- The Washington Times - Tuesday, April 21, 2009

NEW YORK (AP) - Aubrey McClendon, the CEO of Chesapeake Energy Corp. who was forced to sell almost his entire stake in the company in October to cover a margin loan call, was given a huge incentive award at the end of 2008 that boosted his total compensation for the year to $112.5 million, according to an Associated Press analysis of data filed with regulators. That’s more than four times higher than his pay package a year earlier.

Data filed late Monday with the Securities and Exchange Commission show that the board of the Oklahoma City-based natural gas producer granted McClendon a $75 million incentive award on Dec. 31, even after its stock plummeted last year due to falling energy prices.

McClendon, 49, Chesapeake’s co-founder, owns a small stake in some of the company’s wells and is required to help cover the cost of developing and maintaining those wells. According to documents filed with the SEC, McClendon’s share of the well costs will now come from the bonus.

After taxes, McClendon will net $43.5 million from the award _ part of a five-year employment agreement that caps his salary at $975,000 and limits his annual cash bonuses to $1.95 million. The company can take back part of that money if McClendon resigns or is fired with cause.

Besides helping McClendon pay for his share of maintaining the wells, Chesapeake said the incentive award is meant to align his financial interests with the company and reward him for the role he played in several major transactions.

Nevertheless, the Louisiana Municipal Police Employee Retirement System, which owns 85,000 shares in the company, is seeking to force open Chesapeake’s books and determine the reasons behind the award. A hearing is scheduled in Oklahoma County District Court for May 26.

A lawyer for the group, Marc I. Gross, questioned why Chesapeake would need to pay its co-founder an additional award to secure his interest in the company.

“If he’s ready to abandon the company, then what does that say about the services the company was effectively buying from him?” Gross said in an interview.

Gross said there’s another reason for the hefty incentive award. Chesapeake is simply bailing out its chief executive after the company’s stock took a plunge last year as energy prices dropped, he said.

Chesapeake said in Monday’s filing that McClendon’s overall compensation reflects his role “in shaping the vision for the comany and growing it into the largest independent producer of U.S. natural gas.”

McClendon took a leadership role in transactions last year that generated a total of $10.3 billion in cash or cash equivalents, the company added.

“Nobody can fairly question Mr. McClendon’s value to this company, and the board believes Mr. McClendon deserved that bonus,” Chesapeake lawyer Henry Hood wrote in a letter last month responding to a media query about the incentive award.

A company spokesman on Tuesday declined further comment on McClendon’s pay package.

In addition to the $75 million award, McClendon was paid a $975,000 salary last year, unchanged from a year earlier, and received almost a $2 million bonus in July. He also received other compensation worth $1.8 million, including $648,096 worth of personal use of company aircraft, $577,113 in company-paid accounting services and $438,750 in matching contributions to Chesapeake’s retirement plan.

The company’s proxy also showed that he received restricted stock that the company valued at $32.7 million on the days they were granted in January and July 2008. That was before energy company shares plunged, taking down Chesapeake’s stock _ and the value of those awards _ in their wake.

For 2007, the CEO received a compensation package valued at $25.5 million.

The Associated Press formula is designed to isolate the value the company’s board placed on the executive’s total compensation package during the last fiscal year. It includes salary, bonus, performance-related bonuses, perks, above-market returns on deferred compensation and the estimated value of stock options and awards granted during the year.

The calculations don’t include changes in the present value of pension benefits, and they sometimes differ from the totals companies list in the summary compensation table of proxy statements filed with the SEC, which reflect the size of the accounting charge taken for the executive’s compensation in the previous fiscal year.

Last year, Chesapeake’s stock dropped from a June high of $74 to as low as $9.84 in early December, its lowest level since August 2003, before recovering to end the year at $16.17. It now trades just below $20 a share.

In October, McClendon was forced to sell 31.5 million shares _ nearly his entire stake in the company at the time _ to cover margin calls. Those shares, which were valued at $2.3 billion at their peak in July, were worth roughly $595 million when he sold them.

“Instead of suffering the loss, the company is bailing him out,” Gross said.

For 2008, Chesapeake’s net income fell to $623 million, about half of the $1.2 billion it earned in 2007. Revenue jumped 49 percent to $11.6 billion, buoyed by a first-half surge in natural gas prices.

But since peaking last summer at $13.69 per 1,000 cubic feet, natural gas has since tumbled 74 percent. On Monday, natural gas futures lost 2.9 cents to settle at $3.511 per 1,000 cubic feet. Because of the sustained drop in prices, Chesapeake said last week that it will cut natural gas production by 13 percent.

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