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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 4, 2008

 

 

 

 

 

 

 

 

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:

 

 

Important Notice Regarding the Availability of Proxy Materials
for the Stockholder Meeting to be Held on June 4, 2008:

 

Our 2008 Proxy Statement and 2007 Annual Report
are available at www.proxydocs.com/dvn.

 

 

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TABLE OF CONTENTS

 

 

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

 

Proxy Statement

 

Annual Meeting Of Stockholders

 

June 4, 2008

 

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 4, 2008 at 8:00 a.m. We are first sending this Proxy Statement to our stockholders on or about April 25, 2008.

 

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 7, 2008 (the “Record Date”) are eligible to vote their shares at the Annual Meeting. As of the Record Date, there were 445,736,749 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:

 

 

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and simply follow the instructions on the screen, then confirm that your instructions have been properly recorded. If you vote on the Internet, you can request electronic delivery of future proxy materials. Internet voting for stockholders of record will be available 24 hours a day, and will close at 8:00 p.m. Central Daylight Time on June 3, 2008; or

 

 

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.

 

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, 2008, 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 who 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 Janice A. Dobbs 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. Dobbs 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. Dobbs 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,

 

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

 

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

 

Who will count the votes?

 

Georgeson Inc. 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, Computershare Trust Company, 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. Georgeson Inc., 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 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 of the Board of Directors 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.

 

The proposed amendment to our Restated Certificate of Incorporation to increase the number of authorized shares requires the affirmative vote of at least a majority of the shares of the Company’s outstanding common stock.

 

The proposed amendment to our Restated Certificate of Incorporation to elect directors annually requires the affirmative vote of at least two-thirds of the shares of the Company’s outstanding common stock.

 

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

 

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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. Because the proposed amendments to our Restated Certificate of Incorporation require the affirmative vote of the holders of the minimum numbers of the shares of our outstanding common stock noted above, abstentions and broker non-votes will have the effect of a vote “Against” the proposed amendments.

 

Who pays the solicitation expenses?

 

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

 

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

 

We will announce preliminary voting results at the Annual Meeting, and we will publish final results in our quarterly report on Form 10-Q for the second quarter of 2008 which will be filed 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 (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, 2008. 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.

 

Do you have plans to implement the new rules that allow companies to direct their stockholders to an on-line copy of the proxy materials, rather than mailing paper copies to the stockholders?

 

As you may have heard, new rules now allow companies to choose to mail their stockholders a notice that their proxy materials can be accessed over the internet instead of mailing a paper copy of the proxy statement and annual report. Stockholders of companies who choose this delivery method can always request delivery of a paper copy of the proxy materials. We have decided not to adopt this new delivery method for this year’s Annual Meeting materials. We are considering carefully how to realize the cost savings opportunity and the environmental benefits of avoiding the printing and mailing of these documents to stockholders who do not request paper copies, while still maintaining a meaningful and convenient proxy process for our stockholders.

 

Where can I reach you?

 

Our mailing address is:

 

Devon Energy Corporation

20 North Broadway

Oklahoma City, Oklahoma 73102-8260

 

Our telephone number is:

 

(405) 235-3611

 

 

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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 11 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 four Directors.

 

The Board of Directors has nominated incumbent directors David A. Hager, John A. Hill and Mary P. Ricciardello, whose terms expire at the Annual Meeting, for re-election as Directors for terms expiring at the Annual Meeting in the year 2011. Mr. Hager was recommended to the Governance Committee by the Company’s CEO and President, and Ms. Ricciardello was recommended by a third party independent consulting firm. Both were then nominated by the Governance Committee and appointed by the Board of Directors to serve as Directors in 2007, and are standing for election at the 2008 Annual Meeting. Nominees will serve until their successors are elected and qualified. David M. Gavrin was re-elected as a Director for a three-year term in 2007, but as disclosed in the Company’s 2007 proxy statement, will retire effective with the Annual Meeting. William J. Johnson’s term will expire at the Annual Meeting, at which time he and Mr. Gavrin will retire due to the age requirement for Board members in accordance with the Company’s Corporate Governance Guidelines. 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 2009 or 2010 Annual Meeting, as the case may be.

 

As a result of these resignations and the election of the Directors at the Annual Meeting, the Board, after the Annual Meeting, will be comprised of nine Directors in three classes, Class I having two Directors, Class II having four Directors and Class III having three Directors.

 

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.

 

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Our Board of Directors met eight times in 2007. All Directors attended 75% or more of the total meetings of the Board of Directors and Committees on which they served. We require a majority of our Directors be in attendance at our annual meetings of stockholders. All Directors attended the 2007 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 Philosophy, and our Corporate Social Responsibility Report.

 

The Board of Directors has a standing Audit Committee, Compensation Committee, Dividend Committee, Governance Committee and Reserves Committee. The following table shows the current membership of each committee, each committee’s functions, and the number of meetings each committee held in 2007:

 

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In accordance with our Corporate Governance Guidelines, the Board considered transactions and relationships between each Director or any member of the Director’s immediate family and us, our subsidiaries and affiliates. The Board has affirmatively determined that each of the current Directors and Peter J. Fluor, who served as a Director for a portion of 2007, with the exception of our Chairman and Chief Executive Officer, J. Larry Nichols, and our President, John Richels, is an independent Director as defined by the standards for director independence established by applicable laws, rules, and listing standards, including, without limitation, the standards for independent directors established by the NYSE, and the SEC, have no material relationship with us that would interfere with the exercise of independent judgment and, therefore, is independent under our Corporate Governance Guidelines and the NYSE.

 

The Board has a Lead Director whose primary responsibility is to preside over the executive session of the Board meeting in which Mr. Nichols, Mr. Richels and other members of management do not participate. The Lead Director also performs other duties that the Board may from time to time delegate to assist the Board in the fulfillment of its responsibilities. In 2007, 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 his retirement and a successor is named by the Board of Directors.

 

Any stockholder or other interested party may contact any of the Devon Directors, including the Lead Director or non-management directors as a group, by (i) U.S. mail 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 janice.dobbs@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 four 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.

 

During 2007 there have been no “related person transactions” as defined by applicable SEC regulations.

 

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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 2007:

 

 

 

 

 

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The following is a schedule of annual retainers and meeting fees for non-management Directors in effect during 2007:

 

 

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

 

In June 2007, our non-management Directors were granted an annual award of 3,000 stock options and 2,000 shares of restricted stock under our 2005 Long-Term Incentive Plan. Stock and option awards to non-management Directors are granted immediately following each Annual Meeting. Options vest on the date of grant and are granted at an exercise price equal to the closing price of our common stock on that date. Unexercised options will expire eight years from the date of grant. Stock awards vest 25% 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.

 

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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 four 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 2009 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:

 

 

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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.

 

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

 

John A. Hill, Chairman

William J. Johnson

Michael M. Kanovsky

Mary P. Ricciardello

 

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The Board of Directors maintains an Audit Committee which is comprised of four independent Directors. The Board and the Audit Committee believes that the Audit Committee’s current membership satisfies the rules of the NYSE that govern audit committee composition, including the requirement that audit committee members all be independent directors as that term is defined under the listing standards of the NYSE. Also, for purposes of complying with the listing standards of the NYSE, the Board has determined that Michael M. Kanovsky’s simultaneous service on the audit committees of three other 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 2007, 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, 2007 for filing with the SEC. The Audit Committee has approved KPMG LLP as the Company’s independent auditors for the year ending December 31, 2008.

 

Thomas F. Ferguson, Chairman

Michael M. Kanovsky

J. Todd Mitchell

Mary P. Ricciardello

 

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Under the terms of its charter, the Audit Committee approves the fees we pay our independent auditors. For the years ended December 31, 2007 and December 31, 2006, we paid the following fees to KPMG LLP:

 

		2007				2006
Audit fees		$	3,719,000			$	3,300,000
Audit related fees		$	275,000			$	290,000
Tax fees		$	205,000			$	323,000
All other fees		$	—			$	—
		$	4,199,000			$	3,913,000

 

Audit fees include services for the audits of the financial statements and the effective operation of our internal controls over financial reporting. Audit related fees consisted principally of audits of financial statements of 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 2007 and 2006 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.

 

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The Board of Directors established a Reserves Committee in 2004, comprised of four independent Directors, Messrs. Hager, 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2007 of reserves, having regard to industry practices and all applicable laws and regulations. In fulfilling its duties during 2007, 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, 2007 for filing with the SEC.

 

Robert L. Howard, Chairman

David A. Hager

William J. Johnson

J. Todd Mitchell

 

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We depend on the performance of highly-trained, experienced and committed executive officers who have the skill sets, education, experience, and personal qualities necessary to manage an oil and gas business to the benefit of its stockholders. Accordingly, our executive compensation program is designed and administered to attract and retain such individuals in a competitive market for talent. At the same time, we must be flexible enough to adapt to unexpected developments in the oil and gas industry and volatility in the commodities markets.

 

As used in this Compensation Discussion and Analysis:

 

 

Overview

 

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

 

 

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

 

The goals of the program are to:

 

 

The following table gives a broad overview of the elements of our executive compensation program, including the description and purpose of each element as well as market guidelines generally targeted by us. In each case, the desired market position is relative to executives at peer companies, which is discussed in further detail below under “Benchmarking.”

 

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Generally, we target total direct compensation for executive officers, which we define as the aggregate of base salary, annual cash bonus, and long-term incentive awards, between the 60^th and 75^th percentiles of the peer group. The most recent data available to the Company in 2007 indicated that its total direct compensation for named executive officers ranged from below the median to approximately the 75^th percentile at that time.

 

Balancing Pay for Near-Term and Long-Term Performance

 

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

 

Compensation Weighted Toward Incentive Pay

 

We believe that the proportion of an employee’s total direct 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 responsibility for, and influence over, our results, a significant portion of their overall compensation

 

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consists of incentive pay that is “at risk.” In 2007, for example, approximately 90% of the estimated value of the total direct compensation of our CEO was at risk. The estimated value of the total direct compensation at risk in 2007 for all other named executive officers ranged from approximately 80% to 90% of their total direct compensation.

 

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

 

Role of the Compensation Committee and Senior Executive Officers

 

Our executive compensation philosophy is established by 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.

 

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

 

The Committee takes into consideration the CEO’s and President’s recommendations, the Committee’s own review of competitive market data, recent Company performance, interviews with the senior executives and our compensation philosophy. The Committee then determines the pay levels for each named executive officer. In executive session and without any executive officer present, the Committee determines the CEO’s and President’s pay levels.

 

Mr. Heatly, the Company’s vice president of accounting, is included in the group of named executive officers solely because he is the Company’s principal financial officer and not because he was one of the most highly paid senior executive officers. Mr. Heatly was not a senior executive officer in 2007. Therefore, his salary and bonus were determined in accordance with the compensation practices applied to the other non-executive officers of the Company. For the purposes of the discussion of executive officer compensation practices set forth in this Compensation Discussion and Analysis, the term named executive officers does not included Mr. Heatly.

 

2007 pay decisions are discussed further in the “Executive Compensation in 2007” section below.

 

Role of the Independent Compensation Consultant

 

In 2007, the Committee retained the services of an independent compensation consulting firm, Hewitt Associates (the “Compensation Consultant”), to evaluate the competitiveness of our programs and assist with executive compensation program design. The Committee did not direct Hewitt to perform the above services in any particular manner or under any particular method. All of the decisions with respect to the Company’s executive compensation were made by the Committee alone. The Committee has the final authority to hire and terminate the Compensation Consultant, and the Committee evaluates the Compensation Consultant annually. The Company’s Board has adopted a policy that prohibits the Compensation Consultant from providing any service to the Company, or its management, other than the services provided to the Committee.

 

Benchmarking

 

To successfully compete for executive talent, the Company annually compares the compensation of its executives against the compensation of comparable executives. The Company

 

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establishes a peer group consisting of oil and gas and energy services companies having similar asset, revenue and enterprise value profiles as the Company. The Committee believes these metrics are appropriate for determining peers because they provide a reasonable point of reference for comparing similar positions and scope of responsibility.

 

For 2007, the Committee approved a peer group of 21 companies listed below:

 

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

 

The Company’s benchmarking analysis consists of all components of total direct compensation, including base salary, annual bonus and long-term incentives. The Compensation Consultant collected and summarized compensation data from the proxy statements of the peer group and the Compensation Consultant’s proprietary databases. The information available in comparing compensation paid by the Company in the past as well as setting current compensation typically is from the prior year. Thus, when setting current compensation, the Committee works with the Compensation Consultant to adjust the data to account for known or perceived changes in the market between the effective date of the data and the current date.

 

For 2007, the named executive officers were included in the benchmarking analysis. The Committee did not place any particular emphasis on the market benchmark data for Mr. Smette, as he has a unique role relative to other executives in the peer group. Please see the “Material Differences in Pay Decisions for Named Executive Officers” section for additional information.

 

Overview

 

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. As described earlier, the primary components of our executive compensation program are:

 

 

The design of each compensation element and 2007 pay decisions are described further in the sections that follow.

 

Base Salary

 

The Committee reviews and determines, on an annual basis, the base salaries of our named executive officers. Mr. Heatly’s base salary is determined by Mr. Richels. We consider a competitive base salary vital to ensuring the continuity of our management. The following factors are considered when establishing base salaries for the named executive officers:

 

 

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

 

The 2007 benchmarking indicated that base salaries for the named executive officers would generally meet the Company’s market objective on an overall basis, with individual salaries ranging from slightly below the median to above the 75^th percentile of the benchmarking data.

 

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

 

Annual Cash Bonus

 

The Committee awards, on an annual basis, cash bonuses to our named executive officers. Mr. Heatly’s cash bonus is determined by Mr. Richels. The Committee believes that executives’ cash bonuses should reflect, above all, the ongoing enhancement of shareholder value, both in the short-term and the long-term. In that regard, bonuses awarded by the Committee are intended to be competitive with the market while rewarding senior executives for:

 

 

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

 

When evaluating recent Company performance, the Committee considers performance against goals approved by the Board at the beginning of the year. The Company’s performance goals cover a number of both quantitative and qualitative targets. Consistent with the flexible nature of the annual bonus program, the Committee does not assign any specific weight to any particular performance goal nor is any specific weight assigned to the performance goals in the aggregate.

 

The Committee considers not only the Company’s performance during the year with respect to the quantitative and qualitative goals set at the beginning of the year, but also market and economic trends and forces, extraordinary internal and market-driven events, unanticipated developments, and other extenuating circumstances. In short, the Committee analyzes the total mix of available information (including performance against any quantitative performance goals) on a qualitative, rather than quantitative, basis in making bonus determinations.

 

For 2007, the Committee noted, in its evaluation of Company performance:

 

 

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Further, the Committee determined that the Company substantially met the goals related to:

 

 

With respect to finding and development costs, the Committee especially noted that the Company achieved competitive costs even while it invested significant capital in long-term projects that were not expected to yield new reserve additions in 2007. The Committee concluded that negative variances from performance goals were minor and due to circumstances largely beyond management’s control.

 

The Committee determined that the Company had substantially met the goals related to environmental, health and safety performance, though it noted that improvement was needed in the area of tracking corrective actions. With respect to regulatory matters, the Committee determined that the Company managed favorable permitting turnaround times and conducted our operations in a manner so as to avoid any material operational delays related to regulatory action. The Committee also found that considerable efforts had been made to broaden and strengthen the Company’s relationships with key stakeholders. In addition, the Committee considered the significant strides made by the Company in improving the efficiency of business processes. The Committee did note that workforce planning and leadership development efforts had been delayed but that momentum had been achieved in each of these areas.

 

The Committee conducted a thorough evaluation of individual senior executive performance, including the individual, in-depth interviews described above. Among the named executives for which it made bonus determinations, the Committee determined that each had made the expected balanced contribution to overall results.

 

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

 

The 2007 benchmarking indicated that bonuses for the named executive officers would generally meet the Company’s market objective on an overall basis, with individual bonuses ranging from below to above the 75^th percentile of the benchmarking data.

 

For additional detail on the bonuses awarded in 2007, please refer to the Summary Compensation Table.

 

Overview

 

A key component of our compensation program is to reward executives for long-term strategic accomplishments and enhancement of longer-term shareholder value through equity-based long-term incentives. 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 shareholder value.

 

The Company grants long-term incentive awards to named executive officers at the year-end Committee meeting in December. The Committee

 

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does not backdate stock option grants and does not time the grant of awards in coordination with the release of material nonpublic information.

 

We have established long-term incentive target values for each level of responsibility within the Company, including the named executive officers. Similar to our process for annual cash bonuses, in determining the value of long-term incentives to be awarded to our executives, the Committee takes into account:

 

 

For 2007, the Company made grants of long-term incentive awards to named executive officers in the form of stock options and time-vested restricted stock. One-half of the total award value was granted in options, and one-half of the award value was granted in restricted stock. We believe this combination provides a balance between shareholder value creation and executive stock ownership and retention.

 

Benchmarking conducted in 2007 indicated that the value of long-term incentives awarded to the named executive officers in 2006 generally fell below the Company’s market objective on an overall basis, with individual long-term incentive opportunities ranging from below to above the median.

 

Based on the 2007 benchmarking results and the Company’s compensation philosophy, the Committee approved the following grants during its year-end meeting:

 

Each type of award is described further below. For additional detail on the Company’s long-term incentive award grants in 2007, please refer to the Summary Compensation Table and the Grants of Plan-Based Awards Table.

 

Stock Options

 

Stock options are intended to align executives’ interests with those of shareholders by providing an incentive for executives to enhance shareholder 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 provides incentive to continue service with the Company for an extended period. For awards made in 2007, 20% of the stock options immediately vested and became exercisable on the grant date. An additional 20% of each grant vests and becomes exercisable on each of the first four anniversaries of the original grant.

 

Restricted Stock

 

Restricted stock awards are grants of our common stock that will only be earned by an executive officer when the restrictions lapse and only if the individual continues to be employed by us at that time. During the vesting period, the forfeitable value of a restricted stock award is less volatile than the forfeitable value of a stock option award with same economic value at grant. A more constant forfeitable value makes restricted shares an effective tool for

 

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attracting and retaining top executive talent in a competitive industry. For awards made in 2007, 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 provides incentive to continue service with the Company for an extended period.

 

Stock Ownership

 

While we encourage executives to own and hold our stock, we have not adopted any specific executive stock ownership criteria. We periodically review the number of shares owned by our executives and note that they generally maintain ownership levels we believe align their interests with those of shareholders. For additional detail on the stock owned by our named executive officers, please refer to the Stock Ownership Table on page 49.

 

Overview

 

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 participation in two types of retirement plans.

 

Our retirement plans and other benefits for our employees, including the named executive officers, are described in the sections that follow.

 

Defined Contribution Retirement Plans

 

Our 401(k) Plan allows employees to defer a portion of their compensation into a retirement savings account. We match up to 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, executives and certain other employees can elect to participate in our non-qualified deferred compensation plan (the “Deferred Compensation Plan”). 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 to 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 30.

 

Defined Benefit Retirement Plans

 

Our named executive officers 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 up to a maximum of 25 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 named executives, in order to comply with certain requirements of the Employee Retirement Income Security Act of 1974, as amended, (“ERISA”) and the Code.

 

Executive officers and certain other employees 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 Defined Benefit Plan are reduced due to Code 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, including all of the named executive officers. The purpose of this non-qualified plan is to provide additional retirement benefits for these executives. Executive officers may receive benefits under

 

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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 SRIP vest after 10 years of service compared to five years of service required for vesting under the BRP. Superior benefits under the SRIP as compared to the BRP are 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 37.

 

In 2007, we adopted an enhanced defined contribution structure related to our 401(k) Plan that became effective January 1, 2008. Participants in this enhanced defined contribution structure will continue to receive a discretionary matching contribution of 6% of their contributions to the 401(k) Plan, or 3% in the case of participants with less than five years of benefit service. These participants will also receive additional, nondiscretionary contributions by Devon calculated as a percentage of annual compensation. The percentage will vary based on the employee’s years of service.

 

On or before November 15, 2007, existing eligible employees elected to either continue to participate in the defined benefit plan or participate in the enhanced defined contribution structure of the 401(k) Plan. Employees who elected to continue participating in the defined benefit plan will continue to accrue benefits under the existing provisions of such plans and will receive a matching contribution of 6% of their contributions to the 401(k) Plan. Employees who elected to participate in the enhanced defined contribution structure will receive enhanced contributions to the 401(k) Plan and will retain the benefits that they have accrued under the defined benefit plan as of December 31, 2007. However, such employees will only be entitled to the benefits that they have accrued in the defined benefit plan as of December 31, 2007, after all applicable vesting requirements have been met. Employees hired on or after October 1, 2007 will not have an election and will only participate in the 401(k) Plan and the enhanced defined contribution structure.

 

Mr. Nichols’ compensation is higher than that of other currently employed executives primarily because of his seniority, his long tenure with the Company, his status as a founder of the Company, the compensation levels of comparable executives of other companies against whom his compensation is targeted, and his greater influence over and responsibility for the entire Company (as opposed to a distinct division or function). In addition, Mr. Nichols’ compensation recognizes the larger leadership role he has taken with respect to matters affecting the oil and gas industry, generally, at a time that the industry has been subjected to increased legislative, regulatory and media scrutiny.

 

Mr. Richels’ total compensation is higher than that of other named executive officers, except for Mr. Nichols, primarily because of his seniority, experience and stature in the industry, his reporting relationship to the CEO, the compensation levels of comparable executives of other companies against whom his compensation is targeted, and his greater influence over and responsibility for the entire Company (as opposed to a distinct division or function). In addition, Mr. Richels’ compensation recognizes the larger leadership role he has taken with respect to day-to-day Company matters as Mr. Nichols has been required to give more attention to industry matters.

 

Mr. Hadden’s and Mr. Smette’s total compensation levels reflect their roles and responsibilities as the heads of the Company’s two operating divisions - Mr. Hadden for

 

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exploration and production and Mr. Smette for midstream and marketing - their individual contributions to the Company and the officer team, and pay levels for similar positions at our peer companies. Because Mr. Smette also is responsible for the Company’s hedging program and procurement strategy, his role is somewhat unique versus our peer companies, and the Committee places less emphasis on market benchmarks when determining his compensation.

 

Mr. Heatly, the Company’s vice president of accounting, is included in the group of named executive officers solely because he is the Company’s principal financial officer and not because he was one of the most highly paid executive officers. As described above, Mr. Heatly was not a senior executive officer in 2007. Accordingly, his compensation arrangements are more in line with other non-senior executive officers.

 

We provide executive officers with other perquisites on a limited basis. For example, Messrs. Nichols and Richels may make personal use of our aircraft on a very limited basis; however, in most circumstances, they do not use the Company aircraft for personal trips. 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.

 

We currently have 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, becomes 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.

 

As described earlier, Mr. Heatly was not a senior executive officer in 2007. Accordingly, his benefits arrangements are more in line with other non-senior executive officers.

 

Please refer to the Potential Payments Upon Termination or Change In Control section for more information.

 

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 CEO or any other named executive officer except the Chief Financial Officer. One exception applies to “performance-based compensation” paid pursuant to shareholder-approved employee benefit plans (essentially, compensation that is paid only if the individual’s performance meets pre-established objective performance goals using performance measures approved by our shareholders).

 

Although we have generally attempted to structure executive compensation so as to preserve deductibility, we also believe that there are circumstances where our interests are best served by maintaining flexibility in the way compensation is provided, even if it results in the non-deductibility of certain compensation under the Code. A portion of the payments made under our current annual cash compensation program are not deductible in accordance with the provisions of Section 162(m). However, the Committee has determined that the benefit of enhanced flexibility in program design outweighs the value of the lost deduction.

 

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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.

 

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

 

 

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

 

David M. Gavrin, Chairman

David A. Hager

John A. Hill

Robert L. Howard

 

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The following table summarizes the compensation of our named executive officers for the years ended December 31, 2007 and 2006. The named executive officers are our Chief Executive Officer, our principal financial officer and our three other most highly compensated executive officers for the year ended December 31, 2007.

 

 

 

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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, 2007.

 

 

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