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Chesapeake Takes Heat for CEO Compensation Package

Some of Chesapeake Energy Corp.'s shareholders are voicing their disappointment in CEO Aubrey McClendon's 2008 generous compensation package, and at least one shareholder group wants more information on how it was determined.

McClendon's 2008 salary and bonus package were detailed in a Securities and Exchange Commission (SEC) filing by the company in late December (see NGI, Jan. 12). The latest brouhaha appears to have followed a filing to the SEC in late April that detailed how McClendon, his friends and family were enriched by certain actions of Chesapeake's board.

According to the SEC filings, McClendon received nearly $112 million from the company last year. He received a base salary of $975,000, a $77 million bonus and $20 million in stock awards. The $77 million bonus is a "well cost incentive award," which is the pay-out from McClendon having a direct ownership stake in Chesapeake wells, and the money must be reinvested in Chesapeake wells.

The SEC filing in April also details how the board last December paid McClendon $12.1 million for a collection of historical maps of the American Southwest, together with books, water color art and photographs. McClendon originally had paid a total of around $4 million for the items. In addition, the board last year paid $3.5 million to sponsor the Oklahoma City Thunder, a basketball team that is 20% owned by McClendon. The company also spent nearly $200,000 in 2008 to pay a catering company partly owned by the CEO.

In 2007 McClendon's total compensation package was about $18.8 million, which included the base salary, a bonus of about $2 million and $14 million in stock.

McClendon signed a new five-year contract with Chesapeake in 2007. To meet margin loan calls, the CEO was forced to sell most of his Chesapeake stock last year (see NGI, Oct. 13, 2008). McClendon then negotiated a new contract with the company. The agreement in 2007 had required McClendon to hold Chesapeake stock worth five times his annual salary and bonus; the 2008 contract lowered that requirement to only twice the salary and bonus.

The Louisiana Police Authority Retirement System (LPARS), one of Chesapeake's shareholders, alleges that the company bailed out McClendon after he lost money selling shares. In a lawsuit filed in U.S. District Court in Oklahoma, LPARS is seeking documents used to determine McClendon's compensation package.

"Given that Chesapeake's earnings dropped by half, the $75 million bonus appears not attributable to Mr McClendon's exemplary performance but rather to the extraordinary losses he sustained when his Chesapeake shares declined by 60%," said LPARS lawyer Marc Gross. "As such, the bonus appears to be a CEO bailout, while ordinary shareholders got stuck with their losses."

LPARS, which holds around 85,000 shares of Chesapeake, said, "There is a reasonable basis to believe that Chesapeake's officers and directors may have breached their fiduciary duties to the company by approving the contract, and in particular, the $75 million bonus."

An Oklahoma judge could rule this month whether the board has to allow shareholders to review the compensation decisions.

Writing about the upcoming shareholder meeting scheduled for June 12, Sanford Bernstein energy analyst Benjamin Dell suggested that the company make some reforms. Among Dell's suggestions: give investors the right to vote against allowing Chesapeake to increase the number of authorized common shares in the company. The board, said Dell, should "eliminate related-party transactions" with McClendon. In addition, he said McClendon's well participation "should be converted into equity, ideally in an arm's-length transaction."

Chesapeake had no comment on the lawsuit nor on the recommendations of Dell. The company is scheduled to issue its 1Q2009 quarterly earnings on Monday (May 4). A conference call to discuss earnings is scheduled Tuesday.

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