive officers under our Retirement Plan and Restoration Plan. The estimates assume that benefits are received in the form of a ten-year certain and life annuity.

 

 

 

 

Nonqualified Deferred Compensation Table

 

The following table sets forth certain information with respect to contributions made to our Deferred Compensation Plan by our named executive officers during fiscal year 2006.