UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

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CENTENNIAL RESOURCE DEVELOPMENT, INC.

(Name of Registrant as Specified In Its Charter)

 

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Joint Letter from our Chairman and CEO

March 18, 2021

Dear Fellow Shareholders,  

On behalf of the Board of Directors of Centennial Resource Development, Inc., we are pleased to invite you to our 2021 Annual Meeting of Shareholders, which will take place on April 28, 2021 at 10:00 a.m., Central Time. As we collectively continue to face the challenges associated with the COVID-19 pandemic, we wish you and your families well. For the health and safety of our employees and our shareholders, we will be conducting the Annual Meeting as a virtual meeting of shareholders. The following pages of this Proxy Statement explain how you can attend the virtual meeting on the internet.

During 2020, the world was suddenly and unexpectedly impacted by COVID-19 and the ensuing global health pandemic creating unprecedented challenges for the global economy, our industry and our company. We took early action implementing protocols to protect the health and safety of our employees and their families, which allowed us to keep our workforce safe without experiencing any operational disruptions or reported COVID-19 workplace transmissions. As the crisis caused by COVID-19 resulted in extremely depressed commodity prices, we acted to preserve the financial health of our company by halting our drilling and completions activity for much of the second and third quarters of 2020.

During this period, we focused on reducing our cost structure and implemented numerous initiatives that enhanced our leverage profile, cash flow and capital efficiency. As oil prices strengthened later in the year, we resumed modest operational activity. Despite the significant challenges posed by the pandemic, we achieved many accomplishments in 2020 and early 2021. A few highlights are noted below. We believe we are well positioned for 2021 and beyond.

 

Completed our succession plan in April 2020 with the appointment of Sean Smith as Chief Executive Officer and Steve Shapiro as independent Chairman of the Board.

 

Transitioned to a free cash flow positive company, generating $40 million of free cash flow(1) in the second half of 2020, with proceeds used to repay borrowings under our credit facility.

 

Executed a debt exchange in May 2020 that reduced the principal amount of our senior notes by $127 million.  

 

Reduced our cost structure, including substantial improvements in lease operating expenses and well costs from 2019 levels.

 

Released our inaugural Corporate Sustainability Report in early 2021, which details our commitment to sustainable business practices as well as some 2020 achievements, including a 60% increase in recycled water usage and a 38% reduction in the percentage of natural gas flared from 2019 levels.

Your vote is important, and we encourage you to review this Proxy Statement and to vote promptly so that your shares will be represented at the Annual Meeting. We also cordially invite you to attend the Annual Meeting. On behalf of the Board of Directors and management, we express our appreciation for your continued support of our company.

Sincerely,

 

Steven J. Shapiro

Sean R. Smith

Chairman of the Board

Chief Executive Officer

 

(1)

Free cash flow is a non-GAAP financial measure. See Appendix A of this Proxy Statement for a reconciliation to net cash provided by operating activities, our most directly comparable financial measure calculated in accordance with GAAP.

 

1


 

Notice of 2021 Annual Meeting of Shareholders

To our Shareholders:

The 2021 Annual Meeting of Shareholders of Centennial Resource Development, Inc. will be a virtual meeting of shareholders conducted online at www.virtualshareholdermeeting.com/CDEV2021 on April 28, 2021 at 10:00 a.m. Central Time.

At the Annual Meeting, shareholders will be asked to:

 

1.

Elect three Class II directors to our Board of Directors, each for a term of three years;

 

2.

Approve, by a non-binding advisory vote, our named executive officer compensation;

 

3.

Ratify the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2021; and

 

4.

Transact such other business as may properly come before the Annual Meeting or any adjournment or postponement thereof.

All shareholders of record at the close of business on March 08, 2021, the record date for the Annual Meeting, will be entitled to notice of and to vote at the Annual Meeting.

Instead of mailing a printed copy of the proxy materials, including our 2020 Annual Report, to each shareholder of record, we are providing access to these materials via the internet. This reduces the amount of paper necessary to produce these materials, as well as the costs associated with mailing these materials to all shareholders. Accordingly, on or about March 18, 2021, a Notice Regarding the Internet Availability of Proxy Materials (the Notice) was mailed to our shareholders of record as of the record date. The Notice contains instructions on how to electronically access the proxy materials on the internet and how to vote your shares. Instructions for requesting a paper copy of the proxy materials are also contained in the Notice.

Your vote is important. Whether or not you expect to attend the Annual Meeting, please vote as promptly as possible by using the internet or telephone voting procedures described in the Notice and in this Proxy Statement or by requesting a printed copy of the proxy materials (including the proxy card) and completing, signing and returning the enclosed proxy card by mail. We thank you for your continued support and cordially invite you to attend the Annual Meeting.

 

 

By Order of the Board of Directors,

 

 

 

 

Davis O. O’Connor

 

Vice President, General Counsel and Secretary

 

 

Denver, Colorado

 

March 18, 2021

 

 

 

2


Table of Contents

 

 

 

Joint Letter from our Chairman and CEO

1

 

 

Notice of 2021 Annual Meeting of Shareholders

2

 

 

Proxy Statement Summary

4

Annual Meeting and Voting Details

4

Operational and Financial Performance

5

Environmental, Social and Governance (ESG) Highlights

5

Director Nominees

6

Corporate Governance and Compensation Highlights

6

 

 

Proposal 1: Election of Directors

8

Board Structure

8

Director Nomination Process

8

Summary of Director Qualifications

9

Director Nominees

9

Vote Required and Board Recommendation

11

Continuing Directors

11

 

 

Corporate Governance

14

Governance Highlights

14

Board Role in Risk Oversight

14

Board Independence

15

Succession Planning

15

Board Leadership Structure

15

Classified Board Structure

16

Majority Vote in Director Elections

16

Board Meetings

16

Committees of the Board

17

Director Education

19

Compensation Committee Interlocks and Insider Participation

19

Code of Business Conduct and Ethics

19

Complaint and Reporting Procedures

19

Annual Board and Committee Evaluation Process

20

Policies Relating to our Board

20

Shareholder Engagement

20

ESG Initiatives

21

 

 

Audit Committee Report

22

 

 

Compensation Discussion and Analysis

23

2020 Highlights

23

2020 Executive Compensation Program

26

Determination of Compensation

31

Other Compensation Practices and Policies

33

Early 2021 Compensation Decisions

34

 

 

 

 

 

Compensation Committee Report

36

 

 

Executive Compensation

37

Summary Compensation Table

37

Grants of Plan-Based Awards

38

Outstanding Equity Awards at Year-End

39

Option Exercises and Stock Vested in 2020

40

Potential Payments upon a Change in Control

40

CEO Pay Ratio

41

Compensation Risk Assessment

41

Director Compensation

41

 

 

Executive Officers

43

 

 

Certain Relationships and Related Person Transactions

44

Review and Approval of Related Person Transactions

44

Related Person Transactions Relating to Riverstone

45

 

 

Security Ownership of Certain Beneficial Owners and Management

46

Delinquent Section 16(a) Reports

48

 

 

Proposal 2: Approval of an Advisory Basis of our Named Executive Officer Compensation

49

Vote Required and Board Recommendation

49

 

 

Proposal 3: Ratification of Appointment of Independent Registered Public Accounting Firm

50

Principal Accounting Firm Fees

50

Audit Committee Approval

50

Vote Required and Board Recommendation

50

 

 

Annual Report

51

 

 

Other Business

51

 

 

Shareholder Proposals

51

 

 

Availability of Certain Documents

52

 

 

Questions and Answers about the Annual Meeting

53

 

 

Appendix A - Reconciliation of Free Cash Flow

57

 

 

 

 

 

 

 

 

 

 

 

 

 

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Proxy Statement Summary

This summary highlights information contained elsewhere in this Proxy Statement. This summary does not contain all of the information you should consider before voting. Please read the entire Proxy Statement before voting. For more complete information regarding our 2020 operational and financial performance and definitions of industry terms, please review our Annual Report on Form 10-K for the year ended December 31, 2020, which accompanies this Proxy Statement.

All references in this Proxy Statement to “we,” “our,” “us,” “Centennial” or the “Company” refer to Centennial Resource Development, Inc. and its subsidiaries.

Annual Meeting and Voting Details

2021 Annual Meeting Details

 

Date & Time

Location

Record Date

Wednesday, April 28, 2021

10:00 a.m. Central Time

Virtual meeting via live webcast at: www.virtualshareholdermeeting.com/CDEV2021

March 08, 2021

 

Board Recommendations on Voting Matters

 

Voting Matter

Voting Recommendation

Page Reference

Proposal 1: Election of Directors

FOR each Nominee

8

Proposal 2: Advisory Vote on Executive Compensation

FOR

49

Proposal 3: Ratification of Independent Auditors

FOR

50

 

Voting Your Shares

Even if you plan to attend the Annual Meeting, we strongly encourage you to vote as soon as possible by using one of the methods described below. In all cases, you will need to have your Control Number in hand, which is included on the Notice Regarding the Internet Availability of Proxy Materials (the Notice) or Proxy Card you receive in the mail. The deadline to vote is 11:59 Eastern Time on April 27, 2021 (the day before the Annual Meeting) except for voting that occurs during the Annual Meeting. If mailed, your completed and signed Proxy Card must be received by April 27, 2021.

 

By Internet

By Phone

By Mobile Device

By Mail

www.proxyvote.com

1-800-690-6903

Complete, sign, date and

return your Proxy Card in the

envelope provided

 

If you are the beneficial owner of shares held in street name (for example, your shares are held in your brokerage account), your method for accessing the proxy materials and voting may vary. Therefore, if you are a beneficial owner, please follow the instructions provided by your brokers or nominees to vote by internet, telephone or mail. You should contact your broker or nominee or refer to the instructions provided by your broker or nominee for further information.

You may receive more than one Notice, Proxy Card or other voting instruction form if your shares are held through more than one account (for example, through different brokers or nominees). Each Notice, Proxy Card or other voting instruction form only covers those shares held in the applicable account. If you hold shares in more than one account, you will have to provide voting instructions as to all your accounts to vote all your shares.

 

4


 

Operational and Financial Performance

As referenced in the letter from our Chairman and Chief Executive Officer (CEO), 2020 was a transformational year for us, with our capital efficiencies and cost saving initiatives driving free cash flow in the second half of 2020. Here are some highlights of what we achieved in 2020:  

   

   Generated free cash flow of $40 million in Q3 – Q4, with proceeds used to repay borrowings under our credit facility

   Reduced cost structure, including an 18% reduction in our combined lease operating and cash general & administrative expenses for the second half of 2020 compared to the prior year period (on a per Boe basis)

   Decreased drilling, completions and facilities costs to approximately $850 per lateral foot for each well completed in the second half of 2020 (a 29% reduction from Q4 2019)

   Executed a debt exchange that reduced the principal amount of our senior notes by $127 million  

   Reduced corporate oil decline rate to the low 30s from the low 50s at year-end 2019

 

 

 

Environmental, Social and Governance (ESG) Highlights

We are committed to producing oil and natural gas in a way that creates long-term value for our stakeholders, which includes the commitment to do so in an ethical, inclusive, pragmatic and environmentally and socially responsible way. That commitment extends throughout our operations and includes a dedication to superior performance with respect to environmental, social and governance (ESG) matters.

In early 2021, we published our inaugural Corporate Sustainability Report, which is available on our website at www.cdevinc.com/corporate-sustainability. The Report builds upon and substantially expands our prior ESG disclosures and covers our performance in environmental stewardship, regulatory compliance, health and safety, corporate governance, ethics, security, workforce diversity and development, wellbeing and community engagement matters. Hyperlinks to our website in this Proxy Statement are provided for convenience only, and the website content does not constitute a part of this document. The table below identifies some ESG highlights relating to 2020 performance from our Corporate Sustainability Report.  

 

Board

Governance

    Separated the roles of Chairman and CEO in 2020 with the appointment of an independent Chairman of the Board

 

 

 

ESG

Management

& Oversight

    Formed an ESG working group, consisting of select officers and employees from across the organization, to manage our ESG initiatives and regularly report to the Nominating, Environmental, Social and Governance (NESG) Committee  

 

 

 

Water

Recycling

    Recycled and reused 4.8 million barrels of water

    Increased recycled water usage by 60% from 2019 levels

 

 

 

Flaring

    Reduced the percentage of natural gas flared by 38% from 2019 levels

    Flared only 0.5% of total natural gas volumes produced in Q4 2020

 

 

 

Prioritizing

Pipelines

Over Trucks

    Transported 99% of our produced water by pipeline, reducing trucking-related emissions, improving safety, minimizing the potential for spills and lessening the impact on local roads

 

 

 

Responsibly Powering Our Operations

    Implemented the use of dual-fuel systems on drilling rigs and completion equipment to reduce diesel consumption and related emissions

    Connected our Reeves County, Texas wells to the electric grid, reducing the use of diesel and natural gas generators (and their related emissions) from 135 to 10

 

 

 

Health &

Safety

    Suffered 0 recordable employee injuries in 2020

    Suffered 0 reported workplace transmissions of COVID-19

5


 

Director Nominees

There are currently nine directors on our Board, divided into three equal classes. The table below identifies the director nominees named in this Proxy Statement, each of whom is currently a director and was previously elected to the Board by our shareholders.

 

Director Nominees

Age

Director

Since

Committee Membership

Audit

Compensation

NESG

Karl E. Bandtel

54

2016

 

Matthew G. Hyde

65

2018

 

Jeffrey H. Tepper

55

2016

 

 

 

 

= Chair

= Member

Corporate Governance and Compensation Highlights

We are committed to corporate governance and compensation practices that follow best practices, promote the long-term interests of our shareholders, strengthen our Board, foster management accountability and help build public trust in our company. The table below identifies some highlights.

 

Board & Committee Structure

 

Governance Practices

 

Compensation Practices

    Roles of Chairman of the Board and CEO are separate

    Majority voting in uncontested director elections

    Board committees include only independent directors

    Diverse Board skills and experience

 

    Board and Committee risk oversight

    Active shareholder engagement

    No employment agreements

    No shareholder rights (poison pill) or similar plan

    Non-hedging and non-pledging policies for our company securities

    Director education

    Related person transactions policy

 

    Pay-for-performance philosophy

    Stock Ownership Guidelines

    Independent Compensation Consultant

    Annual equity grants to directors

    Compensation clawback policy

    Compensation risk assessment

    Double-trigger change-in-control benefits

    No tax gross-ups for change-in-control payments

    ESG performance goals included in Annual Incentive Program (AIP)

2020 Executive Compensation

Our executive compensation program ties a significant portion of our named executive officers’ compensation to the operational, financial and stock price performance of our company. The following graphic illustrates how our executives’ realized pay in 2020 aligns with our 2020 stock price performance.

 

 

In addition to the direct and meaningful impact of our stock price decline on our executives’ realized pay, the following events and Compensation Committee actions impacted their 2020 realized pay:

6


 

 

Performance stock units granted in 2017 achieved a 0% payout in 2020 given our shareholder returns during the 2017-2020 performance period compared to our peers.

 

Compensation Committee exercised negative discretion in determining to award 2020 AIP compensation to executives at 90% of target.  

 

Compensation Committee reduced the base salaries of our executives in May 2020, with reductions ranging from 10% to 25%, which remained in place until unreduced salaries were restored by the Committee on February 25, 2021.

As used above, Target pay refers to the target total compensation for our executives for 2020, which equals the total of the executive’s 2020 unreduced base salary, target Annual Incentive Program (AIP) award for 2020 and grant date value of 2020 Long-Term Incentive Program (LTIP) awards. Realized pay refers to the total of the executive’s 2020 base salary, paid cash AIP awards for 2020 and the market value at vesting of previously granted stock-based awards that vested during 2020. NEOs or executives refer to our named executive officers, who are identified below on page 26 in the section called “2020 Executive Compensation Program.”

 

The alignment between our executives’ realized pay and stock price performance reflects our pay-for-performance philosophy where a significant portion of the executives’ compensation is performance-based. The graphic to the right reflects the mix of compensation elements for our CEO in 2020. Executive compensation is heavily weighted towards variable, or “at-risk,” pay elements that are only earned based on achievement of performance goals or through continued employment through the award’s vesting period. The ultimate realized value of these variable pay elements, if earned at all, varies based on company performance as determined by our Compensation Committee, as well as our stock price.

 

CEO Compensation Mix

 

 

 

Shareholder Outreach and 2020 Say-on-Pay Vote

We believe that maintaining an open dialogue with our shareholders provides critical feedback for our Board and executive management team on a wide range of topics including our short- and long-term business strategy, ESG matters, performance, governance practices, executive compensation program and other matters of importance. As part of this commitment, and partially in response to a say-on-pay vote at our 2020 Annual Meeting of Shareholders that was lower than in previous years, our Board and management team expanded our regular shareholder engagement to better understand the views of our shareholders. Through this process, we reached out to our 30 largest shareholders, who collectively hold about 60% of our outstanding shares, as well as certain additional shareholders that were significant shareholders during 2020. The table below provides a summary of what we heard from shareholders and how we have responded.

 

What We Heard

 

How We Responded

    Use a rate of return metric in the Annual Incentive Program (AIP) that can be calculated based on GAAP financial statements

    Move towards a more formulaic AIP

    Increase disclosure of environmental, social and governance (ESG) factors

    Include additional metrics in the Long-Term Incentive Program (LTIP) with an increased tie to absolute performance

    Some of our shareholders disfavor a classified board structure

    Incorporated a GAAP-based rate of return metric (Cash Returned on Capital Employed) into the 2021 AIP

    Redesigned the AIP with formulaic scoring for 2021 program

    Increased disclosure of ESG factors in this Proxy Statement and issued our inaugural Corporate Sustainability Report

    Included quantitative and qualitative ESG goals in our 2021 AIP

    Compensation Committee is considering appropriate avenues to include additional metrics for 2021 LTIP awards

    Board annually reviews our board structure and continues to believe our current structure is appropriate and in the best interests of shareholders

 

7


 

Proposal 1

Election of Directors

Board Structure

There are currently nine directors on our Board, divided into three equal classes. The terms of office of the three Class II directors will expire at the Annual Meeting. Each nominee is currently a director, and all nominees were previously elected to the Board by our shareholders.

The following table provides a snapshot of the current members of the Board and its committees.

 

Director Nominees

Class

Term

Expires

Director

Since

Committee Membership

Audit

Compensation

NESG

Karl E. Bandtel

II

2021

2016

 

Matthew G. Hyde

II

2021

2018

 

Jeffrey H. Tepper

II

2021

2016

 

Continuing Directors

 

 

 

 

 

 

Pierre F. Lapeyre, Jr.

III

2022

2016

 

 

 

David M. Leuschen

III

2022

2016

 

 

 

Sean R. Smith

III

2022

2020

 

 

 

Maire A. Baldwin

I

2023

2016

Steven J. Shapiro (Chairman)

I

2023

2019

 

Robert M. Tichio

I

2023

2016

 

 

 

 

 

 

 

 

= Chair

= Member

 

Director Nomination Process

The Nominating, Environmental, Social and Governance (NESG) Committee of our Board identifies, evaluates and recommends director candidates to our Board with the goal of identifying individuals with a high level of personal and professional integrity, strong ethics and values and the ability to make mature business judgments. In evaluating director candidates, the NESG Committee may also consider certain other criteria as set forth in our Corporate Governance Guidelines, including:

 

the candidate’s experience in corporate management, such as serving as an officer or former officer of a publicly held company;

 

the candidate’s experience as a board member of another publicly held company and, in the case of an incumbent director, such director’s past performance on our Board;

 

the candidate’s professional and academic experience relevant to our industry;

 

the strength of the candidate’s leadership skills;

 

the candidate’s experience in finance and accounting and/or executive compensation practices;

 

the diversity of the Board in terms of gender, race, ethnicity, age, sexual orientation, professional background and otherwise; and

 

whether the candidate has the time required for preparation, participation and attendance at Board meetings and committee meetings, if applicable.

The NESG Committee and the Board monitor the mix of specific experience, qualifications and skills of our directors in order to ensure that the Board, as a whole, has the necessary tools to perform its oversight function effectively. The NESG Committee identifies candidates through the personal, business and organizational

8


 

contacts of the directors and management, as well as through executive search firms engaged by the NESG Committee to assist in the process.

We are committed to building a diverse Board comprised of individuals from different backgrounds, including differences in viewpoints, education, gender, race or ethnicity, age and other individual qualifications and attributes. While our Board is comprised of directors with diverse background, experience and gender, our Board currently lacks diversity in terms of race and ethnicity, and we are seeking opportunities to enhance this diversity. In 2020, we revised our director nomination process to better reflect our commitment to board diversity, including the clarification that any search firm retained by our NESG Committee to assist in a director search process will be directed to present a diverse pool of candidates, including women, minority and other candidates of underrepresented communities.

Our Corporate Governance Guidelines require that each nominee for director sign and deliver to our Board an irrevocable letter of resignation that becomes effective if (a) the nominee does not receive a majority of the votes cast in an uncontested election, and (b) the Board decides to accept the resignation. The Board has received such conditional letters of resignation from each of the nominees named in Proposal 1.

While the NESG Committee will consider nominees suggested by shareholders, it did not receive any shareholder nominations for the Annual Meeting prior to the deadline for such nominations.

Summary of Director Qualifications

The biographies of the members of our Board have a diversity of experience and a wide variety of backgrounds, skills, qualifications and viewpoints that strengthen their ability to carry out their oversight role on behalf of our shareholders. The following matrix highlights key qualifications, skills, diversity and other attributes each director brings to the Board. More details on each director’s qualifications, skills and expertise are included in the director biographies on the following pages.

 

 

Maire

Baldwin

Karl

Bandtel

Matthew

Hyde

Pierre

Lapeyre

David

Leuschen

Steven

Shapiro

Sean

Smith

Jeffrey

Tepper

Robert

Tichio

Age

55

54

65

58

69

69

48

55

43

Tenure

4

4

3

4

4

1

1

5

4

Gender Diversity

 

 

 

 

 

 

 

 

Accounting / Financial Oversight

 

 

Business Development / M&A

 

 

ESG Oversight

 

 

 

 

 

 

 

Executive Leadership

 

 

 

 

 

Finance / Capital Markets

 

 

 

Geology / Reservoir Engineering

 

 

 

 

 

 

 

Investor Relations

 

 

 

 

 

 

 

Marketing / Midstream

 

 

 

 

 

Public Company Board

 

 

 

 

Strategic Planning / Risk Management

 

 

 

Director Nominees

The three nominees for election as Class II directors are listed below. If elected, the nominees will serve on our Board for a term of three years expiring at our Annual Meeting of Shareholders in 2024 and until their respective successors are duly elected and qualified. Each of the nominees currently serves on our Board.

If prior to the Annual Meeting a nominee becomes unavailable to serve as a director, any shares represented by a proxy directing a vote will be voted for the remaining nominees and for any substitute nominee(s) designated by our Board. As of the mailing of these proxy materials, our Board has no reason to believe any director nominee would not be available to serve.

9


 

Karl E. Bandtel

 

Independent

Director since 2016

Age: 54

 

Committees

NESG Committee (Chair)

Audit Committee  

 

Karl E. Bandtel has served as a director since October 2016. Mr. Bandtel was a Partner at Wellington Management Company, where he managed energy portfolios from 1997 until June 30, 2016, when he retired. He holds a Master of Business Administration and a Bachelor of Business Administration from the University of Wisconsin-Madison.

We believe Mr. Bandtel is qualified to serve on our Board due to his extensive experience in evaluating and investing in energy companies, both public and private, and to his executive management skills developed as part of his career with Wellington Management Company.

 

Matthew G. Hyde

 

Independent

Director since 2018

Age: 65

 

Committees

NESG Committee

Compensation Committee  

 

Matthew G. Hyde has served as a director since January 2018.  Previously, Mr. Hyde was Senior Vice President of Exploration at Concho Resources Inc. from 2010 to 2016.  After leaving Concho, Mr. Hyde was retired until joining our Board in January 2018. From 2008 to 2010, Mr. Hyde served as Concho’s Vice President of Exploration and Land.  From 2001 to 2007, Mr. Hyde was an Asset Manager of Oxy Permian, a business unit of Occidental Petroleum Corporation (NYSE: OXY).  Mr. Hyde served as President and General Manager of Occidental Petroleum Corporation’s international business unit in Oman from 1998 to 2001.  Prior to that role, Mr. Hyde served in a variety of domestic and international exploration positions for Occidental Petroleum Corporation, including Regional Exploration Manager responsible for Latin American exploration activities.  From 2008 to 2012, Mr. Hyde served in various leadership positions, including the Executive Committee and Chairman of the Board, for the New Mexico Oil & Gas Association (NMOGA), which promotes the safe and environmentally responsible development of oil and natural gas resources in New Mexico.  Mr. Hyde has also served as a director of privately held Birch Permian Holdings, Inc. since April 2018. He is a graduate of the University of Vermont and the University of Massachusetts where he obtained Bachelor of Arts and Master of Science degrees, respectively, in Geology.  Mr. Hyde also holds a Master of Business Administration from the University of California, Los Angeles.  

We believe Mr. Hyde is qualified to serve on our Board due to his extensive management and operational experience in the upstream oil and gas industry, including in the Permian Basin.

 

Jeffrey H. Tepper

 

Independent

Director since 2016

Age: 55

 

Committees

Audit Committee (Chair)

Compensation Committee

 

Jeffrey H. Tepper has served as a director since February 2016.  Mr. Tepper is Founder of JHT Advisors LLC, an M&A advisory and investment firm.  From 1990 to 2013, Mr. Tepper served in a variety of senior management and operating roles at the investment bank Gleacher & Company, Inc. and its predecessors and affiliates, where he was Head of Investment Banking and a member of the Firm’s Management Committee. As Gleacher’s former Chief Operating Officer, he also oversaw operations, compliance, technology and financial reporting.  In 2001, Mr. Tepper co-founded Gleacher’s asset management activities and served as President. Gleacher managed over $1 billion of institutional capital in the mezzanine capital and hedge fund areas. Mr. Tepper served on the Investment Committees of Gleacher Mezzanine and Gleacher Fund Advisors.  Between 1987 and 1990, Mr. Tepper was employed by Morgan Stanley & Co. as a financial analyst in the mergers & acquisitions and merchant banking departments.  Mr. Tepper has been a director of Decarbonization Plus Acquisition Corporation (NASDAQ: DCRB) since 2020 and was previously a director of Alta Mesa Resources, Inc. from March 2017 to June 2020.  Mr. Tepper received a Master of Business Administration from Columbia Business School and a Bachelor of Science in Economics from The Wharton School of the University of Pennsylvania with concentrations in finance and accounting.  

We believe Mr. Tepper is qualified to serve on our Board due to his significant investment and financial experience, particularly as it relates to mergers and acquisitions, corporate finance, leveraged finance and asset management.


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Vote Required and Board Recommendation

The election of each of our Class II director nominees requires the vote of a majority of the votes cast at the Annual Meeting, which means the number of votes cast “FOR” such nominee exceeds the number of votes cast “AGAINST” such nominee. Abstentions and broker non-votes will not be counted as votes cast and, therefore, will not have an effect on the outcome of the election of directors.

 

 

Our Board unanimously recommends that you vote “FOR” the election of each of the director nominees named above.

 

Continuing Directors

The terms of the six Class III and Class I directors will continue after the Annual Meeting and will expire at our 2022 (Class III) or 2023 (Class I) Annual Meeting of Shareholders. The biographies of these Continuing Directors are listed below.

 

Maire A. Baldwin

 

Independent Director

Director since 2016

Age: 55

 

Committees

Compensation Committee (Chair)

Audit Committee

NESG Committee

 

Maire A. Baldwin has served as a director since October 2016 and was previously the Lead Independent Director from May 2018 to March 2020. Ms. Baldwin was employed as an Advisor to EOG Resources, Inc. (NYSE: EOG), an independent U.S. oil and gas company from March 2015 until April 2016. Prior to that, she served as Vice President Investor Relations at EOG from 1996 to 2014. Ms. Baldwin has served as a director of the Houston Parks Board since 2011, a non-profit dedicated to developing parks and green space in the greater Houston area where she serves on several committees. She is co-founder of Pursuit, a non-profit dedicated to raising funds and awareness of adults with intellectual and developmental disabilities. Ms. Baldwin has a Master of Business Administration and a Bachelor of Arts degree in Economics from the University of Texas at Austin.

We believe Ms. Baldwin is qualified to serve on our Board due to her experience in the energy industry. From her executive experience with EOG, Ms. Baldwin has a deep understanding of the oil and gas industry generally and investor relations issues specifically, which we believe gives her an important insight into best practices relating to shareholder engagement and an understanding of the investment community’s expectations for public companies in our industry.

 

Pierre F. Lapeyre, Jr.

 

Director since 2016

Age: 58

 

 

Pierre F. Lapeyre, Jr. has served as a director since October 2016. Mr. Lapeyre is a Founder of Riverstone Holdings, LLC, a private equity firm specializing in energy investments and has been a Partner/Senior Managing Director since 2000. Prior to founding Riverstone, Mr. Lapeyre was a Managing Director of Goldman Sachs in its Global Energy and Power Group. Mr. Lapeyre joined Goldman Sachs in 1986 and spent his 14-year investment banking career focused on energy and power, particularly the midstream, upstream and energy service sectors. Mr. Lapeyre served as a non-executive board member of Riverstone Energy Limited (LSE: REL) from May 2013 until October 2020 and serves on the boards of directors or equivalent bodies of a number of public and private Riverstone portfolio companies and their affiliates. Mr. Lapeyre has also served as a director of Decarbonization Plus Acquisition Corporation (NASDAQ: DCRB) since August 2020, Decarbonization Plus Acquisition Corporation II (NASDAQ: DCRNU) since February 2021, and he was previously a director of Alta Mesa Resources, Inc. from February 2018 until June 2020. He has a Master of Business Administration from the University of North Carolina at Chapel Hill and a Bachelor of Science in Finance and Economics from the University of Kentucky.

We believe Mr. Lapeyre is qualified to serve on our Board due to his extensive financing, mergers and acquisitions and investing experience in the energy and power industries. Furthermore, as a result of Mr. Lapeyre’s service on the boards of various energy and power companies, he is able to share best practices relating to transactions, risk oversight, shareholder engagement, corporate governance, corporate responsibility and management.

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David M. Leuschen

 

Director since 2016

Age: 69

 

 

David M. Leuschen has served as a director since October 2016. Mr. Leuschen is a Founder of Riverstone and has been a Senior Managing Director since 2000. Prior to founding Riverstone, Mr. Leuschen was a Partner and Managing Director at Goldman Sachs and founder and head of the Goldman Sachs Global Energy and Power Group. Mr. Leuschen joined Goldman Sachs in 1977, became head of the Global Energy and Power Group in 1985, became a Partner of that firm in 1986 and remained with Goldman Sachs until leaving to found Riverstone in 2000. Mr. Leuschen also served as Chairman of the Goldman Sachs Energy Investment Committee, where he was responsible for screening potential investments by Goldman Sachs in the energy and power industries and was responsible for establishing and managing the firm’s relationships with senior executives from leading companies in all segments of the energy and power industry. Mr. Leuschen has served as a non-executive board member of REL since May 2013 and serves on the boards of directors or equivalent bodies of a number of private Riverstone portfolio companies and their affiliates. Mr. Leuschen has also served as a director of Decarbonization Plus Acquisition Corporation (NASDAQ: DCRB) since August 2020, Decarbonization Plus Acquisition Corporation II (NASDAQ: DCRNU) since February 2021 and was previously a director of Alta Mesa Resources, Inc. from February 2018 until June 2020. Mr. Leuschen received a Master of Business Administration from Dartmouth’s Amos Tuck School of Business and a Bachelor of Arts degree from Dartmouth College.

As a founder of Riverstone, Mr. Leuschen has overseen investments in, and the operations of, various companies in the energy and power industries. Mr. Leuschen also serves as a director on the boards of various other energy and power companies, which we believe further enhances his understanding of the industry and perspective on best practices relating to corporate governance. For these reasons, among others, we believe Mr. Leuschen is qualified to serve as a director.

 

Steven J. Shapiro

 

Independent Chairman of the Board

Director since 2019

Age: 69

 

Committees

Compensation Committee

NESG Committee

 

Steven J. Shapiro has served as a director since October 2019 and became the Chairman of the Board in April 2020. Mr. Shapiro is a Senior Advisor to Outfitter Energy Capital, a private equity group focused on the energy industry, a position he has held since December 2016. From 2006 through December 2016, Mr. Shapiro was a Senior Advisor to TPH Partners, the legacy private equity business of Tudor, Pickering, Holt & Co. From 2000 to 2006, Mr. Shapiro held various leadership positions at Burlington Resources Inc., an oil and gas exploration and production company, including Executive Vice President of Finance and Corporate Development and Executive Vice President and Chief Financial Officer. While at Burlington Resources, he also served on the Board of Directors starting in 2004. From 1993 to 2000, Mr. Shapiro served as Senior Vice President, Chief Financial Officer and Director at Vastar Resources, Inc., an oil and gas exploration and production company. Previously, Mr. Shapiro spent 16 years with Atlantic Richfield Company, a global oil and gas company, beginning as a planning analyst in 1977 and later holding a variety of positions in ARCO’s coal and minerals businesses.

Mr. Shapiro is also a Director of Elk Meadows Resources, LLC, a private oil and gas exploration and production company, a position he has held since 2013. Mr. Shapiro previously served from 2004 to January 2019 as a Director of Barrick Gold Corporation, a gold mining company (Nasdaq: GOLD); from 2010 to 2017 as Chairman of GeoSynFuels, LLC, a private biofuels company; from 2006 to 2012 as a Director of El Paso Corporation, an oil and gas exploration and production company; and from 2010 to 2012 as a Director of Asia Resource Minerals PLC, a coal exploration and mining company. Mr. Shapiro holds an undergraduate degree in Industrial Economics from Union College and a Master of Business Administration from Harvard University.

From his executive experience with Burlington Resources, Mr. Shapiro has significant oil and gas operating experience and knowledge of the complex financial issues that public companies face. Mr. Shapiro has also served on the Board of Directors of other publicly traded companies, and we believe his knowledge and experience in this area will further strengthen our Board.

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Sean R. Smith

 

Director since 2020

Age: 48

 

 

Sean R. Smith has served as our Chief Executive Officer and as a director since April 2020. Previously, Mr. Smith served as our Chief Operating Officer since October 2016. From May 2014 until October 2016, he served as Vice President, Geosciences of Centennial Resource Production, LLC, the private Centennial that was later acquired in connection with our business combination. Prior to joining Centennial, Mr. Smith worked at QEP Resources from February 2013 to May 2014, where he served in several roles, including as a General Manager, leading the geoscience, regulatory and reservoir engineering departments for the Williston, Powder River and Denver Julesburg Basins. Prior to QEP Resources, from 2005 to February 2013, Mr. Smith worked at Resolute Energy Corporation as a Manager and Geologist. He has also worked in various geotechnical roles at Kerr-McGee and Sanchez Oil & Gas. Mr. Smith earned his Bachelor of Arts degree in Geology from Lawrence University.  He is licensed with the Texas Board of Professional Geoscientists.

We believe that Mr. Smith’s role as the Chief Executive Officer, as well as his substantial experience with and understanding of the energy industry and public companies generally and our company and its assets specifically, qualify him to serve as a member of our Board. 

 

Robert M. Tichio

 

Director since 2016

Age: 43

 

 

Robert M. Tichio has served as a director since October 2016. Mr. Tichio is a Partner of Riverstone and joined Riverstone in 2006. Prior to joining Riverstone, Mr. Tichio was in the Principal Investment Area of Goldman Sachs, which manages the firm’s private corporate equity investments. Mr. Tichio began his career at J.P. Morgan in the Mergers & Acquisitions group where he concentrated on assignments that included public company combinations, asset sales, takeover defenses and leveraged buyouts. Mr. Tichio serves on the boards of a number of Riverstone portfolio companies and their affiliates and has been a director of Talos Energy Inc. (NYSE: TALO) since April 2012.  Mr. Tichio has been a director of Decarbonization Plus Acquisition Corporation (NASDAQ: DCRB) since August 2020 and currently serves as the Chairman. He has also been a director of Decarbonization Plus Acquisition Corporation II (NASDAQ: DCRNU) since December 2020. He holds a Master of Business Administration from Harvard Business School and a Bachelor of Arts degree from Dartmouth College.

We believe Mr. Tichio is qualified to serve on our Board due to his capital markets and mergers and acquisitions experience. Mr. Tichio also serves as a director on the boards of other energy companies, which we believe further enhances his understanding of the industry and perspective on best practices relating to corporate governance, management and capital markets transactions.

 

 

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Corporate Governance

Governance Highlights

We are committed to corporate governance practices that promote the long-term interests of our shareholders, strengthen our Board, foster management accountability and help build public trust in our company. The table below sets forth some of our most important governance highlights, which are described in more detail in this Proxy Statement.

Board and Committee Structure

 

    Independent Chairman of the Board

    Classified Board

    5 of 9 Independent Directors

    Independent Committee Members

    Diverse Board Skills and Experience

    Majority Voting in Uncontested Director Elections

 

Board and Committee Governance; Board’s Role in Risk Oversight

 

    Corporate Governance Guidelines

    Annual Board and Committee Self-Evaluations

    Code of Business Conduct and Ethics

    Director Education

    Board and Committee Risk Oversight

    Active Shareholder Engagement

    No Shareholder Rights (Poison Pill) or Similar Plan

    Confidential Complaint and Reporting Procedures

    Regular Review and Update of Committee Charters and other Governance Policies

    Review of Related Person Transactions and other potential Conflicts of Interests

Our website (www.cdevinc.com) includes materials that are helpful in understanding our corporate governance practices, including our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Policy for Related Person Transactions, Policy for Accounting-Related Complaints and charters for the committees of our Board. 

 

Board Role in Risk Oversight

As an oil and gas exploration and production company, we encounter a variety of risks, including, among others, commodity price volatility and supply and demand risks, risks associated with rising costs of doing business, availability of capital and financing, risks associated with our development, acquisition and production activities, environmental and other regulatory risks, weather-related risks and political instability. In 2020, many of the risks we face were exacerbated by COVID-19 and the ensuing global health pandemic. We encourage you to read our discussion of some of the risks we face in the “Risk Factors” section of our 2020 Annual Report.

Our senior management is responsible for the day-to-day management of the risks we face. We have a Risk Management Committee comprised of our Chief Financial Officer, Chief Operating Officer and General Counsel, and such other officers and employees as may be appointed from time to time by the committee. The committee meets regularly to identify, assess and manage our risk exposures and periodically reports significant risk exposures to the Audit Committee or the Board.

Our Board, directly and through its committees, oversees our management of risk exposures. Specifically, our Board is responsible for ensuring that the risk management processes designed and implemented by management are adequate to address the risks we face and function as intended. Accordingly, during the course of each year, the Board (1) reviews and approves management’s operating plans and considers any risks that could affect operating results, (2) reviews the structure and operation of our various departments and functions and (3) in connection with the review and approval of particular transactions and initiatives, reviews related risk analyses and mitigation plans.

The Board has delegated certain risk oversight responsibility to its Committees. The following table identifies the primary risk oversight of each Committee.

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Audit Committee

Compensation Committee

NESG Committee

     Financial statements and financial reporting processes

     Related person transactions

     Cybersecurity

     Oil and gas reserves

     Management’s general guidelines, policies and processes to identify and address risk exposures

     The adequacy and effectiveness of our internal control policies and procedures

     Risks related to compensation arrangements and whether performance goals encourage excessive risk taking

     Retention risks

     Other risks relating to our human capital  

     Corporate governance, including board structure

     Succession planning

     ESG matters

 

Board Independence

NASDAQ listing rules require that a majority of the board of directors of a company listed on NASDAQ be composed of “independent directors,” which is generally defined as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our Board has determined that Maire Baldwin, Karl Bandtel, Matthew Hyde, Steven Shapiro and Jeffrey Tepper are independent within the meaning of the NASDAQ listing rules. Further, our Board has determined that Maire Baldwin, Karl Bandtel and Jeffrey Tepper, the current members of the Audit Committee, are independent with the meaning of Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the Exchange Act).

Succession Planning

The NESG Committee oversees and approves plans for succession planning. As it relates to CEO succession planning, the Committee identifies the qualities and characteristics necessary for an effective CEO and monitors and reviews the development and progression of potential candidates against these standards. The Committee also regularly consults with the CEO on senior management succession planning.

During 2020, the NESG Committee (known at the time as the Nominating and Corporate Governance Committee) recommended to the Board, and the Board approved, a CEO succession plan. Pursuant to the succession plan, following the retirement of Mark Papa, our former Chairman and CEO, the following governance changes and leadership transition became effective on April 1, 2020:

 

The roles of Chairman of the Board and CEO were separated;

 

Sean Smith, our former Chief Operating Officer, became our CEO;

 

Steven Shapiro, an independent director on the Board, became the Chairman of the Board; and  

 

Matthew Garrison, our former Vice President of Geosciences, became our Chief Operating Officer.

Board Leadership Structure

We have no policy with respect to the separation of the offices of Chairman of the Board and Chief Executive Officer. As discussed above, the Board separated the Chairman and CEO roles in 2020 pursuant to a succession plan that was put in place upon the retirement of Mr. Papa. Our Board believes this leadership structure permits the CEO to focus his attention on setting the strategic direction of our company and managing our business while allowing the Chairman to function as an important liaison between our management and the Board, enhancing the ability of the Board to provide oversight of the Company’s management and affairs.

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Classified Board Structure

The Board, in consultation with the NESG Committee, has determined that a classified board structure continues to be appropriate for our company at this time and to be in the best interests of our shareholders. A classified board provides for stability, continuity and experience within our Board. In our industry in particular, long-term strategic planning is critical for the successful development of oil and natural gas resources through commodity price cycles. This structure can reduce pressure on the directors to focus on short-term results at the expense of our long-term value and success. In this regard, we believe that a three-year term for each of our directors enhances director independence from both management and shareholder special interest groups.

Majority Vote in Director Elections

Our governance documents provide for a majority voting standard in uncontested director elections. As a result, election of the director nominees named in Proposal 1 requires that each director be elected by a majority of the votes cast, meaning that the number of shares voted “FOR” a nominee must exceed the number of shares voted “AGAINST” such nominee. We believe that this majority voting standard in uncontested director elections gives our shareholders a greater voice in determining the composition of our Board than a plurality voting standard. For any director election where the number of director nominees exceeds the number of directors to be elected (in other words, a contested election), a plurality voting standard continues to apply pursuant to our governance documents.

Our Corporate Governance Guidelines include a director resignation policy to address the issue of any “holdover” director who is not re-elected but remains a director because his or her successor has not been elected or appointed. This policy requires each incumbent director that is nominated by our Board for re-election to tender an irrevocable resignation letter to the Board prior to the mailing of the proxy statement for the meeting at which such nominee is to be re-elected as director. If such incumbent director is not re-elected by a majority vote in an uncontested election, the NESG Committee will consider the tendered resignation and make a recommendation to our Board as to whether to accept or reject the resignation. The Board would then, after taking into account the recommendation of the NESG Committee, accept or reject such tendered resignation generally within 90 days following certification of the election results. Thereafter, we would publicly disclose the decision of the Board and, if applicable, the Board’s reasons for rejecting a tendered resignation. If a director’s tendered resignation is rejected, such director would continue to serve until a successor is elected, or until such director’s earlier removal or death. If a director’s tendered resignation is accepted, then the Board could fill any resulting vacancy or decrease the number of directors.

Board Meetings

Our Board conducts its business through meetings of the Board, actions taken by written consent in lieu of meetings and by the actions of its committees. During 2020, the Board held 16 meetings, which was up significantly from the number of Board meetings held in recent years. More than half of these meetings occurred from March through May as the Board and its Committees were meeting regularly with the Company’s management to discuss risk assessments relating to COVID-19 and the resulting depressed commodity prices. During this timeframe, David Leuschen was unable to attend some of the meetings as a result of an ethics wall created at Riverstone to facilitate the discussion and negotiation of the debt exchange transaction that occurred in May 2020, in which Riverstone participated. As a result, Mr. Leuschen’s attendance for 2020 dropped to approximately 67% of the total number of Board meetings. No other incumbent director attended fewer than 75% of the total number of meetings of the Board held during 2020.

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Committees of the Board

The Board currently has three standing committees: the Audit Committee, the Compensation Committee and the Nominating, Environmental, Social and Governance (NESG) Committee. Each of the committees reports to the Board as it deems appropriate and as the Board may request. The composition of the committees at the end of 2020, as well as the duties and responsibilities of each of the committees, are set forth below. From time to time and as necessary to address specific issues, our Board may establish other committees.

 

Independent Director

Committee Membership

Audit

Compensation

NESG

Maire A. Baldwin

Karl E. Bandtel

 

Matthew G. Hyde

 

Steven J. Shapiro

 

Jeffrey H. Tepper

 

Number of Meetings Held in 2020

7

7

4

 

 

 

 

 

 

= Chair

= Member

 

Audit Committee

The principal functions of our Audit Committee are detailed in the Audit Committee charter, which is posted on the Investor Relations portion of our website at www.cdevinc.com, and include:

 

the appointment, compensation, retention, replacement and oversight of the work of the independent auditors and any other independent registered public accounting firm engaged by us;

 

pre-approving all audit and permitted non-audit services to be provided by the independent auditors or any other registered public accounting firm engaged by us, and establishing pre-approval policies and procedures;

 

reviewing and discussing with the independent auditors all relationships the auditors have with us in order to evaluate their continued independence;

 

setting clear hiring policies for employees or former employees of the independent auditors;

 

setting clear policies for audit partner rotation in compliance with applicable laws and regulations;

 

reviewing our annual audited financial statements and quarterly financial statements with management and our independent auditors prior to their final completion and filing with the Securities and Exchange Commission (SEC);

 

reviewing the adequacy and effectiveness of our internal control policies and procedures, including the results of management’s testing of the operating effectiveness of controls;

 

meeting annually with our independent petroleum reservoir engineering firm and management to review the process by which our oil and gas reserves are estimated and reported;

 

reviewing and approving any related person transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC prior to us entering into such transaction;

 

reviewing the program, policies and systems we have in place to monitor compliance with the Code of Business Conduct and Ethics and any ethics complaints we may receive; and

 

reviewing with management, the independent auditors and our legal advisors, as appropriate, any legal, regulatory or compliance matters, including any correspondence with regulators or government agencies and any employee complaints or published reports that raise material issues regarding our financial statements or accounting policies and any significant changes in accounting standards or rules promulgated by the Financial Accounting Standards Board, the SEC or other regulatory authorities.

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Our Audit Committee consists of Jeffrey Tepper, Karl Bandtel and Maire Baldwin, with Mr. Tepper serving as the Chair. We believe that Messrs. Tepper and Bandtel and Ms. Baldwin qualify as independent directors according to the rules and regulations of the SEC with respect to audit committee membership. We also believe that Mr. Tepper qualifies as our “audit committee financial expert,” as such term is defined in Item 401(h) of Regulation S-K.

Compensation Committee

The principal functions of our Compensation Committee are detailed in the Compensation Committee charter, which is posted on the Investor Relations portion of our website at www.cdevinc.com, and include:

 

reviewing and approving on an annual basis the corporate goals and objectives relevant to our CEO’s compensation, evaluating our CEO’s performance in light of such goals and objectives and determining and approving the compensation (if any) of our CEO based on such evaluation;

 

reviewing and approving on an annual basis the compensation of all of our other officers;

 

reviewing on an annual basis our executive compensation policies and plans;

 

implementing and administering our incentive compensation plans;

 

evaluating whether our compensation arrangements encourage unnecessary or excessive risk taking;

 

assisting management in complying with our proxy statement and annual report disclosure requirements;

 

approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our officers;

 

producing a report on executive compensation to be included in our proxy statement;

 

selecting and retaining independent compensation consultants;

 

supporting management’s engagement with shareholders on executive compensation matters;

 

considering the voting results of prior say-on-pay proposals; and

 

reviewing, evaluating and recommending changes, if appropriate, to the compensation for directors.

Our Compensation Committee consists of Maire Baldwin, Matthew Hyde, Steven Shapiro and Jeffrey Tepper, with Ms. Baldwin serving as the Chair. Our Board has affirmatively determined that Ms. Baldwin and Messrs. Hyde, Shapiro and Tepper meet the definition of “independent director” for purposes of serving on a compensation committee under the NASDAQ listing rules.

The Compensation Committee has the authority to retain or obtain the advice of compensation consultants, legal counsel and other advisors (independent or otherwise) to assist in carrying out its responsibilities. For information regarding the role of our CEO, other executive officers and compensation consultants in determining our executive and director compensation, please refer to the section entitled “Compensation Discussion and Analysis—Determination of Compensation.”

Nominating, Environmental, Social and Governance Committee

In October 2020, the Board adopted changes to the charter of the NESG Committee (formerly known as the Nominating and Corporate Governance Committee) to (1) change the name of the Committee to the “Nominating, Environmental, Social and Governance Committee” and (2) expressly delegate oversight authority to the Committee on environmental, social and governance (ESG) matters.

The principal functions of our NESG Committee are detailed in the charter of the NESG Committee, which is posted on the Investor Relations portion of our website at www.cdevinc.com, and include:

 

assisting the Board in identifying individuals qualified to become members of the Board, consistent with criteria approved by the Board;

 

recommending director nominees for election or for appointment to fill vacancies;

 

reviewing and making recommendations to the Board on corporate governance matters;

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reviewing and monitoring our policies, controls and systems relating to ESG matters, as well as broader ESG trends;

 

monitoring the independence of directors;

 

overseeing and approving plans for CEO succession;

 

overseeing annual evaluations of the Board, its committees and our management; and

 

ensuring the availability of director education programs.

The NESG Committee also develops and recommends to the Board corporate governance and ESG principles and practices and assists in implementing them, including conducting a regular review of our corporate governance and ESG principles and practices. Pursuant to its charter, the NESG Committee will treat recommendations for directors that are received from our shareholders equally with recommendations received from any other source. The NESG Committee oversees the annual performance evaluation of the Board and the committees of the Board and makes a report to the Board on succession planning.

Our NESG Committee consists of Karl Bandtel, Maire Baldwin, Matthew Hyde and Steven Shapiro, with Mr. Bandtel serving as the Chair.  Our Board has affirmatively determined that Messrs. Bandtel, Hyde and Shapiro and Ms. Baldwin meet the definition of “independent director” for purposes of serving on a nominations committee under the NASDAQ listing rules.

Director Education

Our Board believes that director education is essential to the ability of our directors to fulfill their roles as directors. When a new director joins our Board, we provide a director orientation. Directors are also encouraged to attend continuing education programs designed to enhance the performance and competencies of individual directors and our Board, including through participation in National Association of Corporate Directors (NACD) events. Directors are reimbursed for any relevant director education programs they attend.

Compensation Committee Interlocks and Insider Participation

During the year ended December 31, 2020, no officer or employee of the Company served as a member of our Compensation Committee. None of our executive officers serve, or have served during the year ended December 31, 2020, as a member of the board of directors or compensation committee of any entity that has or had one or more executive officers serving on our Board or Compensation Committee.

Code of Business Conduct and Ethics

We have adopted a written Code of Business Conduct and Ethics (the Code of Ethics) that applies to our directors, officers and employees and that, among other purposes, is intended to assist directors, officers and employees in recognizing, avoiding and resolving ethical issues. The Code of Ethics covers various topics, including the standards of honest, ethical and fair conduct, conflicts of interest, gifts and entertainment, use of company assets, disclosure requirements, compliance, reporting and accountability, insider information and trading, issues relating to health, safety and the environment, confidentiality, anti-corruption laws and others.

The Code of Ethics is designed to comply with SEC regulations and NASDAQ listing standards related to codes of conduct and ethics and is posted on the Investor Relations portion of our website at www.cdevinc.com. A copy of our Code of Ethics is also available free of charge, upon request directed to Centennial Resource Development, Inc., 1001 17th Street, Suite 1800, Denver, Colorado, 80202, Attention: General Counsel. We intend to satisfy the disclosure requirements regarding any amendment to, or any waiver of, a provision of the Code of Ethics by posting such information on our website within four business days following the date of any such amendment or waiver.

Complaint and Reporting Procedures

We have established complaint and reporting procedures that are posted on the Investor Relations portion of our website. Any person, whether or not an employee, who has a concern about our conduct or the conduct of any of our employees, may, in an anonymous manner, communicate that concern by calling one of our hotlines. Our Accounting and Compliance Whistleblower Hotline is available at 1-844-418-4481 and is intended to facilitate reporting of accounting and compliance issues. We also maintain a separate Operational Concerns Hotline, which

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is available at 1-844-778-5868 and is intended to facilitate reporting of concerns relating to our operations, working environment, course of dealing with contractors and other operational matters. These hotlines are available 24 hours a day, seven days a week.

Annual Board and Committee Evaluation Process

The Board and each of our committees conducted self-evaluations related to their performance in 2020, including an evaluation of each director. The NESG Committee supervises the performance evaluations and uses various processes from year to year in order to solicit feedback, including Board and committee-level questionnaires prepared by each of the Board and committee members, the responses to which are used to evaluate the effectiveness of Board and committee performance and to identify areas for improvement and issues for further discussion. Following a discussion of the results of the evaluations, the Board and each committee review and discuss the evaluation results and take this information into account when assessing the qualifications of the Board and its directors, further enhancing the effectiveness of the Board and its committees over time.

 

Policies Relating to our Board

Shareholder Communications with the Board

All shareholders who wish to contact the Board may send written correspondence to Centennial Resource Development, Inc., 1001 17th Street, Suite 1800, Denver, Colorado, 80202, Attention: General Counsel. Communications may be addressed to an individual director, to the non-management or independent directors as a group or to the Board as a whole, marked as confidential or otherwise. Communications not submitted confidentially, which are addressed to directors that discuss business or other matters relevant to the activities of our Board, will be preliminarily reviewed by the office of the General Counsel and then distributed either in summary form or by delivering a copy of the communication. Communications marked as confidential will be distributed, without review by the office of the General Counsel, to the director or group of directors to whom they are addressed, unless there are safety or security concerns that mitigate against further transmission.

Separate Sessions of Independent Directors

Our Corporate Governance Guidelines require the Board to hold executive sessions for the independent directors, without any non-independent directors or management present, on a regularly scheduled basis but not less than twice per year. Our independent directors met in executive session on 6 occasions in 2020. Each of our independent directors attended each of the executive sessions.

Director Attendance at Annual Meeting of Shareholders

Although we do not have a formal policy regarding director attendance at our Annual Meeting of Shareholders, we encourage directors to attend. All of our directors attended the 2020 Annual Meeting of Shareholders.

Shareholder Engagement 

We believe that maintaining an open dialogue with our shareholders provides critical feedback for our Board and executive management team on a wide range of topics including our short- and long-term business strategy, performance, ESG matters, governance practices, executive compensation program and other matters of importance. As part of this commitment, and partially in response to a say-on-pay vote at our 2020 Annual Meeting of Shareholders that was lower than in previous years, our Board and management team expanded our regular shareholder engagement to better understand the views of our shareholders. Through this process, we reached out to our 30 largest shareholders, who collectively hold about 60% of our outstanding shares, as well as certain additional shareholders that were significant shareholders during 2020.

For more information on what we heard from our shareholders and how we have responded, please read “Response to 2020 Say-on-Pay Vote and Shareholder Outreach” on page 24.

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Environmental, Social and Governance (ESG) Initiatives

We are committed to producing oil and natural gas in a way that creates long-term value for our stakeholders, which includes the commitment to do so in an ethical, inclusive, pragmatic and environmentally and socially responsible way. That commitment extends throughout our operations and includes a dedication to superior performance with respect to ESG matters.

 

In early 2021, we published our inaugural Corporate Sustainability Report, which is available on our website at www.cdevinc.com/corporate-sustainability. The Report builds upon and substantially expands our prior ESG disclosures and covers our performance in environmental stewardship, regulatory compliance, health and safety, corporate governance, ethics, security, workforce diversity and development, wellbeing and community engagement matters. Below are some highlights from our Corporate Sustainability Report.

 

Board Governance

     Separated the roles of Chairman and CEO in 2020 with the appointment of an independent Chairman of the Board

     Majority voting standard in uncontested director elections

ESG Management     & Oversight

     Formed an ESG working group, consisting of select individuals from across the organization, to manage our ESG initiatives and regularly report to the NESG Committee

     Delegated specific authority to oversee ESG matters to the NESG Committee  (re-named as a result to reflect the ESG oversight role)  

Water   Recycling

     Recycled and reused 4.8 million barrels of water in 2020

     Increased water recycling by 60% from 2019 levels

Flaring

     Reduced the percentage of natural gas flared by 38% from 2019 levels

     Flared only 0.5% of natural gas volumes in Q4 2020

     Set a 2021 flaring target of 1% of all produced natural gas

Prioritizing Pipelines Over Trucks

     Transported 99% of our produced water by pipeline, reducing trucking-related emissions, improving safety, minimizing the potential for spills and lessening the impact on local roads

Responsibly Powering Our Operations

     Used dual-fuel systems on drilling rigs and completion equipment to reduce diesel consumption and related emissions

     Connected our Reeves County, TX wells to the electric grid, reducing the use of diesel and natural gas generators (and the related emissions) from 135 to 10

Emission Detection

     Expanded our leak detection and repair program to identify and manage fugitive emissions, including through inspections using optical gas imaging cameras

Land Use

     Utilized multiple wells pads and centralized production facilities, which reduce surface impact compared to single well pads and facilities

     Limited oil spills to 0.003% of oil produced in 2020

     Limited produced water spills to 0.014% of water produced in 2020

Health & Safety

     Suffered 0 recordable employee injuries in 2020

     Suffered 0 reported workplace transmissions of COVID-19

Diversity & Inclusion

     Women accounted for 38% of our employees (and 34% of our supervisors and managers) as of December 31, 2020

     Minorities accounted for 24% of our employees (and 11% of our supervisors and managers) as of December 31, 2020

 

21


 

Audit Committee Report

The Audit Committee has reviewed and discussed with management of the Company and KPMG LLP, the Company’s independent registered public accounting firm, the audited financial statements of the Company for the fiscal year ended December 31, 2020 (the Audited Financial Statements).

The Audit Committee has discussed with KPMG LLP the matters required to be discussed by the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 1301, as in effect on the date of this Proxy Statement.

The Audit Committee has: (1) considered whether non-audit services provided by KPMG LLP are compatible with its independence; (2) received the written disclosures and the letter from KPMG LLP required by the applicable requirements of the PCAOB regarding KPMG LLP’s communications with the Audit Committee concerning independence; and (3) discussed with KPMG LLP its independence.

Based on the reviews and discussions described above, the Audit Committee recommended to the Board that the Audited Financial Statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for filing with the SEC.

Respectfully submitted,

The Audit Committee

Jeffrey H. Tepper (Chair)

Maire A. Baldwin

Karl E. Bandtel

 

22


 

Compensation Discussion and Analysis

2020 Highlights

Introductory Note

The COVID-19 pandemic created unprecedented challenges for the global economy, our industry and our company in 2020. In response to the pandemic, we took early action implementing protocols to protect the health and safety of our employees, contractors and their families. Through a series of precautionary measures, including remote working for many of our employees, we were able to keep our workforce safe without experiencing any operational disruptions or reported COVID-19 workplace transmissions.

The pandemic, taken together with related governmental actions, resulted in a significant decline in the demand for oil and natural gas. As a result, we saw extremely depressed commodity prices, including oil prices that briefly went negative in April 2020. In response, we adjusted our operational plans to preserve capital by halting all drilling and completion operations in the second and third quarters, reduced our workforce by approximately 23% to better align our headcount with operational needs and reduced the salaries and cash retainers of our officers, employees and directors.

Despite the significant challenges posed by the pandemic, our company achieved many accomplishments in 2020, which was a transformational year for us. We completed our CEO succession plan in April 2020 with the appointment of Sean Smith as our new CEO. In addressing the challenged commodity price environment, our management team accelerated our transition away from a growth-oriented company to a company that prioritizes capital efficiency and discipline with a goal of achieving sustainable free cash flow. We believe this realigned company, which we refer to informally as “Centennial 2.0,” better positions us for the future. Some highlights of our operational and financial performance are outlined below.

Operational and Financial Performance

Here are some highlights of what we achieved in 2020 and early 2021:  

 

   Generated free cash flow of $40 million in Q3 – Q4, with proceeds used to repay borrowings under our credit facility

   Reduced cost structure, including an 18% reduction in our combined lease operating and cash general & administrative expenses for the second half of 2020 compared to the prior year period (on a per Boe basis)

   Decreased drilling, completions and facilities costs to approximately $850 per lateral foot for each well completed in the second half of 2020 (a 29% reduction from Q4 2019)

   Executed a debt exchange in May 2020 that reduced the principal amount of our senior notes by $127 million  

   Reduced corporate oil decline rate to the low 30s from the low 50s at year-end 2019

   Increased water recycling by 60% from 2019 levels

   Reduced the percentage of natural gas flared by 38% from 2019 levels

   Released inaugural Corporate Sustainability Report

 

 

23


 

Response to 2020 Say-on-Pay Vote and Shareholder Outreach

At our 2020 Annual Meeting of Shareholders, 79% of the votes cast by our shareholders supported our say-on-pay proposal, which was a decline from the 97% average support level we had received in the prior two years.  This disappointing outcome prompted the Compensation Committee to expand our regular shareholder engagement to better understand their views of our compensation program. Through this process, we reached out to our 30 largest shareholders, who collectively represent about 60% of our outstanding shares, as well as certain additional shareholders that were significant shareholders during 2020.

The table below provides a summary of what we heard from shareholders regarding compensation-related matters and how we have responded.

 

What We Heard

 

How We Responded

    Use a rate of return metric in the Annual Incentive Program (AIP) that can be calculated based on GAAP financial statements

    Move towards a more formulaic AIP

    Increase disclosure of ESG factors

    Include additional metric(s) in the Long-Term Incentive Program (LTIP) with an increased tie to absolute performance

   Incorporated a GAAP-based rate of return metric (Cash Return on Capital Employed) into the 2021 AIP

   Redesigned the AIP with formulaic scoring for 2021 program

   Increased disclosure of ESG factors in this Proxy Statement and issued our inaugural Corporate Sustainability Report

   Included quantitative and qualitative ESG goals in our 2021 AIP

   The Compensation Committee is considering appropriate avenues to include additional metrics for 2021 LTIP awards

 

Pay for Performance

Our executive compensation program ties a significant portion of our named executive officers’ compensation to the operational, financial and stock price performance of our company. The following graphic illustrates how our executives’ realized pay in 2020 aligns with our 2020 stock price performance.

 

 

In addition to the direct and meaningful impact of our stock price decline on our executives’ realized pay, the following events and Compensation Committee actions impacted their 2020 realized pay:

 

Performance stock units granted in 2017 achieved a 0% payout in 2020 given our shareholder returns during the 2017-2020 performance period.

 

Compensation Committee exercised negative discretion in determining to award 2020 AIP compensation to executives at 90% of target.  

 

Compensation Committee reduced the base salaries of our executives, with reductions ranging from 10% to 25%, which remained in place until unreduced salaries were restored by the Committee on February 25, 2021.

24


 

As used above, Target pay refers to the target total compensation for our executives for 2020, which equals the total of the executive’s 2020 unreduced base salary, target Annual Incentive Program (AIP) award for 2020 and grant date value of 2020 Long-Term Incentive Program (LTIP). Realized pay refers to the total of the executive’s 2020 base salary, paid cash AIP awards for 2020 and the market value at vesting of previously granted stock-based awards that vested during 2020. NEOs refer to our named executive officers, who are identified below in the section entitled “2020 Executive Compensation Program,” and the NEO amounts in the graphic exclude 2020 CEO compensation.

Compensation Best Practices

The Compensation Committee believes that our executive compensation program follows best practices and is aligned with long-term shareholder interests. Below are highlights of our current compensation practices.

 

What We Do

   Pay for performance. Align our executives’ compensation with our operational, financial and stock price performance by having a majority of total compensation consist of performance-based compensation.

   Ownership Guidelines. Maintain robust Stock Ownership Guidelines for our NEOs and directors.

   Review Market Data. Review market data of peer group companies to ensure competitive compensation relative to the market.

   Compensation Consultant. Use an independent compensation consultant retained by, and reporting directly to, our Compensation Committee.

   Clawback Policy. Have a Clawback Policy that applies to our NEOs.

   Double-Trigger Change in Control Benefits. Maintain a Severance Plan where cash severance and equity vesting only occur upon a qualifying termination following a change-in-control transaction.

   Risk Assessments. Conduct an annual risk assessment of compensation practices to ensure avoidance of excessive risk taking.

   PSU Cap. Cap payout of PSUs at target if our absolute shareholder return is negative for the performance period.

   Evolving Program. Compensation program continues to evolve based on shareholder feedback and evolving market standards.

   ESG. ESG performance goals included in the Annual Incentive Program.

 

What We Don’t Do

   Hedging or Pledging. We do not allow hedging or pledging of company securities by directors, officers or employees.

   Tax Gross-Ups. We do not provide tax gross-ups for severance or change in control payments to our NEOs or other officers or employees.

   Excessive Perquisites. We do not provide significant perquisites to any of our NEOs or other officers.

   Employment Agreements. We do not have employment agreements with our NEOs or other officers.

   Guarantee bonuses. We do not guarantee bonuses to any of our NEOs or other officers or employees.

   Repricing of Options. We do not permit repricing of underwater stock options without shareholder approval.

 

 

25


 

2020 Executive Compensation Program

This Compensation Discussion and Analysis describes the material elements of our executive compensation program for our current and former principal executive officer, principal financial officer and three other most highly compensated executive officers during 2020. Our named executive officers (NEOs) for 2020 are:

 

Executive

Title

Sean R. Smith

Chief Executive Officer (CEO)

George S. Glyphis

Vice President and Chief Financial Officer (CFO)

Davis O. O’Connor

Vice President and General Counsel (GC)

Matthew R. Garrison

Vice President and Chief Operating Officer (COO)

Brent P. Jensen

Vice President and Chief Accounting Officer (CAO)

Mark G. Papa

Former Chief Executive Officer (Former CEO)

 

On March 31, 2020, Mark Papa retired as our CEO and Chairman, and Sean Smith became our CEO on April 1, 2020. Mr. Smith had previously served as our Vice President and Chief Operating Officer, and Matthew Garrison (former Vice President of Geosciences) was elevated to that position on April 1, 2020.

Elements of 2020 Compensation Program

The primary elements of our executive compensation program and the purpose of each component are summarized in the following table.

 

Type

 

Element

Purpose

Fixed

Base Salary

     Attract and retain qualified executives

     Provide a level of fixed pay based on the executive’s role, skills, experience and performance

Variable

Annual Incentive Program (AIP)

     Provide incentives to attain the Company’s and executive’s short-term financial, operational and strategic goals

     Align executive’s interests with those of our shareholders

Long-Term

Incentive

Plan (LTIP)

Restricted Stock

     Incentivize long-term shareholder value creation through stock price performance

     Promote retention of executives

     Promote stock ownership by executives

Performance Stock Units (PSUs)

     Incentivize long‑term stock price performance relative to industry peers

     Promote retention of executives


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2020 Compensation Mix

A significant portion of our executive compensation is performance-based. The graphics below show the mix of compensation elements for our current CEO and other NEOs in 2020 based on the information included in the Summary Compensation Table. Compensation for our executives is heavily weighted towards variable or “at-risk” pay elements that are only earned based on achievement of performance goals or through continued employment through the award’s vesting period. The ultimate realized value of these variable pay elements, if earned at all, fluctuates or depends on company performance as determined by our Compensation Committee, as well as our stock price.

 

CEO Compensation Mix

 

Average NEO Compensation Mix

 

 

 

 

 

 

 

 

 

 

 

Base Salaries

We pay market competitive base salaries to our NEOs to attract and retain qualified executives. In setting our NEOs’ base salaries, the Compensation Committee considers the role, skills, experience and performance of each executive, as well as industry and market conditions and competitive market data within our peer group and industry.

In early 2020, the Compensation Committee increased the base salaries of Mr. Smith and Mr. Garrison in connection with their promotions to CEO and COO, respectively. No other NEOs received base salary increases in 2020. In addition, in response to the COVID-19 pandemic, we temporarily reduced the base salary of all employees, including the NEOs, as part of a series of measures we took to reduce expenses and further align the short-term executive compensation with the shareholder experience, effective May 10, 2020. While the non-officer salaries were restored in August 2020, the executive salary reductions remained in place until February 25, 2021, at which point the unreduced salaries were restored by the Committee. The following table presents the salary rates for our NEOs in 2019 and 2020, as well as our NEOs’ reduced salary rates following the reduction described above.

 

Executive

 

2019 Salary

 

 

Initial 2020 Salary

 

 

% Change

 

Reduced 

2020 Salary

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sean R. Smith

 

$

491,625

 

 

$

725,000

 

 

+47%

 

$

543,750

 

 

-25%

George S. Glyphis

 

$

443,477

 

 

$

443,477

 

 

 

 

$

376,955

 

 

-15%

Davis O. O’Connor

 

$

399,129

 

 

$

399,129

 

 

 

 

$

359,216

 

 

-10%

Matthew R. Garrison

 

$

349,830

 

 

$

390,000

 

 

+11%

 

$

351,000

 

 

-10%

Brent P. Jensen

 

$

349,830

 

 

$

349,830

 

 

 

 

$

314,847

 

 

-10%

Mark G. Papa

 

$

800,000

 

 

$

800,000

 

 

 

 

N/A

 

 

N/A

 

Annual Incentive Program (AIP)

Our Annual Incentive Program (AIP) is designed to promote the achievement of annual financial, operational and strategic goals that are aligned with the creation of shareholder value. Each year, our Compensation Committee sets an AIP target percentage for each NEO, expressed as a percentage of the NEO’s base salary, based on the pay level that the Compensation Committee deems to be competitive and appropriate assuming all of the Company’s and NEO’s goals are achieved at target levels. After the year is completed, the Committee reviews Company and individual performance and determines what it believes to be the appropriate AIP payout, if any, for each NEO, with possible payouts ranging from 0% to 300% of the NEO’s base salary.

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In July 2020, the Compensation Committee decided to increase the AIP target percentages for Mr. O’Connor and Mr. Jensen to remain competitive with peer data. The Committee also increased the target percentages for Mr. Smith and Mr. Garrison in connection with their promotions to CEO and COO in April 2020, respectively. The following table presents the AIP target percentages for each NEO for 2019 and 2020 except for Mr. Papa, who retired in early 2020 and therefore did not receive an AIP award for 2020.   

 

Executive

 

2019 Target Bonus

 

2020 Target Bonus

 

 

 

 

 

 

 

 

 

 

Sean R. Smith

 

100%

 

120%

George S. Glyphis

 

100%

 

100%

Davis O. O’Connor

 

85%

 

90%

Matthew R. Garrison

 

80%

 

95%

Brent P. Jensen

 

70%

 

85%

 

In evaluating 2020 performance, the Compensation Committee focused on the Company’s performance goals for 2020 and the individual contributions of each NEO. As discussed above, 2020 was a transformational year for the Company, and an early indication of that progression can be seen in the performance goals for the 2020 AIP, which were approved by the Compensation Committee after the management transition. For example, given the significant challenges posed by the COVID-19 pandemic, a principal goal of our company was to protect the balance sheet by minimizing cash flow deficits and reducing costs across the board with a particular focus on capital expenditures, lease operating expenses (LOE) and cash general & administrative expenses (G&A). As a result, these performance goals were featured with more prominence in our 2020 AIP.

The Compensation Committee collectively assigned a majority weighting to the performance goals where company performance can be quantitatively measured. These quantitative metrics are set forth below.

 

Category

 

Performance Goal

 

Assessment

Balance Sheet

 

   Reduce capital expenditures to limit cash flow deficits  

 

   Reduced capital expenditures by 70% from 2019 levels

   Generated $40 million in free cash flow(1) in Q3 and Q4

Cost Structure

 

   LOE per Boe: $4.80

 

   Achieved $4.45

 

   Cash G&A per Boe: $2.05

 

   Achieved $2.03

Rate of Return

 

   Maximize unlevered before-tax rate of return on 2020 capital investment program(2)

 

   Achieved 14% rate of return

Production and Other Unit Costs(3)

 

   Daily oil production (Bo/d): 35,500

 

   Achieved 36,084 Bo/d

 

   GP&T per Boe: $2.91

 

   Achieved $2.90

 

   Interest expense per Boe: $2.65

 

   Achieved $2.66

 

   DD&A per Boe: $15.50

 

   Achieved $14.59

 

 

(1)

Free cash flow is a non-GAAP term that we define as net cash provided by operating activities before changes in working capital, less incurred capital expenditures. See Appendix A of this Proxy Statement for a reconciliation to net cash provided by operating activities, our most directly comparable financial measure calculated in accordance with GAAP.

 

(2)

The calculation of the Rate of Return Metric is based on the estimated recoverable reserves (net to our interest) for all operated wells turned on production in 2020, the estimated net present value of the future net cash flows from such reserves (for which we utilize certain assumptions regarding future commodity prices and operating costs) and our direct net costs incurred in the drilling and completion of such wells (inclusive of well-level facilities expenditures). This calculation also includes certain indirect capital expenditures, such as infrastructure-related expenditures, capital expenditures related to the acquisition

28


 

 

of undeveloped leasehold through organic oil and gas leasing and other related land expenditures, and expenditures for seismic, geological and geophysical services and data. The calculation also includes the impact of financial commodity derivative contracts, general and administrative expenses and other similar expenses.  Such calculation excludes interest and income tax expenses. The Rate of Return Metric cannot be calculated from our consolidated audited financial statements.

 

(3)

Daily oil production refers to our net average daily oil production; GP&T refers to our gathering, processing and transportation expenses; interest expense refers to the total interest accrued during 2020 on our debt instruments (excluding amortization of debt issuance costs and debt discount and interest capitalized) and DD&A refers to our depreciation, depletion and amortization expenses.

In addition, the Compensation Committee considered a variety of qualitative factors and achievements in the following pre-established categories:  

 

Qualitative Factors

Achievements

Health, Safety and

Environmental

   Established an ESG team that oversees ESG matters and explores and directs operational improvements

   Published inaugural Corporate Sustainability Report

   Limited Total Reportable Incident Rate (TRIR) for employees and contractors to 0.5 per 200,000 work hours

   Limited oil spills to 0.003% of oil produced

   Limited produced water spills to 0.014% of water produced

Strategic Initiatives

   Executed a debt exchange that reduced the principal amount of our senior notes by $127 million

   Developed a systematic hedging strategy to protect the balance sheet and cover basic corporate costs

   Completed installation of the Reeves County, Texas substation and main distribution lines to distribute electric power to field facilities

   Maintained (and marginally grew) leasehold acreage despite scaled back operations

 

In February 2021, the Compensation Committee met and evaluated the NEOs’ performance individually and against the 2020 quantitative and qualitative performance goals described above and determined that, overall, the management team had met expectations and the performance goals for the year. Among other considerations, the Compensation Committee noted that the 14% rate of return result for 2020, while below the 15% rate of return achieved in 2019, demonstrated the Company’s resilience in an extremely challenging commodity price environment.

In its discretion, the Compensation Committee also considered the Company’s weak stock price performance for 2020 and determined that it would be appropriate to make AIP payments below target for 2020. Based on the Compensation Committee’s assessment of 2020 performance and these additional considerations, the Committee awarded each NEO with an AIP cash award equal to 90% of the NEO’s 2020 Target Bonus (without regard to the temporary base salary reductions described above that were implemented in response to the COVID-19 pandemic). In a departure from prior practice, and in an effort to better align our AIP with current market practices, the Committee also discontinued the Company’s past practice of paying a portion of the NEO’s award in stock with a premium multiple, resulting in an average 21% reduction in 2020 payouts compared to 2019 payouts (excluding promoted executives).

The cash amounts paid to the NEOs under the 2020 AIP are outlined in the table below.

 

Executive

 

AIP Cash

Award

 

 

% of

Target

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sean R. Smith

 

$

783,000

 

 

90%

George S. Glyphis

 

$

399,129

 

 

90%

Davis O. O’Connor

 

$

323,924

 

 

90%

Matthew R. Garrison

 

$

333,450

 

 

90%

Brent P. Jensen

 

$

267,620

 

 

90%

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Long-Term Incentive Program (LTIP)

Our Long-Term Incentive Program (LTIP) is designed to encourage long-term shareholder value creation through its alignment with our stock price performance and total shareholder returns (TSR), both on an absolute basis and relative to industry peers.  As in prior years, the 2020 LTIP awards consisted of a combination of performance-based PSUs and time-based restricted stock. The Compensation Committee believes the combination of performance-based PSUs and time-based restricted stock provides a balance of incentivizing sustainable performance over an extended time frame with our long-term goals regarding executive retention and executive stock ownership. In 2020, based on a review of peer data and input from its compensation consultant, the Compensation Committee increased the weighting of the PSUs for Mr. Smith and Mr. Glyphis to 50% (from 33% in 2019) to better align with current market practices. The relative weightings for the remainder of the NEOs remained unchanged from 2019.

In July 2020, the Compensation Committee made 2020 LTIP awards to our NEOs other than Mr. Papa, who had retired earlier in the year. In determining the target grant values for each NEO, the Compensation Committee considered peer group data provided by its compensation consultant, each NEO’s role and ability to influence and create long-term shareholder value, the existing stock-based compensation held by the NEOs and 2020 market factors, including the extremely challenged commodity price environment. Based on these considerations, the Compensation Committee determined it appropriate to reduce the grant date target value for 2020 awards from the 2019 levels. Accordingly, except for Mr. Smith and Mr. Garrison whose 2020 awards reflected their new roles as CEO and COO, respectively, the NEOs received LTIP grants in 2020 that were on average 8% lower than their 2019 grants. The following table outlines the LTIP awards received by the NEOs.

 

Executive

 

Target Number of PSUs

Granted (#)

 

Shares of

Restricted Stock

Granted (#)

 

Total Grant Date

Target

Value ($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sean R. Smith

 

 

 

 

2,569,722

 

 

 

 

 

 

 

2,569,722

 

 

 

 

 

 

 

4,625,500

 

 

 

George S. Glyphis

 

 

 

 

1,281,155

 

 

 

 

 

 

 

1,281,155

 

 

 

 

 

 

 

2,306,079

 

 

 

Davis O. O’Connor

 

 

 

 

583,326

 

 

 

 

 

 

 

1,168,405

 

 

 

 

 

 

 

1,576,558

 

 

 

Matthew R. Garrison

 

 

 

 

577,200

 

 

 

 

 

 

 

1,156,133

 

 

 

 

 

 

 

1,560,000

 

 

 

Brent P. Jensen

 

 

 

 

453,030

 

 

 

 

 

 

 

907,420

 

 

 

 

 

 

 

1,224,405

 

 

 

 

Performance Share Units

The PSUs vest at the end of the three-year performance period (July 2020 through June 2023) based on our TSR ranking relative to our compensation peer group. As depicted in the graphic below, the number of PSUs actually earned for the performance period will range from 0% to 200% of the target number of PSUs granted based on our relative TSR ranking, with no PSUs being earned if our relative TSR percentile ranking is below 30%. However, if we experience a negative TSR over the performance period, measured on an absolute basis, the number of PSUs that may be earned is capped at 100% of the target number of PSUs, regardless of our relative TSR performance. The earned PSUs (if any) are payable in cash at the end of the performance period.

 

 

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Vesting of 2017 PSUs

The PSU awards granted in August 2017 were eligible to vest at the end of the three-year performance period ending on June 30, 2020, subject to our relative and absolute TSR during the performance period. Similar to the PSUs granted in 2020, the 2017 PSUs required a minimum TSR percentile ranking of 30% to earn PSUs on the vesting date. Our TSR percentile ranking for the performance period for the 2017 PSUs was 12.5%; therefore, none of the 2017 PSUs were earned. The $0 realized value from the 2017 PSUs demonstrates the rigorous nature of the PSU design, which had an aggregate reported grant date value for the 2017 PSUs of approximately $4.2 million for all NEOs combined.

Retirement Plans and Other Employee Benefits

Our NEOs are eligible to participate in our employee benefit plans and programs, including medical and dental benefits and life insurance, to the same extent as our other full-time employees, subject to the terms and eligibility requirements of those plans. Our NEOs may participate in a 401(k) defined contribution plan, subject to limits imposed by the Internal Revenue Code of 1986, as amended (the Code), to the same extent as our other full-time employees. In 2020, the 401(k) Plan provided for matching contributions equal to 100% of the first 8% of each employee’s eligible compensation contributed to the 401(k) Plan. Employees are immediately 100% vested in the matching contributions. We do not typically provide any perquisites or special personal benefits to our NEOs.

Determination of Compensation

Our executive compensation program has been designed to attract, motivate, reward and retain high caliber management with the skills and competencies we believe are essential to our success and to align executive compensation with our short-term and long-term business objectives, business strategy and financial performance. We link pay and performance to foster a culture of individual accountability and, in evaluating executive officer performance, place particular emphasis on the Company’s and individual’s performance against the pre-assigned goals, which is described in greater detail above in the section entitled “Annual Incentive Program.”

Role of the Compensation Committee

The Compensation Committee administers and determines the parameters of our executive compensation program, including appropriate target levels and performance measures and the allocation between short-term and long-term compensation and between cash and equity-based awards, in order to establish an overall compensation program it believes is appropriate for each NEO. The Compensation Committee has principal authority for determining and approving the compensation awards for our executives and is charged with reviewing our executive compensation policies and practices to ensure adherence to our compensation philosophies and objectives. In making decisions, the Compensation Committee takes into account, among other factors:

 

achievement of individual and Company performance goals and expectations relating to the NEO’s position at the Company;

 

alignment of NEO compensation with short-term and long-term Company performance;

 

competitiveness of compensation with compensation peer group companies, internal pay equity among individuals with similar expertise levels and experience and the unique skill sets of the individual;

 

market demand for individuals with the NEO’s specific expertise and experience;

 

advice, data and analysis provided by the Compensation Committee’s independent compensation consultant;

 

general industry compensation data;

 

the NEO’s background, experience and circumstances, including prior related work experience and training; and

 

the recommendations of our CEO.

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Role of Compensation Consultant in Determining Executive Compensation

In determining 2020 executive compensation, the Compensation Committee received information and reports initially from Longnecker & Associates (Longnecker), an independent compensation consultant retained by the Compensation Committee in 2017.  In late 2020, the Committee initiated a search process for a new compensation consultant and ultimately engaged Meridian Compensation Partners, LLC (Meridian) as its new independent compensation consultant. References in this section and elsewhere in the compensation disclosures to the Committee’s compensation consultant refer to the consultant engaged during the relevant period, with Longnecker serving as the consultant for approximately the first three quarters of 2020 and Meridian serving as the consultant for the remainder of 2020.  

Each of the compensation consultants provided data, analysis and advice to the Compensation Committee, including market information that the Compensation Committee used when determining whether our executive compensation is competitive, commensurate with the executive’s responsibilities and consistent with market trends in executive compensation practices for companies in our industry. Neither consultant provided services to us other than consulting services related to the compensation and benefits of our directors, officers and employees. The Compensation Committee has considered the adviser independence factors required under SEC rules as they relate to Longnecker and Meridian and does not believe either’s work in 2020 raised a conflict of interest.

Use of Competitive Market Data

A key objective of our executive compensation program is to ensure that the total compensation opportunities available to our executives are competitive with those of oil and gas exploration and production companies with whom we compete for executive talent, investment dollars and business opportunities. We maintain a peer group for executive compensation and performance reference purposes to, among other things, assist in evaluating our executive compensation program against this key objective. The Compensation Committee also uses the peer group to determine our total shareholder return relative to our peers for purpose of determining the payout level for the PSUs.

Our Compensation Committee, with input and advice from its compensation consultant, typically reviews the peer group on an annual basis to ensure it remains appropriate year-over-year. The peer group is selected based on multiple factors, including revenue, assets, market capitalization, enterprise value, location, similar geographic footprint and complexity of operations.

In February 2020, the Compensation Committee updated the peer group used for 2020 compensation purposes, including for PSUs that were awarded in 2020. The 2020 peer group added QEP Resources, Inc., offsetting the loss of Jagged Peak Energy Inc., which had been acquired by Parsley Energy, Inc. QEP Resources, Inc. was a member of our 2017 peer group and 2018 peer group, but the Compensation Committee determined in 2019 to remove the entity from our 2019 peer group given the perceived likelihood that it would be acquired during 2019 following its announcement in early 2019 that it was exploring a sales process. Following the announcement by QEP Resources, Inc. in late 2019 that it had concluded its review of a sales process and determined to remain an independent public company, the Compensation Committee considered the factors noted above as it relates to QEP Resources, Inc. and determined in early 2020 to include the entity in our 2020 peer group.

 

In January 2021, both Parsley Energy, Inc. and WPX Energy, Inc. were acquired by other E&P companies and therefore ceased to be part of our peer group going forward.

32


 

Role of Executive Officers in Determining Executive Compensation

Our CEO provides the Compensation Committee with a review of the performance of our executives, other than himself, and makes recommendations to the Compensation Committee to assist it in determining executive compensation levels, other than his own. During 2020, our CEO reviewed compensation assessments and data provided by the Compensation Committee’s compensation consultant prior to and in connection with the recommendations he made to the Committee. While the Compensation Committee utilized this information and valued management’s observations with regard to compensation, the ultimate decisions regarding 2020 executive compensation were made by the Committee.

Other Compensation Practices and Policies

Employment, Severance or Change in Control Agreements

We have not entered into any employment agreements with our NEOs. However, we consider a strong workforce to be essential to our success. To that end, we recognize that the uncertainty which may exist among employees with respect to their “at-will” employment with us could result in the departure or distraction of personnel to our detriment. Accordingly, to encourage the continued attention and dedication of our employees, and to allow our management team to focus on the value to shareholders of strategic alternatives without concern for the impact on their continued employment, we maintain a Change-in-Control Severance Plan under which all of our regular, full-time U.S. employees are eligible to receive certain “double trigger” severance payments and benefits upon a qualifying termination of employment within a specified period following a change in control. In February 2021, to remain competitive with peer data, we updated the plan to increase the multiplier used to calculate the cash severance payable to NEOs that experience a qualifying termination following a change in control, among other changes. For a more detailed description of the Severance Plan, see “Potential Payments Upon a Change in Control.”

Company Guidelines Regarding Stock Ownership

We maintain robust Stock Ownership Guidelines for our NEOs, as well as for our non-employee directors, which are intended to demonstrate to our shareholders, the investing public and other employees that the NEOs and non-employee directors are invested in and committed to our company, and to further align their interests with the interests of our shareholders. Under the guidelines, each NEO must own company stock equal to a multiple of his or her base salary, and each non-employee director must own company stock equal to a multiple of his or her annual cash retainer.  

 

Position

Multiple of

Base Salary / Annual Cash Retainer

Chief Executive Officer

6X

Non-Employee Directors

5X

Chief Financial Officer

3X

Chief Operating Officer

3X

General Counsel

2X

Chief Accounting Officer

2X

 

Our NEOs and non-employee directors generally have five years from the later of the date of adoption of the guidelines or the date she or he became a NEO or non-employee director to come into full compliance with the guidelines. A NEO or non-employee director who is not in compliance with the guidelines on the applicable compliance date is prohibited from selling or transferring any company stock, except as needed to pay income tax liabilities relating to the vesting or exercise price of a stock option, and may be subject to such other discipline as determined by the Compensation Committee. There is an exception to the holding requirement for severe hardship or compliance with court or domestic relations orders, subject to approval by the Compensation Committee.

As of December 31, 2020, all participants were in compliance with the stock ownership guidelines, either through meeting the ownership requirement or by being within the transition period.

33


 

Company Anti-Hedging Policy

Our Insider Trading and Regulation FD Policy prohibits all of our directors, officers and other employees, as well as those acting on behalf of the Company, such as auditors, agents and consultants, from engaging in certain speculative transactions in our securities, including short-term trading, short sales, transactions in puts, calls or other derivatives, margin accounts, pledging for collateral purposes and hedging. To our knowledge, all such covered individuals are in compliance with this policy.

Clawback Policy

We have adopted a clawback policy that applies to each of our NEOs. Under the policy, recoupment of cash incentive compensation or performance-based equity compensation would generally be required in the event we restate our financial statements as a result of a material error in such financials that was caused by the fraud or intentional misconduct of one of the officers covered by the policy. In the event of such misconduct, we may recoup cash incentive compensation or performance-based equity compensation that was paid, granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure during the three years prior to the restatement. The policy gives the Compensation Committee discretion to determine whether a clawback of compensation should be initiated in any given case, as well as the discretion to make other determinations, including whether a covered individual’s conduct meets the specified standard, the amount of compensation to be clawed back and the form of reimbursement to the Company. In order to comply with applicable law, the clawback policy will be updated or modified once the SEC adopts final clawback rules pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Tax Treatment of NEO Compensation

Section 162(m) of the Code imposes an annual deduction limit of $1 million on the amount of compensation paid by a public company to “covered employees.” Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), the deduction limit did not apply to “performance-based compensation” that satisfied the requirements of Section 162(m). Performance stock unit awards and stock options issued under our 2016 Long-Term Incentive Plan prior to November 2, 2017 were generally intended to satisfy the requirements of the Section 162(m) performance-based compensation exemption. The TCJA eliminated the performance-based compensation exemption, although compensation paid pursuant to a written binding contract which was in effect on November 2, 2017, may be “grandfathered” and still qualify for the performance-based compensation exception under certain circumstances. While our Compensation Committee considers the impact of Section 162(m) and other tax rules when developing, structuring and implementing our executive compensation programs, the Compensation Committee also believes that it is important to preserve flexibility in administering compensation programs in a manner designed to promote varying corporate goals. Accordingly, some of our compensation awards are nondeductible.  

Early 2021 Compensation Decisions

In early 2021, the Compensation Committee considered the design of the executive compensation program, the views raised by our shareholders during our shareholder outreach and changes in industry conditions since 2020 and determined to refine the program for 2021 to further emphasize pay-for-performance and address the viewpoints raised by our shareholders. Listed below are some changes that have been implemented or are currently anticipated to be implemented in the 2021 compensation program.

 

Salaries for officers restored to unreduced levels on February 25, 2021 (ending temporary salary reductions imposed in May 2020).

 

Cash retainers for non-employee directors restored to unreduced levels on February 25, 2021 (ending temporary cash retainer reductions imposed in May 2020).

 

Formalized a formulaic approach for the 2021 AIP, with new transparent performance metrics, including metrics relating to debt reduction, cash return on capital employed and capital efficiency.

 

Limit the maximum payout of 2021 AIP to 200% of each NEO’s target bonus (down from 300% of each NEO’s base salary).  

 

The Committee plans to consider appropriate avenues to include additional metrics with an increased tie to absolute performance for 2021 LTIP awards.

34


 

The table below presents the new formulaic approach for our 2021 AIP with 55% of each NEO's AIP award based on a formulaic scoring of quantitative metrics and 45% based on the assessment of certain preset goals regarding environmental, social and governance, health and safety, organization and talent development and strategic initiatives. The formulaic results will be scored against the payout scale listed below, with the two Balance Sheet metrics being equally weighted within the combined 15% weighting.

 

Category

Weighting

Metric

Threshold

(50%)

Target

(100%)

Maximum

(200%)

Balance Sheet

15%

Net Debt / EBITDA Improvement

0.75x

1.0x

1.75x

Total Debt

$1,100

$1,070

$1,040

Returns

15%

Cash Return on Capital Employed

8%

9.5%

11.0%

Capital Efficiency

15%

F&D for 2021 Wells

$9.00

$8.00

$7.00

Cost Structure

10%

(LOE + Cash G&A) / Boe

$7.50

$7.00

$6.50

Formulaic Metrics

55%

 

 

 

 

Environmental, Social and Governance

Health and Safety

Organization and Talent Development

Strategic Initiatives

The combined payout percentage for these goals will be determined by the Compensation Committee after considering our quantitative and qualitative performance relative to the goals in these areas.

Other Goals

45%

 

 

 

 

 

35


 

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in this Proxy Statement with members of 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.

Respectfully submitted,

The Compensation Committee

Maire A. Baldwin (Chair)

Matthew G. Hyde

Steven J. Shapiro

Jeffrey H. Tepper

36


 

Executive Compensation

The following table sets forth the compensation paid to or earned by our NEOs in their capacities as NEOs of the Company during 2020, 2019 and 2018:

Summary Compensation Table

 

Name and

Principal Position

Year

Salary ($)(1)

Bonus ($)

Stock

Awards($)(2)

Option

Awards ($)

Non-Equity

Incentive Plan

Compensation ($)(3)

All Other

Compensation ($)(4)

Total ($)

Sean R. Smith

2020

560,692

5,242,233

783,000

20,348

6,606,273

Chief Executive Officer

2019

481,257

122,907

3,259,126

491,625

19,861

4,374,776

 

2018

457,112

130,625

2,983,826

522,500

16,500

4,110,563

George S. Glyphis

2020

400,688

2,613,556

399,129

23,792

3,437,165

Vice President and

2019

434,124

110,870

2,628,622

443,477

19,861

3,636,954

Chief Financial Officer

2018

417,422

117,832

2,239,217

471,328

16,500

3,262,299

Davis O. O’Connor

2020

373,456

1,693,153

323,294

25,664

2,415,567

Vice President and

2019

390,712

84,815

1,787,702

339,260

25,277

2,627,766

General Counsel

2018

375,680

90,142

1,550,105

360,566

16,500

2,392,993

Matthew R. Garrison

Vice President and

Chief Operating Officer

2020

354,973

1,675,370

333,450

20,240

2,384,033

Brent P. Jensen

2020

327,328

1,314,957

267,620

23,792

1,933,697

Vice President and

2019

342,453

61,221

1,366,971

244,882

23,405

2,038,932

Chief Accounting Officer

2018

329,277

65,065

1,091,377

260,260

16,500

1,762,479

Mark G. Papa

2020

323,878

-

927

324,805

Former Chief

2019

800,695

340,000

8,933

1,360,000

3,708

2,513,336

Executive Officer

2018

799,305

374,000

23,935

1,496,000

2,693,240

 

(1)

Mr. Papa’s 2020 Salary amount include $123,077 in accrued paid time off, which was paid to him upon his retirement.

(2)

Amounts in this column reflect the aggregate grant date fair value of restricted stock and performance stock units granted during 2020 computed in accordance with FASB’s ASC Topic 718, Stock-based Compensation (“ASC Topic 718”), excluding the effect of estimated forfeitures. Fair value of the performance stock units was determined using a Monte Carlo simulation. The assumptions used by the Company in calculating these amounts for 2020 are included in Note 6 to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). The maximum possible value of the 2020 PSUs, based on the closing price per share of our common stock on the date they were granted ($0.86), was as follows: $4,419,922 for Mr. Smith, $2,203,587 for Mr. Glyphis, $1,003,321 for Mr. O’Connor, $992,784 for Mr. Garrison and $779,212 for Mr. Jensen.  For additional information regarding the stock-based awards granted to the NEOs in 2020, refer to the 2020 Grants of Plan-Based Awards table.

(3)

Amounts for 2020 represent the Annual Incentive Program (AIP) compensation awarded in recognition of 2020 performance, which was paid to the NEOs in March 2021.  

(4)

Amounts in this column reflect matching contributions to the 401(k) Plan made by the Company on the NEO’s behalf, the value of holiday gift cards and the amount of imputed income associated with the Company-paid basic life insurance maintained on the NEO’s behalf and for reserved parking for the NEO.

37


 

Grants of Plan-Based Awards

 

 

 

Estimated Future Payouts

Under Non-Equity Incentive

Plan Awards

 

Estimated Future Payouts

Under Non-Equity Incentive

Plan Awards

 

All Other Stock

Awards: Number

of Shares of Stock

 

Grant Date Fair

value of Stock

and Option

 

Name

Grant Date

Threshold

($)

Target

($)

 

Maximum

($)

 

Threshold

(#)

 

Target

(#)

 

Maximum

(#)

 

or Units

(#) (2)

 

Awards

($)(3)

 

Sean R. Smith

 

$

870,000

 

$

2,175,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2/24/2020(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

81,937

 

 

218,772

 

 

7/28/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,569,722

 

 

2,209,961

 

 

7/28/2020

 

 

 

 

 

 

 

 

1,284,861

 

 

2,569,722

 

 

5,139,444

 

 

 

 

 

3,032,272

 

George S. Glyphis

 

$

443,477

 

$

1,330,431