The Director Compensation Project: Chesapeake Energy

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their 2010 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.  One can see some of the effects of these rules when looking at the director compensation table from Chesapeake Energy Corporation (NYSE: CHX) 2010 proxy statement.  The proxy statement shows the directors were compensated accordingly:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Richard K. Davidson	136,000	287,250	0	142,350	565,600
V. Burns Hargis	136,000	287,250	0	119,516	542,766
Frank Keating	117,500	287,250	0	125,988	530,738
Breene M. Kerr*	71,500	0	0	640,834	712,334
Charles T. Maxwell	129,000	287,250	0	1,232	417,482
Merrill A. Miller, Jr.	129,000	287,250	0	107,522	523,772
Don Nickles	136,000	287,250	0	131,437	554,687
Frederick B. Whittemore	136,000	287,250	0	52,376	475,626

*Includes the fair value of 18,750 shares of restricted stock previously awarded to him.

Director Compensation.  During fiscal year 2009, Chesapeake Energy held four Board of Directors meetings in person and six meetings by telephone conference. Each director attended at least 80% of the aggregate number of meetings of the Board of Directors.  All of the Directors attended the 2009 annual shareholder’s meeting.  The Directors are given an annual grant of 12,500 shares of restricted stock, 25% of which vest immediately upon award and the remaining 75% of which vests ratably over the three years following the date of award.  The annual award was made on June 15, 2009.

Director Tenure.  In 2009, Mr. Aubrey K. McClendon, who has held his position as a member of the Board of Directors and Chief Executive Officer since co-founding the company in 1989, held the longest tenure.  Mr. McClendon served as Chairman of the Board of Directors and Chief Executive Officer.  Mr. Kerr retired as a director at the conclusion of the annual meeting in June 2009 and continues to serve as a director emeritus.  Mr. Miller serves as Chairman, President and CEO of National Oilwell Varco, Inc.  Mr. Hargis served as Vice Chairman of BOK Financial Corporation until March of 2008 and now serves as a director.  Additionally, Mr. Hargis has served as President of Oklahoma State University since March 2008.

CEO Compensation.  Mr. McClendon served as Chesapeake Energy’s Chief Executive Officer for 2009 and earned a salary of $975,000 during the fiscal year.  Mr. McClendon received a bonus compensation of $1,951,000, which is the maximum that can be awarded.  Additionally, Mr. McClendon was awarded 760,000 shares of restricted stock, an increase of 140,000 shares over his 2008 award of 620,000.  McClendon also has use of the fractionally owned company aircraft, valued at $445,984 during fiscal 2009.  Marcus C. Rowland, Chief Financial Officer, received a salary of $860,000 and the first installment of his 2008 Incentive Award in the amount of $2,403,125.  Also, because of exemplary performance the company increased Mr. Rowland’s restricted stock award to 165,000 shares from 135,000 shares in 2008.