EXHIBIT 10.12
OGE ENERGY CORP.
ANNUAL INCENTIVE COMPENSATION PLAN
I. PURPOSE AND EFFECTIVE TIME OF THE PLAN
The purpose of the Annual Incentive Compensation Plan (the "Plan") is
to maximize the efficiency and effectiveness of the operations of OGE Energy
Corp. and its subsidiaries (the "Company") by providing incentive compensation
opportunities to certain key executives and managers responsible for operational
effectiveness. The Plan is intended to encourage and reward the achievement of
certain results critical to meeting the Company's operational goals. It is also
designed to assist in the attraction and retention of quality employees, to link
further the financial interest and objectives of employees with those of the
Company, and to foster accountability and teamwork throughout the Company.
This Plan is designed to provide incentive compensation opportunities;
awards made under this Plan are in addition to base salary adjustments given to
maintain market competitive salary levels.
Payments pursuant to Article 6 of the Plan are intended to qualify
under the performance-based compensation exemption of Section 162(m)(4)(C) of
the Internal Revenue Code of 1986, as amended.
The Plan shall be effective as of June 30, 1998, subject to approval of
the Plan by the shareowners of OGE Energy Corp. at its 1998 annual meeting by
the affirmative vote of a majority of the shares of common stock of OGE Energy
Corp. present in person or represented by proxy at the meeting and entitled to
vote.
II. DEFINITIONS
When used in the Plan, the following words and phrases shall have the
following meanings:
2.1. "Base Salary" means the actual annual base salary in effect for
------------
the first full pay period after the beginning of the Plan Year as shown in the
personnel records of the Company, and, for a Participant who is added to the
Plan during a Plan Year pursuant to Section 4.3, his or her annual base salary
in effect at the time he or she becomes a Participant as shown in the personnel
records of the Company.
2.2. "Board" means the Board of Directors of Energy Corp.
-----
2.3. "Change of Control" shall mean the happening of any of the
-----------------
following events:
(i) An acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either (1) the
then outstanding shares of common stock of Energy Corp. (the
"Outstanding Company Common Stock") or (2) the combined voting power of
the then outstanding voting securities of Energy Corp. entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); excluding, however, the following: (1) any acquisition
directly from Energy
108
Corp., (2) any acquisition by Energy Corp., (3) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained
by Energy Corp. or any corporation controlled by Energy Corp. or (4)
any acquisition by any corporation pursuant to a transaction which
complies with clauses (1), (2) and (3) of subsection (iii) below; or
(ii) A change in the composition of the Board such that the
individuals who, as of January 1, 1998, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual who
becomes a member of the Board subsequent to January 1, 1998, whose
election, or nomination for election by Energy Corp.'s shareowners, was
approved by a vote of at least a majority of those individuals then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board; but, provided further,
that any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest with respect
to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board shall not be so considered as a member of the Incumbent
Board; or
(iii) Consummation of a reorganization, merger, share exchange
or consolidation or sale or other disposition of all or substantially
all of the assets of Energy Corp. (a "Business Combination"),
excluding, however, such a Business Combination pursuant to which (1)
all or substantially all of the individuals and entities who are the
beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to
such Business Combination beneficially own, directly or indirectly,
more than 60% of, respectively, the outstanding shares of common stock
and the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns Energy Corp. or all or substantially all of Energy
Corp.'s assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately
prior to such Business Combination, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be,
(2) no Person (other than the corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of Energy
Corp. or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of,
respectively, the outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power
of the outstanding voting securities of such corporation except to the
extent that such ownership existed prior to the Business Combination
and (3) at least a majority of the members of the board of directors of
the corporation resulting from such Business Combination were members
of the Incumbent Board at the time of the execution of the initial
agreement, or the action of the Board, providing for such Business
Combination; or
(iv) The approval by the shareowners of Energy Corp. of a
complete liquidation or dissolution of Energy Corp.
2.4. "Code" means the Internal Revenue Code of 1986, as amended.
----
2.5. "Committee" means the Compensation Committee of the Board or any
---------
other Committee of the Board designated by resolution of the Board to perform
certain administrative functions under the Plan provided that, to the extent
awards under the Plan are intended to be exempt from Section 162(m) of
109
the Code, such Committee shall be comprised of two persons, each of whom shall
qualify as an "outside director" for purposes of Section 162(m)(4) of the Code.
2.6. "Company" means Energy Corp., its subsidiary, Oklahoma Gas and
-------
Electric Company, and any domestic subsidiary or division of these entities, as
designated by the Committee for participation in the Plan.
2.7. "Company Performance Goals" shall have the meaning ascribed to it
--------------------------
by Section 6.2 hereof.
2.8. "Covered Employee" means, for any Plan Year, a Participant
-----------------
designated prior to the grant of a Target Company Award for such Plan Year who
is or may be a "covered employee" within the meaning of Section 162(m)(3) of the
Code for such Plan Year.
2.9. "Earned Award" means the Earned Individual Award, if any, and the
------------
Earned Company Award, if any, for a Participant for the applicable Plan Year.
2.10. "Earned Company Award" means the actual award earned under a
----------------------
Participant's Target Company Award during a Plan Year as determined by the
Committee after the end of the Plan Year (pursuant to Section 6.3 hereof).
2.11. "Earned Individual Award" means the actual award earned under a
------------------------
Participant's Target Individual Award during a Plan Year as determined by the
Committee after the end of the Plan Year (pursuant to Section 5.4 hereof).
2.12. "Energy Corp." shall mean OGE Energy Corp. and its successors and
------------
assigns.
2.13. "Participant" means any officer, executive or other key employee
-----------
of the Company selected by the Committee to be eligible to receive an award
under the Plan. Members of the Board who are not employed on a full-time basis
by the Company are not eligible to receive awards under the Plan.
2.14. "Performance Matrix" means the chart or charts or other schedules
------------------
approved by the Committee that are used to determine the percentage of each
Participant's Target Company Award which the Participant will actually receive
as a result of the attainment of Company Performance Goals.
2.15. "Plan" means this Annual Incentive Compensation Plan,as it may be
----
amended from time to time.
2.16. "Plan Year" means a fiscal year beginning January 1 and ending
---------
December 31.
2.17. "Target Company Award" means an award established pursuant to
---------------------
Article 6 hereof. Such Target Company Award shall be expressed as a percentage
of the Participant's Base Salary.
2.18. "Target Individual Award" means an award established pursuant to
-----------------------
Article 5 hereof. Such Target Individual Award shall be expressed as a
percentage of the Participant's Base Salary.
110
III. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee to the extent provided
herein. Subject to the provisions of the Plan, the Board shall have exclusive
authority to amend, modify, suspend or terminate the Plan at any time.
IV. ELIGIBILITY AND PARTICIPATION
4.1. Eligibility. Eligibility for participation in the Plan shall be
-----------
limited to those officers, executives or other key employees who are nominated
for participation by the Chief Executive Officer of Energy Corp. (the "Chief
Executive Officer") and then selected by the Committee to participate in the
Plan.
4.2. Participation. Participation in the Plan shall be determined
-------------
annually based upon nomination by the Chief Executive Officer and selection by
the Committee. Specific criteria for participation shall be determined by the
Committee prior to the beginning of each Plan Year. Persons selected for
participation shall be notified in writing of their selection, and of their
individual performance goals and Company Performance Goals and related Target
Individual Awards and Target Company Awards, as soon after approval as is
practicable.
4.3. Partial Plan Year Participation. Subject to Article 6 herein, the
-------------------------------
Committee may, upon recommendation of the Chief Executive Officer, allow an
individual who becomes eligible after the beginning of a Plan Year to
participate in the Plan for that period. In such case, the Participant's Earned
Award normally shall be prorated based on the number of full months of
participation during such Plan Year. However, subject to Section 5.1 and Article
6 herein, the Chief Executive Officer, subject to Committee approval, may
authorize an unreduced Earned Award.
4.4. Termination of Approval. In its sole discretion, the Committee may
-----------------------
withdraw its approval for participation in the Plan with respect to a Plan Year
for a Participant at any time during such Plan Year; provided, however, that
such withdrawal must occur before the end of such Plan Year and provided further
that, in the event a Change of Control occurs during a Plan Year, the Committee
may not thereafter withdraw its approval for a Participant during such Plan
Year. In the event of such withdrawal, the employee concerned shall cease to be
a Participant as of the date designated by the Committee, and the employee shall
not be entitled to any part of an Earned Award for the Plan Year in which such
withdrawal occurs. Such employee shall be notified of such withdrawal in writing
as soon as practicable following such action.
V. INDIVIDUAL AWARDS
5.1. Award Opportunities. At the beginning of each Plan Year, the
--------------------
Committee shall establish Target Individual Award levels for each Participant
who is to be granted an opportunity to achieve an Earned Individual Award. The
established levels may vary in relation to the responsibility level of the
Participant. In the event a Participant changes job levels during the Plan Year,
the Target Individual Award may be adjusted at the discretion of the Committee
to reflect the amount of time at each job level. Notwithstanding any provision
in this Plan to the contrary, (i) Target Individual Awards and Earned Individual
Awards shall not be granted to Covered Employees, and (ii)Target Individual
Awards shall not be dependent in any manner on, and shall be established
independently of and in addition to, the establishment of any Target Company
Awards or the payout of any Earned Company Awards pursuant to Article 6 herein.
111
5.2. Individual Performance Goals. At the beginning of each Plan Year,
-----------------------------
the Chief Executive Officer shall recommend individual performance goals for
each Participant who is granted a Target Individual Award. The Committee shall
consider and approve or modify the recommendations as appropriate. The level of
achievement of the individual performance goals by a Participant at the end of
the Plan Year, as determined pursuant to Section 5.4 below, will determine such
Participant's Earned Individual Award, which may range from 0% to 175% of such
Participant's Target Individual Award.
5.3. Adjustment of Individual Performance Goals. The Chief Executive
--------------------------------------------
Officer shall have the right to adjust the individual performance goals (either
up or down) during the Plan Year if he determines that external changes or other
unanticipated conditions have materially affected the fairness of the goals and
unduly influenced a Participant's ability to meet them; provided, however, that
no such adjustment to the Chief Executive Officer's individual performance goals
shall be made unless approved by the Committee; and provided further that no
adjustment of such individual performance goals for any Participant shall be
made based upon the failure, or the expected failure, to attain or exceed the
Company Performance Goals for any Target Company Award granted to such
Participant under Article 6 herein and provided further that no adjustment shall
be made of such individual performance goals for a Plan Year in which a Change
of Control occurs.
5.4. Earned Individual Award Determination. At the end of each Plan
----------------------------------------
Year, the Chief Executive Officer shall review the performance of each
Participant who received a Target Individual Award. Based on the Chief Executive
Officer's determination as to a Participant's level of achievement of his or her
individual performance goals, the Chief Executive Officer shall make a
recommendation to the Committee as to the Earned Individual Award to be received
by such Participant. The payment of all Earned Individual Awards is subject to
approval by the Committee. The payment of an Earned Individual Award to a
Participant shall not be contingent in any manner upon the attainment of, or
failure to attain, the Company Performance Goals for the Target Company Awards
granted to such Participant under Article 6.
5.5. Maximum Payable/Aggregate Award Cap. The maximum amount payable to
-----------------------------------
a Participant pursuant to this Article 5 for performance by the Participant
during any fiscal year of the Company shall be $250,000. The Committee also may
establish guidelines governing the maximum Earned Individual Awards that may be
earned by all Participants in the aggregate, in each Plan Year. These guidelines
may be expressed as a percentage of a financial measure, or such other measure
as the Committee shall from time to time determine.
5.6. Deferral of Payment. The Committee may in its sole discretion
-------------------
delay payment to a Participant pursuant to this Article 5, until the Participant
is no longer a "covered employee" under Section 162(m) of the Code, as amended
from time to time, its legislative history, and any regulations promulgated
thereunder.
VI. COMPANY AWARDS
In addition to any Target Individual Awards granted under Article 5,
Target Company Awards based solely on Company performance may be established
under this Article 6 for Participants. Earned Company Awards are intended to
satisfy the performance-based compensation exemption under Code Section
162(m)(4)(C) and the related regulations and shall thus be subject to the
requirements set forth in this Article 6.
112
6.1. Award Opportunities. On or before the 90th day of each Plan Year
--------------------
and in any event before 25% or more of the Plan Year has elapsed, the Committee
shall establish in writing for each Participant for whom a Target Company Award
is to be granted under this Article 6, the Target Company Award and specific
objective performance goals for the Plan Year, which goals shall meet the
requirements of Section 6.2 herein (such goals are hereinafter referred to as
"Company Performance Goals"). The extent, if any, to which an Earned Company
Award will be payable to a Participant will be based solely upon the degree of
achievement of such preestablished Company Performance Goals over the specified
Plan Year; provided, however, that, unless and until a Change of Control occurs,
the Committee may, in its sole discretion, reduce or eliminate the amount which
would otherwise be payable with respect to a Plan Year. Payment of an Earned
Company Award to a Participant shall consist of a cash award from the Company to
be based upon a percentage (which may exceed 100%) of the Participant's Target
Company Award.
6.2. Company Performance Goals. The Company Performance Goals
-----------------------------
established by the Committee pursuant to Section 6.1 will be based on one or
more of the following: total shareholder return, return on equity, return on
capital, earnings per share, market share, stock price, sales, costs, net
operating income, net income, return of assets, earnings before income taxes,
depreciation and amortization, return on total assets employed, capital
expenditures, earnings before income taxes, economic value added, cash flow,
retained earnings, results of customer satisfaction surveys, aggregate product
price and other product price measures, safety record, service reliability,
demand-side management (including conservation and load management), operating
and/or maintenance cost management (including operation and maintenance expenses
per Kwh), and energy production availability performance measures. At the time
of establishing a Company Performance Goal, the Committee shall specify the
manner in which the Company Performance Goal shall be calculated. In so doing,
the Committee may exclude the impact of certain specified events from the
calculation of the Company Performance Goal. For example, if the Company
Performance Goal were earnings per share, the Committee could, at the time this
Company Performance Goal was established, specify that earnings per share are to
be calculated without regard to any subsequent change in accounting standards
required by the Financial Accounting Standards Board. Company Performance Goals
also may be based on the attainment of specified levels of performance of Energy
Corp. and/or any of its subsidiaries under one or more of the measures described
above relative to the performance of other corporations. As part of the
establishment of Company Performance Goals for a Plan Year, the Committee shall
also establish a minimum level of achievement of the Company Performance Goals
that must be met for a Participant to receive any portion of his Target Company
Award. All of the provisions of this Section 6.2 are subject to the requirement
that all Company Performance Goals shall be objective performance goals
satisfying the requirement for "performance-based compensation" within the
meaning of Section 162(m)(4) of the Code and the related regulations.
6.3. Payment of an Earned Company Award. At the time the Target Company
----------------------------------
Award for a Participant is established, the Committee shall prescribe a formula
to determine the percentage (which may exceed 100%) of the Target Company Award
which may be payable to the Participant based upon the degree of attainment of
the Company Performance Goals during the Plan Year. Such formula may be
expressed in terms of a Performance Matrix, a form of which is attached hereto
as Schedule B. If the minimum level of achievement of Company Performance Goals
established by the Committee for a Participant for a Plan Year is not met, no
payment of an Earned Company Award will be made to the Participant for that Plan
Year. To the extent that the minimum level of achievement of Company Performance
Goals is satisfied or surpassed for a Participant for a Plan Year, and upon
written certification by the Committee that the Company Performance Goals have
been satisfied to a particular extent and that any other material terms and
conditions of the Company Performance Awards have been
113
satisfied, payment of an Earned Company Award shall be made to the Participant
for that Plan Year in accordance with the prescribed formula except that, unless
and until a Change of Control occurs, the Committee may determine, in its sole
discretion, to reduce or eliminate the payment to be made.
6.4. Maximum Payable. The maximum amount payable to a Participant
----------------
pursuant to this Article 6 for performance by the Participant during any fiscal
year of the Company shall be $1,000,000.
6.5. Committee Discretion. Notwithstanding Articles 3 and 5 herein, the
--------------------
Committee shall not have discretion to modify the terms of Target Company Awards
or the formula for calculating Earned Company Awards, except as specifically set
forth in this Article 6.
VII. FORM AND TIME OF PAYMENT OF AWARDS
Subject to Article 6 herein, as soon as practicable following the
availability of the Company's audited financial statements pertaining to the
applicable Plan Year, Earned Award payments, if any, for such Plan Year shall be
paid in cash.
VIII. TERMINATION OF EMPLOYMENT
8.1. Termination of Employment Due to Death, Disability, or Retirement.
-----------------------------------------------------------------
In the event a Participant's employment is terminated by reason of death, total
and permanent disability (as determined by the Committee), or retirement (as
determined by the Committee) during a Plan Year and such termination does not
occur within twenty-four (24) months after a Change of Control, the Earned
Award, determined in accordance with Section 5.4 and Section 6.3 herein, for
such Plan Year shall be reduced to reflect participation prior to termination.
This reduction shall be determined by multiplying said Earned Award by a
fraction; the numerator of which is the months of participation through the date
of termination rounded up to whole months and the denominator of which is 12.
The Earned Award thus determined for a Plan Year shall be paid as soon as
practicable following the release of the Company's audited financial statements
pertaining to such Plan Year.
8.2. Termination of Employment for Other Reasons. In the event a
------------------------------------------------
Participant's employment is terminated for any reason other than death, total
and permanent disability (as determined by the Committee) or retirement (as
determined by the Committee) during a Plan Year and such termination does not
occur within twenty-four (24) months after a Change of Control, all of the
Participant's rights to an Earned Award for the Plan Year then in progress shall
be forfeited; provided that, except in the event of a termination of employment
for cause (as determined in the sole discretion of the Committee and without
regard to Section 10.2 hereof), the Committee, in its sole discretion, may pay a
prorated award for the portion of that Plan Year that the Participant was
employed by Energy Corp. or any of its subsidiaries, computed as determined by
the Committee.
IX. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively and
who may include a trustee under a will or living trust) to whom any benefit
under the Plan is to be paid in case of his death before he received any or all
of such benefit. Each designation will revoke all prior designations by the same
Participant, shall be in a form prescribed by the Committee, and will be
effective only when filed by the Participant in writing with the Committee
during his lifetime. In the absence of any such designation, or if all
designated
114
beneficiaries predecease the Participant, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
X. CHANGE OF CONTROL
10.1. Termination Other than for Cause. Notwithstanding any other
-----------------------------------
provisions of the Plan, in the event a Participant's employment with Energy
Corp. or any of its subsidiaries is terminated voluntarily or involuntarily for
any reason other than for cause (with cause being determined by the Committee in
accordance with Section 10.2 hereof), within twenty-four (24) months after a
Change of Control, all awards, if any, previously deferred (with earnings) shall
be paid to the Participant within ten (10) business days of the termination,
along with the Target Company Award and Target Individual Award established for
the Participant for the Plan Year in progress at the time of the employment
termination, prorated for the number of days in the Plan Year in which the
Participant was employed by Energy Corp. or any of its subsidiaries, up to and
including the date of termination; provided, however, any such payment to a
Participant pursuant to this Section 10.1 shall be reduced to the extent the
Participant otherwise received payment of such Target Company Award or Target
Individual Award pursuant to the terms of any employment agreement, plan,
contract or other arrangement involving the Participant and Energy Corp. or any
of its subsidiaries.
10.2. Termination for Cause. In the event a Participant's employment
---------------------
with Energy Corp. or any of its subsidiaries is terminated for cause (as
determined by the Committee in the manner hereinafter set forth) within
twenty-four (24) months after a Change of Control, no Earned Award will be paid
for the Plan Year in progress at the time of the employment termination;
provided that, following a Change of Control, a Participant shall be deemed to
be terminated for cause only if his employment was terminated involuntarily at
the written direction of the Committee due solely to: (i) the willful and
continued failure of the Participant to substantially perform his duties (other
than any such failure resulting from physical or mental illness) for a minimum
period of two weeks after receiving a written demand for substantial performance
from the Committee which specifically identifies the manner in which the
Committee or Chief Executive Officer believes that the Participant has not
substantially performed his duties or (ii) the willful engaging by the
Participant in illegal conduct or gross misconduct that is materially and
demonstrably injurious to the Company.
XI. MISCELLANEOUS
11.1. Nontransferability. No Participant shall have the right to
------------------
anticipate, alienate, sell, transfer, assign, pledge or encumber his or her
right to receive any award made under the Plan until such an award becomes
payable to him or her.
11.2. No Right to Company Assets. Any benefits which become payable
---------------------------
hereunder shall be paid from the general assets of Energy Corp. or applicable
subsidiary. No Participant shall have any lien on any assets of the Company by
reason of any award made under the Plan.
115
11.3. No Implied Rights; Employment. The adoption of the Plan or any
-------------------------------
modification or amendment hereof does not imply any commitment to continue or
adopt the same plan, or any modification thereof, or any other plan for
incentive compensation for any succeeding year, provided, that no such
modification or amendment shall adversely affect rights to receive any amount to
which Participants have become entitled prior to such modifications and
amendments. Neither the Plan nor any award made under the Plan shall create any
employment contract between the Company and any Participant.
11.4. Participation. No Participant or other employee shall at any time
-------------
have a right to be selected for participation in the Plan for any Plan Year,
despite having been selected for participation in a prior Plan Year. Nothing in
this Plan shall interfere with or limit in any way the right of the Company to
terminate any Participant's employment at any time, nor confer upon any
Participant any right to continue in the employ of the Company.
11.5. All Determinations Final. All determinations of the Committee or
-------------------------
the Board as to any disputed questions arising under the Plan, including
questions of construction and interpretation, shall be final, binding and
conclusive upon all Participants and all other persons and shall not be
reviewable.
11.6. Plan Description. Each Participant shall be provided with a Plan
----------------
description and a Plan agreement for each Plan Year which shall include Target
Individual Awards, individual performance goals, Target Company Awards, Company
Performance Goals and a Performance Matrix for each year. In the event of a
conflict between the terms of the Plan description and the Plan, the terms of
the Plan shall control unless the Committee decides otherwise.
11.7. Successors. This Plan shall be binding on the successors and
----------
assigns of Energy Corp.
IN WITNESS WHEREOF, OGE Energy Corp. has caused this Plan to be
executed on its behalf by its Chairman of the Board, President and Chief
Executive Officer.
OGE ENERGY CORP.
By: ________________________________
Steven E. Moore
Chairman of the Board, President and
Chief Executive Officer
116