NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON JUNE 6, 2007

 

DEVON ENERGY CORPORATION

 

 

IMPORTANT

 

Your proxy is important to assure a quorum at the meeting. Whether or not you expect to attend the meeting, please vote in any one of the following ways:

 

 

 

Please note that all votes cast via telephone or the Internet must be cast before 8:00 p.m. Central Daylight Time on Tuesday, June 5, 2007.

 

Table of Contents

 

 

Proxy Statement

 

for the

 

Annual Meeting Of Stockholders

 

To Be Held On June 6, 2007

 

Devon Energy Corporation

20 North Broadway

Oklahoma City, Oklahoma 73102-8260

 

We are furnishing you this Proxy Statement in connection with the solicitation of proxies by our Board of Directors to be used at the Annual Meeting and any adjournment thereof. The Annual Meeting will be held on Wednesday, June 6, 2007 at 8:00 a.m. We are first sending this Proxy Statement to our stockholders on or about April 27, 2007.

 

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

 

What is the purpose of the Annual Meeting?

 

At our Annual Meeting, stockholders will be asked to:

 

 

Who is entitled to vote?

 

Stockholders as of the close of business on April 9, 2007 (the “Record Date”) are eligible to vote their shares at the Annual Meeting. As of the Record Date, there were 444,981,404 shares of our common stock outstanding. Each share of common stock is entitled to one vote at the Annual Meeting.

 

How do I vote?

 

You may:

 

 

If I vote by telephone or Internet, do I need to return my proxy card?

 

No.

 

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

 

If you are a current employee participating in the Devon Energy Incentive Savings Plan (the “401(k) Plan”), please follow the instructions you received via email from our Proxy Solicitor, Georgeson Inc. (“Georgeson”).

 

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

 

The 401(k) Plan Trustee will vote your account shares in the 401(k) Plan account in accordance with your instructions. If instructions are not received by June 1, 2007, the shares credited to your account will be voted by the 401(k) Plan Trustee in the same proportion as it votes shares for which it did receive timely instructions.

 

Will each stockholder in our household receive a Proxy Statement and Annual Report?

 

Generally, no. We try to provide for only one Proxy Statement and Annual Report to be delivered to multiple stockholders sharing an address unless you have notified us to the contrary. Any stockholder at a shared address to which a single copy of this Proxy Statement and the Annual Report has been sent who would like a separate copy of this Proxy Statement and the Annual Report or would like separate copies of Proxy Statements and Annual Reports for future meetings may write Devon Energy Corporation, Attention: Corporate Secretary, 20 North Broadway, Oklahoma City, Oklahoma 73102-8260, e-mail: janice.dobbs@dvn.com or call (405) 235-3611. Any stockholder at a shared address to which multiple copies of this Proxy Statement and the Annual Report have been sent may request delivery of a single copy of the Proxy Statement and Annual Report for future meetings by contacting us using the contact information set forth above.

 

What is the difference between voting via telephone or the Internet or returning a proxy card versus voting in person?

 

Voting by proxy, regardless of whether it is via telephone or the Internet or by returning your proxy card by mail, appoints J. Larry Nichols, John Richels and Marian J. Moon as your proxies. They will be required to vote on the proposal exactly as you specified. However, if any other matter requiring a stockholder vote is properly raised at the Annual Meeting and you are not present to cast your vote, then Messrs. Nichols and Richels and Ms. Moon are authorized to use their discretion to vote on the issues on your behalf.

 

How does discretionary authority apply?

 

If you sign your proxy card, but do not make any selections, you give authority to Messrs. Nichols and Richels and Ms. Moon to vote on the proposals and any other matter that may arise at the Annual Meeting.

 

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

 

Yes.

 

What if I want to change my vote?

 

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

 

Is my vote confidential?

 

Yes, only Georgeson and certain of our employees will have access to voting information submitted by our registered or beneficial stockholders. Georgeson will also act as our Inspector of Election. All comments will remain confidential, unless you ask that your name be disclosed.

 

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

 

Who will count the votes?

 

Georgeson will tabulate the votes.

 

What does it mean if I get more than one proxy card?

 

Your shares are probably registered differently or are in more than one account. Vote all proxy cards to ensure that all your shares are voted. You should then contact our transfer agent, UMB Bank, n.a., to have your accounts registered in the same name and address.

 

What constitutes a quorum?

 

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

 

How many votes will be required to approve a proposal?

 

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

 

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

 

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

 

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

 

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

 

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

 

How will you treat abstentions and broker non-votes?

 

We will (i) count abstentions and broker non-votes for purposes of determining the presence of a quorum at the Annual Meeting; (ii) treat abstentions as votes not cast but as shares represented at the Annual Meeting for determining results on actions requiring a majority of shares present and entitled to vote at the Annual Meeting; (iii) not consider broker non-votes for determining actions requiring a majority of shares present and entitled to vote at the Annual Meeting; and (iv) consider neither abstentions nor broker non-votes in determining results of plurality votes.

 

Who pays the solicitation expenses?

 

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

 

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

 

We will announce voting results at the Annual Meeting, and we will publish final results in our quarterly report on Form 10-Q for the second quarter of 2007. We will file that report with the United States Securities and Exchange Commission (the “SEC”). You may obtain a copy of this and other reports free of charge on our website at www.devonenergy.com, or by contacting either our Investor Relations Department at 405-552-4570 or the SEC at 1-800-732-0330 or www.sec.gov.

 

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

 

Yes. The Audit Committee of the Board of Directors has approved KPMG LLP to serve as our independent auditors for the year ending December 31, 2007. Representatives of KPMG LLP are expected to be present at the Annual Meeting. They will have an opportunity to make a statement, if they desire to do so, and will be available to respond to stockholder questions.

 

Where can I reach you?

 

Our mailing address is:

 

  Devon Energy Corporation

  20 North Broadway

  Oklahoma City, OK 73102-8260

 

Our telephone number is:

 

  405-235-3611

 

YOUR PROXY VOTE IS IMPORTANT. REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE ASKED TO VOTE BY USING THE TOLL-FREE TELEPHONE NUMBER SHOWN ON THE PROXY CARD; ACCESSING THE INTERNET WEBSITE SHOWN ON THE PROXY CARD; OR RETURNING THE ACCOMPANYING PROXY CARD OR VOTING INSTRUCTION FORM.

 

 

Pursuant to provisions of our Restated Certificate of Incorporation and Bylaws, the Board of Directors shall consist of not less than three nor more than 20 Directors. Currently, the Board is comprised of nine Directors. Our Restated Certificate of Incorporation and Bylaws provide for three classes of Directors. These three classes of Directors serve staggered three-year terms, with Class I having three Directors, Class II having four Directors and Class III having two Directors.

 

The Board of Directors has nominated incumbent directors Thomas F. Ferguson and David M. Gavrin, whose terms expire at the Annual Meeting, for re-election as Directors for terms expiring at the Annual Meeting in the year 2010. The Board has also nominated our President, John Richels, to serve as a member of the Board for a term expiring at the Annual Meeting in 2010. Nominees will serve until their successors are elected and qualified. Although Mr. Gavrin is standing for election for a full three-year term, he is expected to retire from the Board as of the 2008 Annual Meeting due to the age requirement of Board members. Peter J. Fluor’s term as a Director will expire at the Annual Meeting, and Mr. Fluor chose not to stand for re-election. Other Directors who are remaining on the Board of Directors will continue to serve in accordance with their previous elections until the expiration of their terms at the 2008 or 2009 Annual Meeting, as the case may be.

 

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

 

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

 

 

Our Board of Directors met six times in 2006. All Directors attended 75 percent or more of the total meetings of the Board of Directors and Committees on which they served. We require a majority of our Directors be in attendance at our annual meetings of stockholders. All Directors attended the 2006 Annual Meeting.

 

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

 

 

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

 

Also, on our website is information on our Environmental, Health and Safety programs, including our Corporate Global Climate Change Position and Strategy.

 

The Board of Directors has a standing Audit Committee, Compensation Committee, Dividend Committee, Governance Committee and Reserves Committee. The following table shows the current membership of each committee, each committee’s functions, and the number of meetings each committee held in 2006:

 

 

 

Our Corporate Governance Guidelines, including a definition of director independence, complies with the NYSE listing standards. The full text of our Corporate Governance Guidelines may be found on our website at www.devonenergy.com.

 

Pursuant to our Corporate Governance Guidelines, the Board considers transactions and relationships between each Director or any member of his immediate family and us and our subsidiaries and affiliates. Applying our Corporate Governance Guidelines, the Board has affirmatively determined that each of the current Directors, with the exception of our Chairman and Chief Executive Officer, J. Larry Nichols, has no material relationship with us that would interfere with the exercise of independent judgment and, therefore, is independent under our Corporate Governance Guidelines and the listing standards of the NYSE. The Board noted that the father of Director, J. Todd Mitchell, owns indirectly a majority interest in a company whose services we utilize. However, the Board determined that this relationship was not material to us, the Director or to the other company. See “Related Party Transactions”.

 

The Board has a Lead Director whose primary responsibility is to preside over the executive session of the Board meeting in which Mr. Nichols and other members of management do not participate. The Lead Director also performs other duties that the Board may from time to time delegate to assist the Board in the fulfillment of its responsibilities. In 2006, the Lead Director presided over four executive sessions of the Board.

 

David M. Gavrin has served as our Lead Director since 2005 and will serve in that position until a successor is named by the Board of Directors.

 

Any stockholder or other interested party may contact our Lead Director or any of the non-management Directors by (i) U.S. mail to Lead Director or to Non-Management Directors, c/o Office of the Corporate Secretary, Devon Energy Corporation, 20 North Broadway, Oklahoma City, Oklahoma 73102-8260; (ii) calling our non-management Director access line 1-866-888-6179; or (iii) sending an email to nonmanagement.directors@dvn.com. A management Director may be contacted by (i) U.S. mail to Management Directors, c/o Office of the Corporate Secretary, Devon Energy Corporation, 20 North Broadway, Oklahoma City, Oklahoma 73102-8260; (ii) contacting the Office of the Corporate Secretary at 405-235-3611; or (iii) sending an email to management.directors@dvn.com. All calls or correspondence are anonymous and confidential. All such communications, other than advertisements or commercial solicitations, will be forwarded to the appropriate Director(s) for review.

 

The Compensation Committee is composed of three independent non-management Directors with no interlocking relationships as defined by the SEC.

 

We have adopted a Code of Business Conduct and Ethics which applies to all of our Directors, officers and employees. The Code of Business Conduct and Ethics is posted on our website at www.devonenergy.com. The Code of Business Conduct and Ethics describes our policies and standards for protecting our integrity and provides guidance to our Directors, officers and employees in recognizing and properly resolving any ethical and legal issues that may be encountered while conducting our business. The Code of Business Conduct and Ethics provides that our Directors or officers may not act on our behalf as a principal in any transaction with a supplier, competitor or customer in which an affiliate of such Director or officer is a principal, officer or representative in such transaction, without prior approval of the Audit Committee. It is the policy of the Audit Committee to review the terms and substance of any potential related party transaction for purposes of determining whether a waiver to the Code of Business Conduct and Ethics should be granted.

 

Our Audit Committee reviews information provided in the annual Director questionnaire relating to transactions between us and the Director to determine if the Director meets our and the NYSE’s independence standards. The Board confirms the independence of each Director upon receiving the Audit Committee recommendation.

 

George P. Mitchell, the beneficial owner of approximately 5.33% of our common stock and the father of J. Todd Mitchell, one of our Directors, indirectly owns a majority interest in Rock Solid Images (“RSI”), which provides seismic data and analysis software. We utilize several RSI software packages and have also utilized RSI for specific reservoir analysis. We have, as part of an industry consortium, sponsored research and development by RSI in the areas of seismic attenuation and lithology and fluids prediction. J. Todd Mitchell serves as non-executive Chairman of RSI. We paid RSI $204,084 in 2006 for the foregoing products and services. The Board has determined that this relationship was not material to J. Todd Mitchell, RSI or to us.

 

Under our Corporate Governance Guidelines, non-management Director compensation is determined annually by the Board of Directors acting upon the recommendation of the Governance Committee. Directors who are also our employees receive no additional compensation for service as a Director. The following table shows compensation for non-management Directors for 2006:

 

 

 

 

The following is a schedule of annual retainers and meeting fees for non-management Directors in effect during 2006:

 

 

All non-management Directors are reimbursed for out-of-pocket expenses they incur serving as Directors.

 

In June 2006, our non-management Directors were granted an annual award of 3,000 stock options and 2,000 shares of restricted stock under our 2005 Long-Term Incentive Plan. Stock options and restricted stock awards to non-management Directors are granted immediately following each Annual Meeting. Stock options vest on the date of grant and are granted at an exercise price equal to the closing price of our common stock on that date. Unexercised stock options will expire eight years from the date of grant. Restricted stock awards vest 25 percent on each anniversary of the date of grant. Cash dividends on shares of restricted stock are paid at the same times and in the same amounts as on other shares of our common stock.

 

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

 

The Governance Committee is responsible for proposing qualified candidates to serve on the Board of Directors, and reviews with the Board special director qualifications, taking into account the composition and skills of the entire Board, and specifically ensuring a sufficient number of the members of the Board are financially literate. The Governance Committee will consider nominees recommended by stockholders and will give appropriate consideration in the same manner as given to other nominees. Stockholders who wish to submit director nominees for election at our 2008 Annual Meeting of Stockholders may do so by submitting in writing such nominee’s name in compliance with the procedures required by our Bylaws, to the Governance Committee of the Board of Directors, Attention: Chairman, c/o Office of the Corporate Secretary, Devon Energy Corporation, 20 North Broadway, Oklahoma City, Oklahoma 73102-8260. Pursuant to our Bylaws, stockholders may nominate a person for election or re-election as a director by delivering a timely notice to our Corporate Secretary at the address above. Please see “Submission of Stockholder Proposals and Nominees” for a discussion of the deadlines for delivering such notice. The stockholder’s notice must contain:

 

 

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

 

 

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

 

 

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

 

 

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

 

The Governance Committee intends to continue to require an annual evaluation of the effectiveness of the Board and its Committees and an annual self-assessment of the performance and effectiveness by each member of the Board.

 

With the Company’s fundamental corporate governance practices firmly in place and annually evaluated, the Governance Committee is prepared to respond quickly to new regulatory requirements and emerging best practices. The Governance Committee intends to continue the self-assessment process and its work will be updated periodically to enable the Company to maintain its position at the forefront of corporate governance best practices.

 

John A. Hill, Chairman

Michael M. Kanovsky

William J. Johnson

 

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

 

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

 

In fulfilling its duties during 2006, the Audit Committee:

 

 

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors, and the Board has approved, that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 for filing with the SEC. The Audit Committee has approved KPMG LLP as the Company’s independent auditors for the year ending December 31, 2007.

 

Thomas F. Ferguson, Chairman

Michael M. Kanovsky

J. Todd Mitchell

 

Under the terms of its charter, the Audit Committee approves the fees we pay our independent auditors. For the years ended December 31, 2006 and December 31, 2005, we paid the following fees to KPMG LLP:

 

 

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

 

All of the 2006 and 2005 audit and non-audit services provided by KPMG LLP were approved by the Audit Committee. The non-audit services which were approved by the Audit Committee were also reviewed to ensure compatibility with maintaining the auditors’ independence.

 

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

 

The Board of Directors established a Reserves Committee in 2004, comprised of three independent Directors, Messrs. Howard, Johnson and Mitchell. The Reserves Committee operates under a charter approved by the Board of Directors. The charter is available on the Company’s website at www.devonenergy.com. The Reserves Committee oversees, on behalf of the Board, the evaluation and reporting process of the Company’s oil, gas and natural gas liquids reserves data. Management and our independent engineering consultants have the primary responsibility for the preparation of the reserves reports. In fulfilling its oversight responsibilities, the Reserves Committee reviewed with management the internal procedures relating to the disclosure in the Annual Report of reserves, having regard to industry practices and all applicable laws and regulations. In fulfilling its duties during 2006, the Reserves Committee has:

 

 

In reliance on the reviews and discussions referred to above, the Reserves Committee recommended to the Board of Directors, and the Board has approved, that the reserves reports be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 for filing with the SEC.

 

Robert L. Howard, Chairman

William J. Johnson

J. Todd Mitchell

 

 

Our success is dependent on the performance of highly-trained, experienced and committed employees in all positions and at all levels. The skill sets, education, experience and personal qualities of the executives needed to successfully manage the business and develop managers over the long-term are especially coveted by many of our competitors. The competition for executive talent in the oil and gas industry is considerable. In addition, the oil and gas business is cyclical, and, accordingly, our compensation program must be flexible. Therefore, our executive compensation programs are designed and administered to support our strategic objectives as well as to address the realities of the competitive market for talent.

 

Our executive compensation philosophy is established by the Compensation Committee of the Board of Directors (the “Committee”), which also administers the overall executive compensation program. The Committee operates under a written charter approved by the Board of Directors. The charter is available on our website at www.devonenergy.com. In 2006, the Committee retained the services of an independent compensation consulting firm, Mercer Human Resource Consulting (the “Compensation Consultant”), to assist with executive compensation program design, calibration of the program to our performance and the competitive market, to monitor program effectiveness, and to review the competitiveness of our executive compensation program. The Compensation Consultant provides competitive compensation information through an analysis of our peers and other relevant companies.

 

Our two-pronged operating strategy – investing the majority of our capital budget in individually-significant, large-scale, low-risk development projects capable of producing reliable, repeatable results over the near-term and investing a measured amount of the capital budget in longer-term initiatives with higher-impact potential aimed at providing a development inventory over the longer-term – requires a compensation philosophy that balances the utilization of objective measures of our near-term success with a more subjective evaluation of executive officer performance that supports our long-term success.

 

Overall, our executive compensation program is designed to support a high-performance culture and to closely align the interests of our executives with the interests of our stockholders. The goals of the program are to:

 

 

The following principles influence the design and administration of our executive compensation program and are consistent with our compensation philosophy.

 

Attracting and Retaining Executive Talent Over the Long-Term

 

We believe that the attraction and long-term retention of executive officers contributes significantly to our

success. When executives remain with us over the long-term, they cultivate meaningful, long-term relationships with key employees. This enables them to positively impact our performance by continually developing our personnel, fine-tuning business processes, and creating a high-performance, effective culture. In addition, stability at the executive level helps us attract and retain managers and other employees who possess valuable technical expertise and an understanding of the oil and gas industry.

 

In order to attract and retain key executives who will successfully manage the business over the longer-term, we must compensate executives in a manner that is competitive with the market for executive talent. Annually, the Committee reviews peer group compensation information prepared by the Compensation Consultant to ensure that our total executive compensation program is competitive. The survey data used by the Committee as a guide in determining our executive compensation includes information from companies in the energy industry and the broader market in which we compete for key executive talent. Companies against which our executive compensation is measured include Anadarko Petroleum Corporation, Apache Corporation, Baker Hughes Incorporated, Chesapeake Energy Corporation, Chevron Corporation, ConocoPhillips, Dominion Resources, Inc., Duke Energy Corporation, El Paso Corporation, EnCana Corporation, Enterprise Products Partners, L.P., EOG Resources, Inc., Halliburton Company, Hess Corporation, Kerr-McGee Corporation (now a part of Anadarko Petroleum Corporation), Marathon Oil Corporation, Murphy Oil Corporation, Nabors Industries Ltd., Occidental Petroleum Corporation, Schlumberger Limited, Tesoro Corporation, Transocean Inc., Valero Energy Corporation and Williams Companies, Inc. A significant portion of the long-term compensation awarded to our executives is subject to a vesting schedule, which, in addition to attracting executive officers and aligning them with the goal of maximizing stockholder value, motivates executives to remain with us over the long-term.

 

Pay for Performance

 

We believe that an executive officer’s compensation should be tied to a combination of our overall performance, performance of his or her business function or area and individual performance, with the primary driver of value being our financial success and long-term value creation for stockholders. Generally, we try to reward executives with incentive pay when we are successful and stockholder value is created.

 

With respect to individual performance, our operating strategy requires a goal-setting and performance management process that promotes and rewards executive behaviors and decision-making methods that help the organization achieve its near-term and longer-term objectives. The goal-setting and performance management process consists of setting:

 

 

This approach to compensation not only motivates executives to deliver near-term financial and operating results, but also provides incentives for them to develop internal talent, cultivate key relationships with managers, ensure positive relationships with regulators, landowners and other stakeholders, refine business processes and build a culture of mutual respect and teamwork focused on creating long-term stockholder value.

 

Compensation Weighted Toward Incentive Pay

 

We believe that the proportion of an employee’s total compensation that varies based on performance should increase as the scope of the individual’s ability to influence our results increases. Since executive officers have the greatest influence over our results, a significant portion of their overall compensation consists of incentive pay that is “at risk,” and the potential value of incentive awards provided to executives increases at higher levels of responsibility. In 2006, for example, approximately 90% of the total direct compensation (the sum of salary, bonus and long-term incentive compensation awards granted in 2006) of our Chief Executive Officer was at risk against near-term and long-term performance goals. The total direct compensation at risk against near-term and long-term performance goals in 2006 for all other named executive officers

ranged from approximately 81% to 86% of their total direct compensation. This approach also helps to align our compensation expenses with the cyclical nature of the oil and gas industry.

 

Balancing Pay for Near-Term and Longer-Term Performance

 

To reinforce the importance of balancing the goals of delivering near-term results and creating long-term stockholder value, executive officers regularly are provided both annual and long-term incentives. We believe that properly allocating near-term and longer-term incentives is critical in motivating executives to effectively carry out our two-pronged operating strategy. Overall, the value of an executive’s total compensation opportunity is weighted in favor of long-term incentives.

 

Consideration of Tax Implications

 

Section 162(m) of the Internal Revenue Code (the “Code”) disallows, with certain exceptions, a federal income tax deduction for compensation over $1,000,000 paid to the Chief Executive Officer or any other named executive officer. One exception applies to “performance-based compensation” paid pursuant to stockholder-approved employee benefit plans (essentially, compensation that is paid only if the individual’s performance meets pre-established objective performance goals based on performance criteria approved by our stockholders). Although we have generally attempted to structure executive compensation so as to preserve deductibility, we also believe that there are circumstances where our interests are best served by maintaining flexibility in the way compensation is provided, even if it results in the non-deductibility of certain compensation under the Code. A portion of the payments made under our current annual cash compensation program are not deductible in accordance with the provisions of Section 162(m). However, the Committee has determined that the benefit of enhanced flexibility in program design outweighs the value of the lost deduction.

 

A portion of the stock options we granted to our executives are incentive stock options, which allow the executives to defer the payment of certain taxes upon exercise of the options and provide for the characterization of certain gains as long-term capital gains. These tax advantages can be partly offset by the alternative minimum tax.

 

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

 

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

 

 

At the year-end Committee meeting, the Committee sets base salary for the upcoming fiscal year, awards annual cash bonuses for the fiscal year then ending, and grants stock options and restricted stock awards. Grants of stock options and restricted stock to qualifying new employees are made by the Committee on the last business day of the month during which their employment commences. The Committee does not back date stock option grants and does not time the grant of awards in coordination with the release of material nonpublic information.

 

Base Salary

 

We consider a competitive base salary vital to ensuring the continuity of our management. We believe that the base salaries of the executive officers should be competitive with the base salaries of executive officers of similar companies within the oil and gas industry with whom we compete for executive personnel. We believe that targeting base salaries at or slightly above the market level median enables us to compete successfully and allows us to emphasize variable compensation appropriately.

 

The Committee reviews and determines, on an annual basis, the base salaries of our Chief Executive Officer, J. Larry Nichols, and our other executive officers. In each case, the Committee considers the scope of responsibility and experience of each executive, in light of competitive analysis provided by the Compensation Consultant. In determining the appropriate base salary for Mr. Nichols, the Committee meets in executive session and reviews the goals for the past year, our performance against those goals, Mr. Nichols’ leadership in guiding our operations, and the changes in salaries of other chief executive officers at comparable companies. The Committee reviews competitive compensation information provided by the Compensation Consultant and discusses trends with the consultant. The Committee also reviews the competitive position and trends of our other executives to ensure appropriate internal equity. Based on this data and considering our overall compensation strategy, the Committee determines Mr. Nichols’ base salary.

 

Each year, the Committee individually interviews each executive officer to discuss the officer’s analysis of our performance for the year in general and the performance within his or her area of responsibility. In addition, the Chief Executive Officer discusses with the Committee his evaluation of each executive officer’s performance, which includes a review of contributions and performance over the past year, an assessment of the strengths and weaknesses of the executive officer and the development plans and succession potential of the executive. Mr. Nichols makes recommendations to the Committee for changes to base salaries based on his assessment of the executive’s performance, internal equity considerations, and external market forces and data, including the competitive market information provided by the Compensation Consultant. Taking into consideration Mr. Nichols’ recommendation, the Committee’s own review of competitive market data, interviews with the executive officers and our compensation philosophy, the Committee determines the base salary for each executive.

 

Available data indicates that Mr. Nichols’ base salary has been near the market median, and that our other executive officers as a group have earned salaries that are approximately 111% of the market median. These salary levels are consistent with the compensation philosophy of setting base salaries at or slightly above the median of salaries for comparable executives at the comparison companies.

 

Annual Incentive Plan

 

During an annual goal-setting process, management sets, and the Board approves, objective annual targets for our performance as well as more subjective goals that focus on the manner in which the business is managed. Because the more subjective aspects of managing the business support the creation of long-term stockholder value, we believe they are just as important as achieving near-term objective performance measures. In 2006, our goals addressed production volumes; reserve replacement rates; finding and development (“F&D”) costs; operating expenses; general and administration (“G&A”) costs; property acquisitions; the pursuit of high impact projects; environmental, health and safety performance; relationships with regulators; efficiency in business processes; collaboration among our divisions and departments; our competitive position; and leadership development.

 

The Committee believes that executives’ cash bonuses should reflect their success in achieving corporate goals, as well as the ongoing enhancement of stockholder value, and, accordingly, considers performance with respect to corporate goals when making decisions related to cash bonuses and other compensation matters. However, the Committee does not assign a relative weight to each goal in evaluating performance. Likewise, it does not assign target award or maximum award levels to the participants in the plan. Instead, in determining the appropriate payout amounts, the Committee reviews our performance in light of the goals adopted by the Board; each executive officer’s individual performance during the year, including the executive’s part in meeting the specific financial and other key goals established for the Company and the executive’s function; market conditions; historical practices; incentive awards for others in the organization; and competitive market practices.

 

While our approach to annual incentives is not strictly formulaic, it is highly structured. The process for goal setting is followed rigorously and reviewed in detail with the Committee prior to the beginning of the year. At the end of the year, the Committee interviews the executives to rate performance against the approved goals. We have considered the relative merits of a non-formulaic approach to paying annual incentives, that is, one that combines objective measurement with subjective evaluation of performance, versus a purely formulaic approach. We have concluded that the present non-formulaic approach has been

successful, resulting in the creation of a highly-effective, focused management team, while providing the necessary flexibility to address changing market and industry conditions.

 

In making its decisions regarding cash bonuses for 2006, the Committee determined that we had substantially met our goals related to production volumes; reserves additions; F&D costs; operating expenses; G&A costs; and environmental, health and safety performance. The Committee concluded that any negative variances from established goals were minor and due to circumstances largely beyond management’s control. In the Committee’s opinion, we performed extraordinarily well with respect to the goals related to property acquisitions and the pursuit of high impact projects. The Committee particularly noted the significant enhancement of our long-term growth potential through the successful production test of the Jack No. 2 well and the Kaskida discovery, both in the Lower Tertiary trend in the Gulf of Mexico; the significant augmentation of our position in the Barnett Shale field in north Texas through the acquisition of oil and gas properties from Chief Holdings LLC; and several other smaller acreage acquisitions in and around our core areas of operations. In the Committee’s opinion, these acquisitions, together with the successful pursuit of high impact projects like China block 42 – 05; an exploration joint venture with Bill Barrett Corporation in the Montana overthrust belt; and the potential expansion of Jackfish, our steam-assisted gravity drainage project in the Alberta oilsands, significantly increased stockholder value in terms of both immediate stock price appreciation and the addition of quality long-term assets.

 

With respect to the regulatory environment, the Committee determined that we managed favorable permitting turnaround times and conducted our operations in a manner so as to avoid any material operational delays related to regulatory action. In the business process area, it was the Committee’s opinion that we had made significant strides in improving the efficiency of business processes, increasing collaboration among divisions and departments, and increasing the use of industry benchmark analysis to improve performance measurement. The Committee did note that leadership development efforts had been delayed and that more progress was required in this area. The Committee also determined that each of our executive officers had contributed to our performance with respect to its 2006 goals in ways that were meaningful and appropriate for his or her function.

 

Available data indicates that Mr. Nichols’ annual cash bonus has averaged 81% of the 75^th percentile of market bonuses over the three years prior to 2006, and our executive officers as a group have earned cash bonuses that averaged 93% of the 75^th percentile of market bonuses over that same period. Bonuses paid to our executive officers as a group generally are consistent with our compensation philosophy of providing executives with the opportunity to earn bonuses at or near the 75^th percentile of bonuses of comparable executives of the comparison companies. The Committee believed that the Company’s positive performance and Mr. Nichols’ continued leadership in achieving our goals merited a bonus at the 75^th percentile of market bonuses and awarded Mr. Nichols’ 2006 bonus accordingly.

 

Long-Term Incentives

 

A key component of our compensation program is to reward executives for long-term strategic accomplishments and enhancement of longer-term stockholder value through equity-based long-term incentives, which include stock option grants and restricted stock awards. We believe that long-term incentive compensation plays an essential role in attracting and retaining executive officers and aligns their interests with the goal of maximizing stockholder value.

 

We have established long-term incentive target values for each level of responsibility within the Company, including the named executive officers. In determining the target value of long-term incentives to be awarded to our executives, the Committee considers comparable data from our peers, which is provided by the Compensation Consultant. The Committee also reviews with the Compensation Consultant the annual grant rates for equity-based awards (equity awards granted as a percentage of common shares outstanding) among peers and the general industry to ensure that the grants we make are competitive but not unduly dilutive to our stockholders.

 

Stock Option Grants

 

We grant stock options to each of our named executive officers once each year, generally in the month of December. Approximately 50% of each executive officer’s annual long-term incentive award is in the form of stock options. On the grant date, 20% of the stock options are immediately vested and exercisable.

An additional 20% of each grant vests and becomes exercisable on each of the first four anniversary dates of the original grant.

 

The grant of stock options is intended to align executives’ interests with those of stockholders by providing an incentive for executives to perform and behave in a manner that enhances stockholder value. Due to the significance of the risk/reward profile of stock options, executives stand to gain from their receipt of stock options only to the extent our common stock appreciates in value. The vesting schedule is intended to provide a continuous and consistent incentive to executives over an extended period.

 

Restricted Stock Awards

 

We also provide Restricted Stock Awards (“RSAs”) to each of our named executive officers once each year, generally in the month of December. Approximately 50% of each executive officer’s annual long-term incentive award is in the form of restricted stock. One quarter of each award vests on each of the first four anniversary dates of the original grant. As with stock options, the vesting schedule is intended to provide a continuous and consistent incentive to increase stockholder value over an extended period.

 

RSAs are grants of our common stock that will only be earned by an executive officer when the restrictions lapse (that is, once the RSAs become vested) and only if the individual continues to be employed by us at that time. Unlike stock options, which carry significant risk as well as reward opportunity for the executive officer, RSA awards generally have less down-side risk. While RSAs provide incentive for the executive officers to perform and behave in ways that drive longer-term stockholder value, their lower risk profile make them a very effective means of attracting and retaining top executive talent in our cyclical and competitive industry.

 

Available data indicates that in the last three years Mr. Nichols has received long-term incentive awards with a value of 77% of the 75^th percentile, our President, John Richels, has received long-term incentive awards with a value of 49% of the 75^th percentile, and our executive officers other than Messrs. Nichols and Richels have received long-term incentive awards near the 75^th percentile, in each case measured against long-term incentive awards for comparable executives at the comparison companies. Long-term incentives awarded to our executive officers other than Messrs. Nichols and Richels are consistent with our compensation philosophy of providing executives with the opportunity to earn long-term incentives at or near the 75^th percentile of long-term incentives paid to comparable executives at the comparison companies. However, the long-term incentives granted to Messrs. Nichols and Richels in 2005 fell significantly below that goal despite the Committee’s intention to reward each such individual for performance warranting long-term incentive awards in the range of the 75^th percentile of market long-term incentive awards. The Committee believed that our positive performance and Messrs. Nichols’ and Richels’ respective contributions to achieving our goals merited long-term incentive awards closer to the 75^th percentile of the long-term incentives paid to comparable executives at the comparison companies and adjusted Messrs. Nichols’ and Richels’ 2006 long-term incentive awards accordingly.

 

Total Compensation

 

The Committee reviews each executive’s base pay, bonus, and equity incentives annually with the guidance of the Committee’s Compensation Consultant. Available data indicates that over the last three years Mr. Nichols has earned total direct compensation near the market median, and the executive officers as a group have earned total direct compensation at 119% of market median and 82% of the 75^th percentile of the total direct compensation paid to comparable executives at the comparison companies. It is expected that Mr. Nichols’ bonus and the long-term incentives awarded to Messrs. Nichols’ and Richels’ will result in them receiving total direct compensation in line with our goal of paying total direct compensation between the 60^th percentile and the 75^th percentile.

 

In addition to these direct compensation elements, the Committee also reviews the deferred compensation program, perquisites and other compensation, and payments that would be required under various severance and change-in-control scenarios. In connection with the 2006 review, the Committee determined that these elements of compensation were reasonable in the aggregate.

 

Retirement and Other Benefits

 

Our executive officers are eligible for the same medical and dental insurance, accidental death

insurance, disability insurance, vacation, and other similar benefits as the rest of our full-time employees.

 

We offer all employees, including our executives, participation in two types of retirement plans.

 

Defined Contribution Retirement Plans

 

Our 401(k) Plan allows employees to defer a portion of their compensation into a retirement savings account. We will match the first six percent of each employee’s compensation (base pay and bonus) contributed to this plan, up to certain limits imposed by the IRS. Additionally, officers and certain other executives can elect to participate in our non-qualified deferred compensation plan (the “Deferred Compensation Plan”) which allows them to defer an additional portion of their cash compensation in a way that is tax effective for both the executive and us. The Deferred Compensation Plan allows participants to set aside more of their compensation for retirement than is allowed in the 401(k) Plan. In addition, to the extent that tax rules limit our ability to make the full six percent match of an employee’s or executive’s contribution in the 401(k) Plan, such contribution is made to the Deferred Compensation Plan. Our matching contributions to the 401(k) Plan and Deferred Compensation Plans are included in the “All Other Compensation” column of the “Summary Compensation” table on page 27.

 

Defined Benefit Retirement Plans

 

All employees, including our executives, are eligible to participate in our qualified Retirement Plan for Employees of Devon Energy (the “Defined Benefit Plan”). This plan provides benefits based on compensation and years of employment service with us. Each eligible employee who retires is entitled to receive annual retirement income of 65% (or 60% if compensation exceeds $220,000) of his or her “final average compensation” (which consists of the average of the highest three consecutive years’ compensation out of the last 10 years), less any benefits due to the participant under Social Security, times a fraction, the numerator of which is credited years of service and the denominator of which is 25 (or service projected to age 65 if greater, for employees whose compensation exceeds $220,000). This fraction cannot be greater than one. Employee contributions to this plan are neither required nor permitted. Benefits under this plan are reduced for certain highly compensated employees, including our executives, in order to comply with certain requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Code.

 

Officers and certain other executives are also eligible to participate in the non-qualified Benefit Restoration Plan (“BRP”). The purpose of this plan is to restore the benefits for selected employees because their benefits under the qualified plan are reduced because of ERISA and IRS limitations. The provisions of the BRP essentially mirror those of the Defined Benefit Plan. Any benefits to which an employee is entitled under this plan are offset by benefits payable under the Defined Benefit Plan.

 

We also offer participation in the Supplemental Retirement Income Plan (“SRIP”) to a certain group of senior officers. The purpose of this non-qualified plan is to provide additional retirement benefits for these executives. Executive officers may receive benefits under the SRIP or the BRP but no duplication of benefits is allowed. The SRIP provides superior benefits to the BRP, however, an executive’s benefits under the BRP vest after five years of service compared to 10 years of service required for vesting under the SRIP. Superior benefits under the SRIP as compared to the BRP include the following:

 

 

The present values of the accumulated benefits of our named executive officers under the Defined Benefit Plan and the SRIP are disclosed in the Pension Benefits Table on page 34.

 

Post-Termination or Change in Control Benefits

 

We currently have, or had at the time of termination of their employment, employment agreements with each of our named executive officers with the exception of Mr. Heatly, with whom we have a severance agreement. These agreements give the named executive officers certain additional compensation if their employment is involuntarily terminated other than for “cause” or if the executive voluntarily

terminates his or her employment for “good reason,” as those terms are defined in their agreements. Also, in these situations, the unvested long-term incentive awards for each of the named executive officers become fully vested and each of our named executive officers, with the exception of Mr. Heatly, become fully vested in his SRIP benefit.

 

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

 

In 2006, Robert A. Myers and Brian J. Jennings received payments under their employment agreements in connection with the termination of their employment, each such termination being other than for “cause.”

 

Other Benefits

 

We provide executive officers with other perquisites on a limited basis, including, in the case of the Chief Executive Officer and the President, limited personal use of our aircraft. Additionally, personal use of our aircraft by other officers may be appropriate if there is a health-related or other emergency reason, the flight coincides with a business-related flight, or if there is some urgent matter requiring the executive’s attendance.

 

Stock Ownership

 

While we encourage executives to maintain ownership of our stock and to hold vested stock options, we have not adopted any specific executive ownership criteria. We periodically review the number of shares of our stock owned by our executives and note that they generally maintain shares that we believe are sufficiently significant in value to align their interests with those of the stockholders.

 

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

 

David M. Gavrin, Chairman

Robert L. Howard

Peter J. Fluor

 

The following table summarizes the compensation of our named executive officers for the year ended December 31, 2006. The named executive officers are our Chief Executive Officer, our acting Chief Financial Officer, our three other most highly compensated executive officers at December 31, 2006, and two additional individuals whose compensation in 2006, as a result of severance payments, exceeded the compensation of the other named executive officers, but who were not employed by us as of December 31, 2006.

 

 

 

 

The following table shows the components of “All Other Compensation” in the previous table.

 

 

 

 

 

 

 

The following table shows the number of shares covered by exercisable and unexercisable options and unvested restricted stock awards held by our named executive officers on December 31, 2006.