SEAGULL ENERGY CORPORATION
1996
EXECUTIVE INCENTIVE PLAN
(As revised and approved May 13, 1996)
Background
The 1996 Executive Incentive Plan (the "Incentive Plan") for Seagull Energy
Corporation is designed to motivate key employees of the Company to achieve
tough, but realistic, performance goals and to reward those employees who
perform at or above the expected level. The Incentive Plan defines participants,
award opportunities and performance goals for the 1996 performance year. It is,
of course, based upon the 1996 Operating Plan (the "Operating Plan") and is
designed to maximize performance incentives while allowing for the recognition
of individual efforts through a significant discretionary component.
Participation
Approximately 125 key employees are or may become participants in the Incentive
Plan. They are officers or individuals whose positions have been valued in the
salary structure in and above Grade 12. These are the persons responsible for
the annual and longer-term success of the company.
Timing of Payments
Seventy-five percent of any Incentive Plan award is paid to the recipient early
in the year following the performance year, and the remaining 25% in the next
year. In this case, the performance year is 1996. The award will be determined
and the first 75% increment paid in early 1997, and the remaining installment in
early 1998. The recipient must be an employee on the payment dates in order to
receive any of the respective payments.
Award Opportunities
Annual incentive targets are expressed as a percentage of total salary earned
during a given year and can increase to double the targeted amounts or decrease
to zero, relative to the achievement of predetermined performance goals and
subject to senior management and Board of Director discretion at year-end. The
Compensation Committee of the Board reserves the right to modify the performance
measures and award levels specified in the objective components of the Incentive
Plan if presently unforeseen circumstances should occur during the year which
invalidate any of the material assumptions that underlie the Operating Plan, or
if, in the opinion of the Compensation Committee, such modifications are
required to avoid a result that is inequitable to either the company or the
Incentive Plan participants.
Performance Measures
The performance measures for the Incentive Plan are summarized on pages 3-5.
Four performance criteria are included with the following weightings:
Pre-tax cash flow from operations 25% weight
Pre-tax cash flow from operations
to revenue ratio to E&P peers 25% weight
Discretionary individual performance assessment 25% weight
Company stock performance assessment 25% weight
The first component, pre-tax cash flow from operations ("PCFO"), is defined as
earnings before income taxes, plus operating and non-operating depreciation,
depletion and amortization, plus pre-tax incentive compensation expense, and is
based on actual corporate performance for the year as compared to the Company's
Operating Plan projection of PCFO.
The second component compares the ratio of PCFO from E&P to E&P revenue with the
same measures for our E&P peers. The definition of PCFO is the same as described
above, except incentive compensation expenditures are not added back to the
results, and the data is for E&P only. The PCFO and revenue figures will be for
the sum of the last four quarters ending September 30 of the performance year.
The third component, discretionary individual performance assessment, will be
determined individually and subjectively based on the respective participant's
individual job performance.
The fourth component, Company stock performance assessment, will be determined
by subjectively comparing the Company's stock price performance to the average
stock price performance by a selected group of "peer companies" over three
separate time periods. The time periods are:
year-end 1995 to year-end 1996;
rolling three-year average from year-end 1993 to year-end 1996; and
rolling five-year average from year-end 1991 to year-end 1996.
Each performance component will be measured at year-end independently of the
other. At that time, the Chief Executive Officer will recommend specific awards,
subject to final approval of each element of the total awards by the
Compensation Committee and ultimately the Board of Directors.
Performance Weightings:
25% on pre-tax cash flow from operations
25% on pre-tax cash flow from operations to revenue ratio to E&P peers
25% on subjective individual performance assessment
25% on subjective Company stock performance assessment
I. Objective Performance Assessment - 50%:
Pre-Tax Cash Flow from Operations ("PCFO") - 25%
The performance award will be calculated as follows:
Column 1 Column 2 Column 3 Column 4
-------- -------- -------- --------
Pre-Tax Cash Percentage of Percentage of PCFO Percentage of Total
Flow From Operating Plan Target Award Target Award
Operations (1) Projection (2) Earned (3) Earned (3)
-------------- -------------- ---------- ----------
97,988 85 0 0.00
103,752 90 25 6.25
109,516 95 50 12.50
115,280 100 100 25.00
121,044 105 110 27.50
126,808 110 120 30.00
132,572 115 130 32.50
138,336 120 140 35.00
144,100 125 150 37.50
149,864 130 160 40.00
155,628 135 170 42.50
161,392 140 180 45.00
167,156 145 190 47.50
172,920 150 200
(1) Earnings before income taxes plus operating and non-operating
depreciation, depletion and amortization and also plus pre-tax
incentive compensation expense (dollars in thousands).
(2) If subsequent events over the course of the performance year
invalidate any of the basic assumptions in the Operating Plan,
then the original Operating Plan projections will be revised to
conform the Operating Plan assumptions to reality. The initial
PCFO performance criteria for the Incentive Plan shown in Column
1 will then be adjusted by applying the percentages shown in
Column 2 to the revised Operating Plan projection of PCFO.
(3) If, after the actual PCFO for the performance for the year is
determined, it falls within the ranges shown in Column 1, the
exact incentive award percentages from Columns 3 and 4 will be
calculated by interpolation.
Pre-Tax Cash Flow from Operations ("PCFO") to revenue ratio to E&P
peers - 25%
Pre-tax cash flow will be defined in the same way as in the other
objective measures of the plan (i.e., pre-tax income plus amortization,
depreciation and depletion). In order to allow the appropriate
performance comparisons to industry peers, only pre-tax cash flow from
the E&P segment is considered in the calculation. Further, pre-tax cash
flow levels will be expressed as a percent of E&P revenues (which are
defined as gross sales less write-offs). The PCFO pre-tax cash flow and
revenue figures will be for the sum of the last four quarters ending
September 30 of the performance year.
Performance on the pre-tax cash flow to revenue ratio will be assessed
relative to the industry peer group used in the Company's Total
Shareholder Return Graph in the proxy statement. As a result, the
Company will be measured against other companies that face volatility
in the price of energy.
The performance award will be calculated as follows:
Percentage of PCFO Percentage of Total
PCFO Relative Against Peers Target Target Award
to Peers (1) Award Earned Earned
Less than 25th percentile 0 0
40th percentile 40 10
50th percentile 80 20
55th percentile 100 25
60th percentile 120 30
70th percentile 160 40
80th percentile 200 50
(1) Awards for performance between stated levels will be calculated
using straight-line interpolation.
II. Discretionary Performance Assessment - 50%
Both the discretionary individual performance assessment and the
Company stock performance assessment will be determined informally and
subjectively.
25% on the respective participant's individual job performance, based
primarily on the extent to which individual and collective goals and
objectives established at the beginning of the year are achieved.
25% on the Company's stock price performance based on rolling five-year
and three-year averages and year-end 1995 to year-end 1996 comparisons
with the average stock price performance by a selected group of "peer
companies" over the same three periods. The five-year and three-year
comparative calculations will be done on a "total return" basis,
weighted for variances in beginning market capitalization and in all
respects consistent with the SEC proxy disclosure rules.
Gatekeeper Performance Level
For this component, regardless of performance against the peer group,
if the five-year stock price performance has not resulted in a positive
return, no award will be made.
At year-end, the Chief Executive Officer will counsel with his direct
reports in completing discretionary performance assessments for each
participant and recommend specific awards, which will be subject to
final approval by the Compensation Committee and ultimately the Board
of Directors.
Total Plan Payout Potential
Maximum potential is 200% (1)
Target goal is 100% (1)
Minimum potential is 0% (1)
(1) Expressed as a percentage of the executive's targeted incentive
opportunity as defined in the Incentive Plan.
SEAGULL ENERGY CORPORATION
PERFORMANCE MEASURES
FOR THE 1996 EXECUTIVE INCENTIVE PLAN