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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

(Amendment No.     )

Filed by the Registrant   x

Filed by a Party other than the Registrant   ¨

Check the appropriate box:

 

¨

   Preliminary Proxy Statement    ¨    Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

x

   Definitive Proxy Statement      

¨

   Definitive Additional Materials      

¨

   Soliciting Material Pursuant to §240.14a-12      

Unit Corporation

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

x No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1) Title of each class of securities to which the transaction applies:

  

 

  (2) Aggregate number of securities to which the transaction applies:

  

 

  (3) Per unit price or other underlying value of the transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

  

 

  (4) Proposed maximum aggregate value of the transaction:

  

 

  (5) Total fee paid:

  

 

 

¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1) Amount Previously Paid:

  

 

  (2) Form, Schedule or Registration Statement No.:

  

 

  (3) Filing Party:

  

 

  (4) Date Filed:

  

 


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LOGO

UNIT CORPORATION

NOTICE OF THE ANNUAL MEETING OF OUR STOCKHOLDERS

AND

PROXY STATEMENT

 

 

Meeting Date

   Wednesday, May 4, 2011

Meeting Time

   11:00 a.m., Central Time

Meeting Place

   Tulsa Room -Ninth Floor
   Bank of Oklahoma Tower
   One Williams Center
   Tulsa, Oklahoma


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LOGO

Dear Stockholder:

On behalf of the board of directors and management, it is my pleasure to invite you to our Annual Meeting of Stockholders to be held on Wednesday, May 4, 2011 at 11:00 a.m., Central Time. The meeting will be held in the Tulsa Room on the ninth floor of the Bank of Oklahoma Tower, One Williams Center, Tulsa, Oklahoma.

By attending the meeting you will have an opportunity to hear a report on our operations and to meet our directors and officers. There will also be time for questions.

Information about the meeting, including the various matters on which you will act, may be found in the attached Notice of Annual Meeting of Stockholders and proxy statement.

We hope that you will be able to attend the annual meeting. However, whether or not you plan to attend the meeting in person, it is important that your shares be represented. Please vote your shares using one of the methods available to you.

On a personal note, I want to extend on behalf of the board our gratitude and thanks to Mr. King Kirchner for his 48 years of dedication and service to the company. With the expiration of his term as a director at the upcoming meeting, King will not be standing for re-election, but instead will be assuming the status of a director emeritus. At this meeting, we have two new nominees standing for election as directors. We believe that both of these individuals are well qualified to serve as directors and look forward to their contributions to the board and the company.

If you have any further questions concerning the annual meeting or any of the proposals, please contact our investor relations department at (918) 493-7700. If you are a registered stockholder and have questions regarding your stock ownership, you may contact our transfer agent, American Stock Transfer & Trust Company (AST) at:

Toll Free Number: (800) 710-0929

Foreign Stockholders: (718) 921-8283

Web Site Address: www.amstock.com

AST Customer Service Representatives are also available through AST’s “Live Help” Internet service weekdays from 9:00 a.m. - 5:00 p.m., Eastern Time.

I look forward to your participation and thank you for your continued support.

Dated this 21 st day of March, 2011.

Sincerely,

LOGO

John G. Nikkel

Chairman of the Board

7130 S. Lewis Ave., Suite 1000, Tulsa, OK 74136     PO Box 702500, Tulsa, OK 74170-2500

Phone:  (918) 493-7700     Fax: (918) 493-7711

 

 


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UNIT CORPORATION

7130 South Lewis Avenue, Suite 1000

Tulsa, Oklahoma 74136

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

 

Time and Date

   11:00 a.m., Central Time, on Wednesday, May 4, 2011

Place

   Tulsa Room on the ninth floor of the Bank of Oklahoma Tower, One Williams Center, Tulsa, Oklahoma

Items of Business

  

•      elect J. Michael Adcock, Steven B. Hildebrand, Larry C. Payne, and G. Bailey Peyton, the four directors named in the proxy, for a three-year term expiring in 2014 (Item No. 1 on the proxy card) ;

  

•      cast a non-binding advisory vote on executive compensation (“say-on-pay vote”) (Item No. 2 on the proxy card) ;

  

•      cast a non-binding advisory vote on the frequency of future say-on-pay votes (Item No. 3 on the proxy card) ;

  

•      ratify the selection of PricewaterhouseCoopers LLP, Tulsa, Oklahoma, as our independent registered public accounting firm for our fiscal year 2011 (Item No. 4 on the proxy card) ; and

  

•      transact any other business that properly comes before the meeting or any adjournment(s) of the meeting.

Record Date

   March 7, 2011

Voting Options

  

Most stockholders have four options for submitting their vote:

 

•      via the Internet at http://www.voteproxy.com ,

 

•      by phone (please see your proxy card for instructions),

 

•      by mail, using the paper proxy card, and

•      in person at the meeting.

Date of this Notice

   March 21, 2011

By Order of the Board of Directors,

LOGO

Mark E. Schell

Senior Vice President,

Secretary and General Counsel

YOUR VOTE IS IMPORTANT

Whether or not you plan to attend the meeting, we urge you to vote.


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PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS

May 4, 2011

 

 

This proxy statement and the accompanying proxy card are being mailed to our stockholders in connection with the solicitation of proxies by the board of directors for the 2011 Annual Meeting of Stockholders. Mailing of this proxy statement will commence on or about March 21, 2011.

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     Page  

Questions and Answers

     1   

Corporate Governance and Board Matters

     6   

General governance information

     6   

Director independence criteria

     6   

Director independence determinations

     7   

Role of the board in our risk management process

     7   

Board structure and committees

     8   

Consideration of nominees for director

     10   

Director qualifications

     10   

Executive sessions

     14   

Contacting our board

     14   

Board and committee evaluations

     14   

Directors’ Compensation and Benefits

     15   

Cash compensation

     15   

Stock options

     15   

Director compensation table

     17   

Ownership of Our Common Stock by Beneficial Owners and Management

     18   

Directors and executive officers

     18   

Stockholders owning 5% or more of our common stock

     19   

Executive Compensation

     20   

Overview of NEOs’ 2010 compensation

     20   

Highlights of 2010 financial performance

     20   

Protecting the integrity of our compensation practices

     20   

Compensation committee report

     21   

Compensation discussion and analysis

     21   

Summary compensation table

     35   

Grant of plan-based awards for 2010

     37   

Outstanding equity awards at end of 2010

     38   

Option exercises and stock vested table for 2010

     39   

Non-qualified deferred compensation for 2010

     39   

 

(i)


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Potential Payments on Termination or Change-in-Control

     41   

Separation benefit plan

     42   

Change-in-control arrangements

     42   

Payments on termination or change-in-control table

     45   

Retirement or consulting agreements

     47   

Related Person Transactions

     47   

Our related person transaction policy

     47   

Certain transactions between the company and its officers, directors, nominees for director and their associates

     48   

Report of the Audit Committee

     48   

Principal Accountant Fees and Services

     49   

Fees incurred for PricewaterhouseCoopers LLP

     49   

Policy on audit committee pre-approval of audit and permissible non-audit services of independent auditor

     49   

Compensation Committee Interlocks and Insider Participation

     50   

Items to be Voted On

     50   

Item 1: Election of directors

     50   

Item 2: Advisory vote on executive compensation (“say on pay”)

     54   

Item 3: Advisory vote on the frequency of a say-on-pay advisory vote on executive compensation

     54   

Item 4: Ratification of appointment of independent registered public accounting firm

     55   

Other Matters

     55   

Section 16(a) beneficial ownership reporting compliance

     55   

Matters which may come before the meeting

     55   

2012 stockholder proposals or nominations

     55   

Contacting us

     56   

Availability of our Form 10-K, annual report and proxy statement

     57   

Incorporation by reference

     57   

 

(ii)


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QUESTIONS AND ANSWERS

 

 

 

 

Q: Why am I receiving these materials?

 

A: The board of directors of Unit Corporation, a Delaware corporation, is providing these proxy materials to you in connection with our annual meeting of stockholders. The meeting will take place on May 4, 2011. As a stockholder, you are invited to attend the meeting and are entitled to and requested to vote on the items of business described in this proxy statement.

 

Q: What is included in these materials?

 

A: These materials include:

 

   

this Notice of the Annual Meeting of our Stockholders and Proxy Statement (the “proxy statement”); and

 

   

our Annual Report for the year ended December 31, 2010 (the “annual report”).

If you requested printed versions of these materials by mail, these materials also include the proxy card or vote instruction form for the annual meeting.

 

Q: Who can vote?

 

A: You can vote if you were a stockholder at the close of business on the record date, March 7, 2011. On that date, there were 47,995,522 shares outstanding and entitled to vote at the meeting.

 

Q: What information is contained in this proxy statement?

 

A: The information included relates to the proposals to be voted on at the meeting, the voting process, the compensation of our directors and certain executive officers, and certain other required information.

 

Q: What is an “NEO?”

 

A: An NEO is one of the “named executive officers” we provide compensation information about in this proxy statement. For purposes of this proxy statement, our NEOs are:

 

   

Larry D. Pinkston, our CEO and President;

 

   

Mark E. Schell, our Senior Vice President, General Counsel and Secretary;

 

   

David T. Merrill, our Chief Financial Officer and Treasurer;

   

John Cromling, the Executive Vice President of Unit Drilling Company; and

 

   

Bradford J. Guidry, the Executive Vice President of Unit Petroleum Company.

 

Q: Can I access the proxy material on the Internet?

 

A: Yes. We place the proxy material on our web site at www.unitcorp.com .

 

Q: How may I obtain the company’s 10-K?

 

A: You may go to our website, www.unitcorp.com , and download and print a copy of our Form 10-K or you can have one mailed to you at no charge by submitting a request for one to:

Unit Corporation

Attn: Investor Relations

7130 South Lewis Avenue, Suite 1000

Tulsa, Oklahoma 74136

(918) 493-7700

www.unitcorp.com

We will also furnish any exhibit to the 2010 Form 10-K if specifically requested.

 

Q: Who can attend the meeting?

 

A: All stockholders can attend.

 

Q: What am I voting on?

 

A: You are voting on:

 

   

the election of J. Michael Adcock, Steven B. Hildebrand, Larry C. Payne, and G. Bailey Peyton to the board of directors for terms that expire in 2014;

 

   

a non-binding advisory vote on executive compensation as disclosed in this proxy statement (“say-on-pay vote”);

 

   

a non-binding advisory vote on the frequency of future say-on-pay votes; and

 

   

the ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2011.

 

Q: How do I cast my vote?

 

A:

If you hold your shares as a stockholder of record, you can vote in person at the meeting or you can vote by mail, telephone or the Internet.

 

 

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If you are a street-name stockholder, you will receive instructions from your bank, broker or other nominee describing how to vote your shares.

The enclosed proxy card contains instructions for voting by mail, by telephone, or over the Internet. The proxies identified on the proxy card will vote the shares of which you are the stockholder of record in accordance with your instructions. If you submit a proxy card without giving specific voting instructions, the proxies will vote those shares as recommended by the board.

 

Q: How does the board recommend I vote on the proposals?

 

A: The board recommends you vote “FOR” each of Items No. 1, 2 and 4, and “ONE YEAR” for Item No. 3.

 

Q: Can I revoke my proxy?

 

A: Yes. You can revoke your proxy by:

 

   

submitting a new proxy;

 

   

giving written notice before the meeting to our corporate secretary stating that you are revoking your proxy; or

 

   

attending the meeting and voting your shares in person.

 

Q: Who will count the vote?

 

A: American Stock Transfer & Trust Company, our transfer agent, will count the vote. A representative of American Stock Transfer & Trust Company will also act as the inspector of election.

 

Q: How many votes must be present to hold the annual meeting?

 

A: In order to conduct business and have a valid vote at the meeting a quorum must be present in person or represented by proxies. A quorum is defined as at least a majority of the shares outstanding on the record date and entitled to vote. In accordance with our amended and restated bylaws and Delaware law, broker “non-votes” and proxies reflecting abstentions will be considered present and entitled to vote for purposes of determining whether a quorum is present.
Q: What are broker “non-votes?”

 

A: Broker “non-votes” occur when a broker is not permitted to vote shares it holds for a beneficial owner and the beneficial owner does not provide voting instructions. Shares held in a broker’s name may be voted by the broker, but only in accordance with the rules of various national and regional securities exchanges. Under those rules, the broker must follow the instructions of the beneficial owner. If instructions are not provided, the broker may generally vote on routine matters but cannot vote on non-routine matters. This means that if you do not provide voting instructions to your broker for the non-routine items on our agenda, your broker will inform the inspector of elections that it does not have the authority to vote your shares with respect to those matters. This is referred to as a “broker non-vote.”

 

Q: Which ballot measures are considered “routine” or “non-routine?”

 

A: The ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2011 (Item No. 4) is a matter considered routine under applicable rules. A broker or other nominee may generally vote on routine matters, and therefore no broker non-votes are expected to exist in connection with Item No. 4.

The election of directors (Item No. 1), the advisory vote on executive compensation (Item No. 2), and the advisory vote on the frequency of the advisory vote on executive compensation (Item No. 3) are matters considered non-routine under applicable rules. A broker or other nominee cannot vote without instructions on non-routine matters, and therefore there may be broker non-votes on Item Nos. 1, 2 and 3.

 

Q: How many votes are required to approve the proposals?

 

A: Directors will be elected by a plurality of the votes cast. This means that the four nominees with the greatest number of “FOR” votes will be elected as directors. Votes withheld will have no effect on the election of directors. Broker “non-votes” will be treated as though they are not entitled to vote and will not affect the outcome of the director elections.
 

 

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Approval of Item No. 2 and Item No. 4 both require the affirmative vote of a majority of the shares represented in person or by proxy at the meeting and entitled to vote on the proposal. Abstentions on these matters will be treated as votes against the proposal. Broker “non-votes” will be treated as though they are not entitled to vote and will not affect the outcome of the proposals.

The frequency option (one, two, or three years) selected by the greatest number of shares represented in person or by proxy at the meeting and entitled to vote on the proposal will determine the voting outcome for Item No. 3. Abstentions and broker “non-votes” will have no effect on the outcome of the vote on Item No. 3.

 

Q: What is the difference between holding shares as a stockholder of record and as a beneficial owner?

 

A: Most of our stockholders hold their shares through a broker or other nominee rather than directly in their own name. As summarized below, there are some distinctions between shares held of record and those owned beneficially.

 

     Stockholder of Record. If your shares are registered directly in your name with the transfer agent, you are considered, with respect to those shares, the stockholder of record , and these proxy materials are being sent directly to you. As the stockholder of record , you have the right to grant your voting proxy directly to the company or to vote in person at the meeting. We have enclosed or sent a proxy card for you to use.

 

     Beneficial Owner. If your shares are held in a brokerage account or by another nominee, you are considered the beneficial owner of shares held in street name , and these proxy materials are being forwarded to you together with a voting instruction card. As the beneficial owner, you have the right to direct your broker, trustee or nominee how to vote and are also invited to attend the meeting.

 

     Since a beneficial owner is not the stockholder of record , you may not vote these shares in person at the meeting unless you obtain a “legal proxy” from the broker, trustee or nominee that holds your shares, giving you the right to vote the shares
 

at the meeting. Your broker, trustee or nominee has enclosed or provided voting instructions for you to use in directing the broker, trustee or nominee how to vote your shares.

 

Q: What shares are included on my proxy card?

 

A: Your proxy card represents all shares registered to your account in the same social security number and address. However, the proxy card does not include shares held for participants in our 401(k) plan. Instead, those participants will receive from the plan trustee separate voting instruction cards covering these shares. If voting instructions are not received from participants in the plan, the plan trustee will vote the shares in the same proportion as the votes that were cast by participants.

 

Q: What does it mean if I get more than one proxy card?

 

A: Your shares are probably registered in more than one account. You should vote each proxy card you receive. We encourage you to consolidate all your accounts by registering them in the same name, social security number and address.

 

Q: How many votes can I cast?

 

A: On each matter, including each director position, you are entitled to one vote per share.

 

Q: What happens if additional matters are presented at the meeting?

 

A: Other than the four items of business described in this proxy statement, we are not aware of any other business to be acted on at the meeting. If you grant a proxy, the persons named as proxyholders, Larry D. Pinkston and Mark E. Schell, will have the discretion to vote your shares on any additional matters properly presented for a vote at the meeting. If, for any unforeseen reason, one or more of the board’s nominees are not available as a candidate for director, the persons named as proxy holders will vote your proxy for that candidate or candidates as may be nominated by the board on the recommendation of the nominating and governance committee.

 

Q: Where can I find the voting results of the annual meeting?

 

A:

The preliminary voting results will be announced at the annual meeting. The final voting results

 

 

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will be tallied by the inspector of election and published in a Current Report on Form 8-K, which we are required to file with the SEC within four business days following the annual meeting.

 

Q: What is the deadline to propose actions for consideration at next year’s annual meeting of stockholders or to nominate individuals to serve as directors?

 

A: Stockholder proposals. For a stockholder proposal to be considered for inclusion in our proxy statement for next year’s annual meeting, the written proposal must be received by our corporate secretary at our principal executive offices no later than November 22, 2011. If the date of next year’s annual meeting is moved more than 30 days before or after the anniversary date of this year’s meeting, the deadline for inclusion of proposals in our proxy statement is instead a reasonable time before we begin to print and mail our proxy materials. Proposals will also need to comply with SEC regulations under Rule 14a-8 regarding the inclusion of stockholder proposals in company-sponsored proxy materials. Proposals should be addressed to:

Corporate Secretary

Unit Corporation

7130 South Lewis Avenue, Suite 1000

Tulsa, Oklahoma 74136

Fax: (918) 496-6302

 

     For a stockholder proposal that is not intended to be included in our proxy statement under Rule 14a-8, the stockholder must deliver a proxy statement and form of proxy to holders of a sufficient number of shares of our common stock to approve that proposal, provide the information required by our bylaws and give timely notice to our corporate secretary in accordance with our bylaws, which, in general, require that the notice be received by the corporate secretary:

 

   

not earlier than the close of business on January 5, 2012; and

 

   

not later than the close of business on February 4, 2012.

 

     If the date of the stockholder meeting is moved more than 30 days before or 70 days after the anniversary of our annual meeting for the previous year, then notice of a stockholder proposal that is not intended to be included in
 

our proxy statement under Rule 14a-8 must be received no earlier than the close of business 120 days before the meeting and no later than the close of business on the later of the following two dates:

 

   

90 days before the meeting; and

 

   

10 days after public announcement of the meeting date.

 

    

Nomination of director candidates. You may propose director candidates for consideration by the board’s nominating and governance committee. Any recommendations should include the nominee’s name and qualifications for board membership and should be directed to our corporate secretary at the address of our principal executive offices set forth above. In addition, our bylaws permit a stockholder to nominate directors for election at an annual stockholder meeting. To nominate a director, a stockholder must deliver a proxy statement and form of proxy to holders of a sufficient number of shares of our common stock to elect the nominee and provide the information required by our bylaws, including a statement by the stockholder identifying (i) the name and address of the stockholder, as they appear on the company’s books, and of the beneficial owner, if any, on behalf of who the nomination or proposal is made, (ii) the class and number of shares of our capital stock which are owned beneficially and of record by the stockholder (and such beneficial owner, if any), (iii) whether and the extent to which any hedging or other transaction or series of transactions has been entered into by or on behalf of, or any other agreement, arrangement or understanding (including any short positions or any borrowing or lending of shares of stock) has been made, the effect or intent of which is to mitigate loss or manage risk of a stock price change for or to increase the voting power of such stockholder or beneficial owner with respect to any shares of stock of the corporation, (iv) a representation that the stockholder is a holder of record of our stock entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to propose the nomination, and (v) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (A) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of our

 

 

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outstanding capital stock required to elect the nominee and/or (B) otherwise to solicit proxies from stockholders in support of the nomination. In addition, the stockholder must give timely notice to our corporate secretary in accordance with our bylaws, which, in general, require that the notice be received by the corporate secretary within the January 5, 2012 through February 4, 2012 time period described above.

 

     Copy of bylaw provisions. You may contact our corporate secretary at our principal executive offices for a copy of the relevant bylaw provisions regarding the requirements for making stockholder proposals and nominating director candidates. Our bylaws are also available on our website at http://www.unitcorp.com .

 

Q: How is this proxy solicitation being conducted?

 

A: We have hired Alliance Advisors, LLC, Bloomfield, New Jersey, as proxy solicitor to assist in the distribution of proxy materials and solicitation of votes. We will pay Alliance Advisors a fee of $6,500, plus reasonable out-of-pocket expenses incurred in connection with their proxy solicitation activities on our behalf. We will reimburse brokerage houses and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy and solicitation materials to stockholders. Some of our employees may also solicit proxies. Alliance Advisors or our employees may solicit proxies in person, by telephone and by mail. None of our employees
 

will receive special compensation for these services, which the employees will perform as part of their regular duties.

 

Q: What is the company’s fiscal year?

 

A:

The company’s fiscal year is the calendar year period that ends on the 31 st of December. Unless otherwise stated, all information presented in this proxy statement is based on the company’s fiscal year.

 

Q: How can I obtain the company’s corporate governance information?

 

A: Our Internet website is located at www.unitcorp.com . You may also enter www.unitcorp.com/corpgov.html for a direct link to the following information:

 

   

Our bylaws;

 

   

Audit Committee Charter;

 

   

Compensation Committee Charter;

 

   

Nominating and Governance Committee Charter;

 

   

Corporate Governance Guidelines;

 

   

Code of Business Conduct and Ethics;

 

   

Accounting and Auditing Complaint Procedures;

 

   

Policy and Procedures with respect to Related Person Transactions; and

 

   

Director Independence guidelines.

 

   Our corporate governance webpage also has a link for reporting on any accounting, internal controls, or auditing matters that pertain to us.
 

 

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CORPORATE GOVERNANCE AND BOARD MATTERS

 

 

 

 

G ENERAL GOVERNANCE INFORMATION

We are committed to having sound corporate governance principles. Our Corporate Governance Guidelines and Code of Business Conduct and Ethics are available on our website at http://www.unitcorp.com/corpgov.html and copies of these documents may also be obtained from our corporate secretary. These provisions apply to our employees, including our principal executive officer, principal financial officer, and principal accounting officer. We will post any amendments or waivers to our Code of Business Conduct and Ethics (to the extent applicable to our CEO, principal financial officer, or principal accounting officer) on our website.

Each year, our directors and executive officers are asked to complete a director and officer questionnaire which requires disclosure of any transactions with us in which the director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest. Our CEO and general counsel are charged with resolving any conflict of interests not otherwise resolved under one of our other policies.

D IRECTOR INDEPENDENCE CRITERIA

Our board has defined an independent director as a director who the board has determined has no material relationship with the company, either directly, or as a partner, stockholder, or executive officer of an organization that has a relationship with the company. A relationship is “material” if, in the judgment of the board, the relationship would interfere with the director’s independent judgment. Based on the materiality guidelines adopted by the board, a director is not independent if:

 

   

the director, or the director’s immediate family member received as direct compensation any payment from the company in excess of $120,000 during any twelve-month period within the last three years, other than compensation for board service and pension or other forms of deferred compensation for prior service with the company, except that compensation received by an immediate family member for service as an employee of the company (other than as an executive officer) need not be considered in determining independence;

   

the director is an executive officer or employee of, or his or her immediate family member, is an executive officer of, a company, or other for profit entity, to which the company made, or from which the company received for property or services (other than those arising solely from investments in the company’s securities), payments in excess of the greater of $1 million or 2% of that company’s consolidated gross revenues in any of the last three fiscal years; or

 

   

the director serves as an executive officer of any tax exempt organization which received contributions from the company in any of the preceding three fiscal years in an aggregate amount that exceeded the greater of $1 million or 2% of that tax exempt organization’s consolidated gross revenues.

Any person who, or whose immediate family member(s), has within the last three years had any of the following relationships with the company does not qualify as an independent director.

 

   

Former employees. No director will be independent if he or she is currently, or was at any time within the last three years, an employee of the company.

 

   

Interlocking directorships. No director, and no immediate family member of a director, may currently be, or have been within the last three years, employed as an executive officer of another company where any of our present executive officers at the same time serves or served on that company’s compensation committee.

 

   

Former executive officers of company. No director will be independent if he or she has any immediate family member that is currently, or was at any time within the last three years, an executive officer of the company.

 

   

Former auditor. No director will be independent if (i) he or she or an immediate family member is a current partner of a firm that is the company’s internal or external auditor; (ii) the director is a current

 

 

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employee of such a firm; (iii) the director has an immediate family member who is a current employee of such a firm; and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice; or (iv) the director or an immediate family member was at any time within the last three years but is no longer a partner or employee of such a firm and personally worked on the company’s audit within that time.

Additional requirements for audit committee members.   A director is not considered independent for purposes of serving on the audit committee, and may not serve on the audit committee, if the director:

 

   

receives directly or indirectly any consulting, advisory, or compensatory fee from the company, other than fees for service as a director or fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the company (provided that such compensation is not contingent in any way on continued service); or

 

   

is an affiliated person of the company or its subsidiaries, as determined in accordance with SEC regulations. In this regard, audit committee members are prohibited from owning or controlling more than 10% of any class of the company’s voting securities or such lower amount as may be established by the SEC.

Additional requirements for compensation committee members.   A director is not considered independent for purposes of serving on the compensation committee, and may not serve on the compensation committee, if the director:

 

   

receives directly or indirectly any remuneration as specified for purposes of Section 162(m) of the Internal Revenue Code;

 

   

has ever been an officer of the company; or

 

   

has a direct or indirect material interest in any transaction, arrangement or relationship or any series of similar transactions, arrangements or relationships required to be disclosed under SEC Regulation S-K Item 404(a) and involving, generally, amounts in excess of $120,000.

D IRECTOR INDEPENDENCE DETERMINATIONS

The board has determined that William B. Morgan, John H. Williams, J. Michael Adcock, Gary R. Christopher, Robert J. Sullivan Jr., Steven B. Hildebrand, Larry C. Payne and G. Bailey Peyton have no material relationship with the company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the company) and is independent within the meaning of both our director independence standards and those of the NYSE, as currently in effect. The board has also determined that each of the members of its three standing committees has no material relationship with the company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the company) and is “independent” within the meaning of our director independence standards.

R OLE OF THE BOARD IN OUR RISK MANAGEMENT PROCESS

Oversight of risk management committee.   Our board’s oversight of our risk management activities is delegated to our audit committee. The audit committee manages this responsibility by maintaining regular contact with our director of corporate planning, who oversees our risk management committee. The risk management committee was established in April of 2009, and is staffed by members of our executive and operations management employees. The objective of this committee is to identify and analyze factors that might pose a significant risk to our company as a whole. In the fall of 2009, the committee began the process of conducting in-depth risk analyses of the most significant potential risks initially identified. As necessary and feasible, remediation plans have been developed for the highest-priority risks. In April 2010, the committee completed its first full report and presented its findings to the audit committee. A second annual analysis was completed and presented to the audit committee in February 2011. Monitoring of the risks and the remediation plans, as appropriate, is ongoing. The director of corporate planning provides periodic progress reports directly to the audit committee, which provides input and direction that is communicated back to the risk management committee. The audit committee keeps the full board updated on the ongoing risk management activities of the company and reports any significant findings to the board. In addition, management discusses its highest priority risks and remediation plans with the full board.

 

 

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Oversight of hedging activities.   To varying amounts, we hedge the interest we incur under our bank credit facility. We also hedge some of our oil, natural gas and natural gas liquids production. Our objective in each instance is to reduce our exposure to volatile forces out of our control, such as interest rates or commodity prices. Any risks to our enterprise posed by our hedging activities is directly overseen by our board. The board defines the scope of our permissible hedging or derivatives activities. The audit committee (and, ultimately, the board) monitors our hedging activities on an ongoing basis.

B OARD STRUCTURE AND COMMITTEES

Our board is currently structured so that the principal executive officer (our CEO) and board chair positions are separate. Our Corporate Governance Guidelines provide that the board has no policy with respect to separation of these positions. Our board believes that the decision to combine or separate those positions should be an ad hoc decision based on the qualities of the individuals being considered to fill them at a given point in time. Our board’s oversight of risk management has had no effect on our leadership structure.

The current structure is a result of specific facts and circumstances and not a specific governance policy. When Mr. Nikkel chose to step down as CEO and retain only his Chairman position in 2005, both he and Mr. Pinkston had many years of leadership experience with the company, along with the valuable insights that such experience provides. Separating the Chairman and CEO positions at that time was part of the succession plan for Mr. Nikkel, and the board felt that his ongoing service as Chairman would be a continuing benefit to the company. Accordingly, the board chose to have Mr. Nikkel continue in his role as Chairman, and elected Mr. Pinkston to succeed him as CEO. Our board believes that the combined experience and knowledge of Messrs. Pinkston and Nikkel, strengthened further by several years of successful leadership and collaboration under the current structure, continues to benefit the company. At this

time and in view of the individuals involved, maintaining the separation of the CEO and Chairman positions is the most appropriate leadership structure.

Our board does not have a “lead independent director,” though one of its independent directors does preside over all executive sessions of the board.

As of the date of this proxy statement, our board has nine directors and the following three standing committees:

 

   

audit;

 

   

compensation; and

 

   

nominating and governance.

The board is divided into three classes with each class historically consisting of three directors. If all four nominees standing for election at this year’s annual meeting are elected, then Class III will consist of four directors. Directors serve for a three year term.

Each of the board’s three standing committees operates under a written charter adopted by the committee. Each committee’s charter is available at our website at http://www.unitcorp.com/corpgov.html . In addition, copies of these charters may also be obtained from our corporate secretary.

During 2010, the board and its committees held a total of 24 meetings. Our board met eight times, seven of which were regularly scheduled meetings, and one a special meeting. The committees met in the aggregate 16 times. All directors attended 100% of the board meetings except that one director missed the one special meeting of the board. Each committee member attended 100% of his respective committee meetings, except that one director missed two of eight committee meetings. No director attended less than 75% of board and applicable committee meetings. Directors are encouraged to attend our annual meeting of stockholders. All directors attended our last annual meeting of stockholders. In addition to meetings, the board and the various committees may act, from time to time, by unanimous consent.

 

 

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The following table identifies the membership of each of the three standing committees and the number of meetings the committee held during 2010. A summary of each committee’s responsibilities follows the table.

 

DIRECTOR    COMMITTEE MEMBERSHIP
   Audit     Compensation     Nominating
and
Governance 

William B. Morgan

   x    x    x *

John H. Williams

        x    x

J. Michael Adcock

   x    x *    x

Gary R. Christopher

   x          

Robert J. Sullivan Jr.

             x

Steven B. Hildebrand

   x *    x     

Number of meetings in 2010

   8    5    3

 

  * Designates the chairman of the committee.

 

Audit Committee.   The responsibilities of our audit committee include:

 

   

selecting our independent registered public accounting firm;

 

   

approving all audit engagement fees and terms;

 

   

to pre-approve all audit and non-audit services to be rendered by our independent registered public accounting firm;

 

   

reviewing and approving our annual and quarterly financial statements;

 

   

to consult with our employees and our independent registered public accounting firm to determine the adequacy of our internal accounting controls over financial reporting;

 

   

overseeing our relationship with our independent registered public accounting firm;

 

   

overseeing our internal audit functions;

 

   

reviewing with our independent registered public accounting firm and our internal audit department and management any significant matters regarding internal controls over financial reporting that may come to their attention during the conduct of their audit;

 

   

recommending to our board whether the financial statements should be included in our annual report on Form 10-K;

 

   

reviewing our earnings press releases, as well as our policies with respect to the publication of our earnings and other financial information; and

   

monitoring our ongoing risk assessment and management activities.

The committee has the authority to form and delegate authority to subcommittees and to delegate authority to one or more of its members.

The committee has the authority to obtain advice and assistance from, and receive appropriate funding from the company for, outside legal, accounting or other advisors as the committee deems necessary to carry out its duties.

The committee has also established procedures for the receipt, retention and treatment (on a confidential basis) of complaints received by the company, the board or the audit committee, regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters. These procedures are described in the Accounting and Auditing Complaint Procedures posted on our website.

The report of the audit committee is included at page 48.

Compensation Committee.   Our compensation committee has overall responsibility for approving and evaluating director and executive officer compensation plans, policies and programs. In carrying out these responsibilities the committee:

 

   

annually reviews and approves any corporate goals and objectives relevant to our CEO’s compensation, and makes recommendations to the board as to our CEO’s compensation;

 

 

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recommends to our board the compensation of our other executive officers and certain key employees;

 

   

reviews the severance arrangements, change-in-control agreements and any special or supplemental benefits or plans (if any) applicable to our NEOs;

 

   

administers any director and employee compensation plans, policies and programs, and discharges its duties under any of those plans;

 

   

recommends director compensation;

 

   

reviews and approves the “compensation discussion and analysis” for inclusion in our proxy statement; and

 

   

has the authority to retain compensation consultants or other advisors to assist the committee in its evaluation of director, CEO, or executive officer compensation.

The committee has the authority to form and delegate authority to subcommittees and to delegate authority to one or more of its members. For additional information on the operations of the committee, including the role of our executive officers in determining executive compensation, see “Compensation Discussion and Analysis – Administration of our executive compensation program – overview of our process.”

The report of the compensation committee is included at page 21.

Nominating and Governance Committee.

The responsibilities of this committee include:

 

   

advising the board as a whole on corporate governance matters;

 

   

advising the board on the size and composition of the board;

 

   

recommending a slate of nominees for election to the board;

 

   

identifying those individuals qualified to become board members, consistent with any criteria approved by the board;

 

   

identifying best practices and recommending corporate governance principles, including giving proper attention and making effective responses to stockholder concerns regarding corporate governance;

 

   

recommending membership to each board committee; and

   

defining specific criteria for director independence.

C ONSIDERATION OF NOMINEES FOR DIRECTOR

Stockholder nominees.   The nominating and governance committee is charged with evaluating any properly submitted stockholder nominations for candidates for membership on our board as more fully described below under “Identifying and evaluating nominees for directors; diversity policy.” In evaluating nominations, the committee seeks (but is not obligated) to achieve a balance of diversity, age, knowledge, skills, experience, and expertise on the board. Any stockholder nominations submitted for consideration by the committee should include the nominee’s name and qualifications for board membership and should be addressed to:

Corporate Secretary

Unit Corporation

7130 South Lewis Avenue, Suite 1000

Tulsa, Oklahoma 74136

Our bylaws also permit stockholders to nominate directors for consideration at an annual stockholders meeting. For a description of the process for nominating directors under our bylaws, see “QUESTIONS AND ANSWERS – What is the deadline to propose actions for consideration at next year’s annual meeting of stockholders or to nominate individuals to serve as directors?”

D IRECTOR QUALIFICATIONS

General director qualifications.   Our Corporate Governance Guidelines contain certain criteria that our nominating and governance committee uses in evaluating nominees that it may recommend for a position on our board. Under these criteria, nominees should meet the board’s qualifications as independent (as applicable) and should have sufficient time to carry out their duties as well as being able to provide services beneficial to the company’s success. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties. Each director must represent the interests of the company and its stockholders.

Current director specific qualifications.   Each of our current directors possesses a combination of attributes that qualifies him for service on our board. These attributes can include (but are not limited) to: business experience (in general or specific to our industry), knowledge based on

 

 

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specialized education (such as technical industry training or legal or accounting), and leadership abilities (civic, work-related or both). We believe the qualifications of our directors, individually and collectively, have made our board an effective and productive one.

The following is a non-exhaustive description of the attributes of each of the four nominees standing for election or re-election at the 2011 Annual Meeting of Stockholders, followed by that of the other members of the board:

Nominees:

 

   

J. Michael Adcock – Mr. Adcock is a licensed attorney with over 26 years of experience in tax, banking and SEC/regulatory compliance law, working both as in-house counsel and in private practice. He has served as CEO of two different companies, one a community bank and one a publicly-traded international energy company with exploration and production, pipeline, trading and co-generation subsidiaries. In his capacity as CEO he was responsible for all operations, financial statements, and SEC and other regulatory-agency reporting. He currently serves as Co-Trustee of a private business trust responsible for investments in real estate, oil and gas, and other equity investments. In addition, Mr. Adcock serves as chairman of the board of a privately held bank, where he is a member of the loan committee, responsible for reviewing and approving business loans. He is also a current director of a non-profit community health organization, where he serves on the compensation committee and as its finance chairman. He has 14 years of experience as a director for the company. Mr. Adcock’s legal background, his executive experience in energy operations and lending, and his familiarity with the company’s business practices and history all serve to qualify him for service on our board as well as the three committees on which he serves.

 

   

Steven B. Hildebrand – Mr. Hildebrand brings to the board 32 years of experience in the accounting and finance field, more than 10 years of which was as the chief financial officer for a public company. While serving

   

as a public company executive, Mr. Hildebrand was involved in an initial public stock offering, strategic planning, SEC reporting, Sarbanes-Oxley compliance, investor relations, enterprise risk management, executive compensation, establishing and monitoring corporate compliance programs, internal audit, bank facilities, private placement debt transactions and working with ratings agencies. All of these areas of expertise are valuable to his service on the board and its audit and compensation committees. A CPA with both public and private experience, he is qualified for board service as well as serving as the chairman and SEC audit committee financial expert for our audit committee.

 

   

Larry C. Payne – Mr. Payne brings to the board over 36 years of experience in the energy industry, six years of which was in the capacity of president and COO of a midstream energy company engaged in natural gas liquids supply and marketing. He has an extensive background in commodity risk management, serving for six years as vice president of commodity management for another midstream energy operation. Mr. Payne is familiar with requirements for marketing various oil and natural gas components. In addition to executive and strategic experience in the industry, Mr. Payne also has extensive operational experience that includes management of assets such as product terminals, pipelines, fractionators, storage facilities, and transportation equipment. Mr. Payne’s expertise in the energy industry based on his many years of executive and operational experience will be of significant value to our company at this time.

 

   

G. Bailey Peyton – Mr. Peyton has 23 years of energy industry operations experience. He founded an oil and gas exploration company in 1984 and operated it as its president until he sold the company in 2007. At the time of sale, the company operated over 120 wells with a daily production of 12,000 MCF of natural gas and 200 bbls of oil per day. Mr. Peyton currently operates a company he founded in 1985 to purchase

 

 

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land, minerals, and royalty interests. His company currently owns over 50,000 acres, with holdings in Texas, Oklahoma and Nebraska. The board feels that Mr. Peyton’s longtime familiarity and hands-on experience with the operations side of our exploration and production business will bring experience and practical guidance to the company going forward. Mr. Peyton along with Mr. Payne, is being nominated for board membership as part of the board’s desire to add industry experience and knowledge to the board.

Continuing directors:

 

   

Larry D. Pinkston – Mr. Pinkston is an accounting professional who has served the company for 30 years, 26 of which have been in the following leadership positions (some of these positions he has held concurrently):

 

   

Treasurer – 17 years

 

   

Vice President – 14 years

 

   

Chief Financial Officer – 14 years

 

   

President – 8 years

 

   

Director – 8 years

 

   

Chief Operating Officer – 7 years

 

   

CEO – 6 years

Mr. Pinkston’s extensive knowledge of the company (both as a whole as well as that of each of its three business segments), along with his accounting and finance expertise and his many years of experience provides significant and continuing value to our board.

 

   

William B. Morgan – Mr. Morgan is a licensed attorney with over 35 years of experience, both as an attorney in private practice and as vice president and general counsel of a large healthcare organization. He has also served as President of that healthcare organization’s principal for-profit subsidiary, which employed 1,500 persons. Over the course of his career, Mr. Morgan has advised clients with respect to a broad range of matters, including domestic and foreign loan syndications, project financing, leveraged sale and leasebacks, receivable and depreciation monetization, private and

   

public placement of debt and equity securities, and entity formation. He also served as an adjunct professor of law for over 15 years, teaching securities law and appellate advocacy. Mr. Morgan has served on our board for 23 years. His experience inside and outside of the energy industry, along with his leadership and analytical skills, working knowledge of securities and compliance laws, financial and business expertise, and his extensive history with our company all qualify him for service on our board as well as the three committees on which he serves.

 

   

John H. Williams – Mr. Williams is a degreed engineer by training, with over 61 years of experience in the energy industry, almost thirty of which was as the President and CEO of The Williams Companies, Inc., a multi-billion dollar public energy company. During the course of his long business career, Mr. Williams has gained industry, financial, corporate governance, operating, and international business experience, all of which are of value to our board. Additionally, Mr. Williams has long been an active civic leader in his community, serving as a trustee of the Tulsa Performing Arts Center Trust since 1977, as well as serving as a director for the Philbrook Museum of Art and the Gilcrease Museum, both in Tulsa, Oklahoma, for a combined total of 12 years. Like Mr. Morgan, Mr. Williams has served the company as a director for 23 years. Mr. Williams’ lifetime knowledge of the energy industry, along with his many years as a corporate and civic leader along with his lengthy history with and knowledge of our company make him a valuable and contributing member of our board.

 

   

John G. Nikkel – Mr. Nikkel is a geologist and mathematician with over 54 years of experience in the energy industry, 45 years of which were spent in management positions. Mr. Nikkel retired from the company in 2005, after a 21-year tenure as its president and chief operating officer and then CEO. He has served the company as a director for 28 years, serving as the board’s chairman for the last seven years. His years

 

 

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of insight into the operations of the company and the industry, along with his years of successful leadership of the company, make him an invaluable member of the board, and more than qualify him to serve in his current position as chairman.

 

   

Gary R. Christopher – Mr. Christopher has a petroleum engineering degree, and over 38 years of experience in the energy industry. Mr. Christopher’s industry experience has been diverse: he has experience as a drilling engineer, production engineer, reservoir engineer, an acquisitions advisor, and an energy lending professional. Mr. Christopher has also served as President and CEO of a publicly traded oil and gas company. He currently consults on financial and engineering matters in the oil and gas business. Accordingly, Mr. Christopher has operations expertise, financial expertise, and leadership expertise, all of which have enabled him to serve as a productive board member, including in his role as an SEC audit committee financial expert. Mr. Christopher’s knowledge of lending practices and his ability to identify and analyze potential business acquisitions for the company are of significant value to the board.

 

   

Robert J. Sullivan Jr.   – Mr. Sullivan has both undergraduate and master’s degrees in business administration, and he has over 41 years of experience in the energy business. Mr. Sullivan founded and operated both a 3D seismic company and a mid-stream natural gas transportation company, and he has been involved in a family-owned independent oil and gas operation since 1975. He has also served the State of Oklahoma as its Energy Secretary under former Governor Frank Keating’s administration. Mr. Sullivan’s unique energy industry background serves as a complement to the backgrounds of the other industry-side directors.

Our board is a mix of personalities, backgrounds and experiences that continually proves that the sum is greater than the individual parts. The current directors have a proven track record of working well together to ably guide the company, and it is the belief of the board that Messrs. Payne and Peyton

will bring new insights and expertise to strengthen the board as it continues to provide guidance to the company.

For additional information on the background and experience of each of our directors, including other public directorships they now hold or may have held in the last five years, please refer to their individual biographical summaries starting on page 51 of this proxy statement.

Identifying and evaluating nominees for directors; diversity policy.   The nominating and governance committee uses a variety of means to identify and evaluate individuals being considered for a position on our board. The committee assesses the appropriate size of the board (within the size limits contained in our corporate charter), and whether any vacancies on the board are expected due to retirement or otherwise. In the event that vacancies are anticipated (or otherwise arise), the committee undertakes to identify those potential candidates that it believes will make good decisions and be able to contribute to the company in a meaningful way. Candidates may come to the attention of the committee through current board members, professional search firms, stockholders, or other persons. Candidates are evaluated at regular or special meetings of the committee and may be considered at any point during the year. As described above, it is the committee’s responsibility to consider any properly-submitted stockholder nominations for candidates for the board, verify the stockholder status of persons proposing candidates, and then submit its recommendations to the full board.

At the suggestion of, and in collaboration with, one of our institutional stockholders, we recently amended our Corporate Governance Guidelines to clarify our position with respect to diversity. Our board is committed to inclusiveness in selecting candidates for board membership. Within the context of our fiduciary duties, applicable law and regulations, and the membership of the board at the applicable time, our nominating and governance committee will take reasonable steps to include women, minority candidates, and candidates from non-traditional environments (such as government, academia, and non-profit organizations) in the pool from which board nominees are chosen. We will make good faith efforts to achieve this goal, but we have no specific implementation plan. Achievement of our diversity goals will be evaluated annually as part of our board self-evaluations.

 

 

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E XECUTIVE SESSIONS

Executive sessions of non-management directors are held at each regularly-scheduled board meeting. The sessions are scheduled and presided over by Mr. J. Michael Adcock, who was elected by the board to chair its executive sessions. Any non-management director can request that an executive session be scheduled.

Any interested party may communicate directly with the presiding director by writing to the following:

Mr. J. Michael Adcock

c/o Corporate Secretary

Unit Corporation

7130 South Lewis Avenue, Suite 1000

Tulsa, Oklahoma 74136

C ONTACTING OUR BOARD

Individuals may communicate with our board by submitting an e-mail to the board in care of the company’s corporate secretary at mark.schell@unitcorp.com or sending a letter to: Board of Directors, c/o Corporate Secretary, Unit Corporation, 7130 South Lewis Avenue, Suite 1000, Tulsa, Oklahoma 74136.

The chair of the nominating and governance committee has been designated as the person to receive communications directed to non-management directors. Our stockholders may write to the chairman of this or any other board committee or to the outside directors as a group c/o Mark E. Schell, Senior Vice President and General Counsel, Unit Corporation, 7130 South Lewis Avenue, Suite 1000, Tulsa, Oklahoma 74136.

Stockholder communications are distributed to the board, or to the appropriate individual director or directors, depending on the facts and circumstances of the communication. However, at the request of the board, certain items that are not related to the duty and responsibilities of the board are excluded, such as advertisements, junk mail, mass mailings, spam, and surveys.

B OARD AND COMMITTEE EVALUATIONS

Each year the board evaluates its performance and effectiveness. Each director completes a board evaluation form to solicit feedback on specific aspects of the board’s role, organization, and meetings. The collective ratings and comments are compiled by or for the chairman of the nominating and governance committee, and presented by him to the full board. Additionally, each of the three standing board committees conducts an annual self-evaluation of its performance through a committee evaluation form.

 

 

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DIRECTORS’ COMPENSATION AND BENEFITS

 

 

 

C ASH COMPENSATION

Only non-employee directors receive compensation for serving as a director. The various components of the cash compensation paid to our non-employee directors during 2010 are as follows:

 

Annual retainer (payable quarterly)

     $60,000   

Annual retainer for each committee a board member serves on (payable quarterly)

     $3,500   

Each board meeting attended*

     $1,500   

Each committee meeting attended**

     $1,500   

Additional compensation for service as chairman of the audit committee

     $7,500   
Additional compensation for service as chairman for each of the compensation committee and nominating and governance committee      $3,500   

Reimbursement for expenses incurred attending stockholder, board and committee meetings

     Yes   

Range of total cash compensation (excluding expense reimbursement and retirement/

consulting fees) earned by directors for the year 2010

     $70,500 – $102,500   

 

  * No fees were paid to those directors attending the one special (telephonic) meeting of the board in 2010.

 

  ** The Audit Committee conducts quarterly telephone meetings expressly for purposes of finalizing its review and approval of quarterly financial reports and earnings releases. No meeting fees are paid for these quarterly telephone meetings.

 

S TOCK OPTIONS

Under the Unit Corporation 2000 Non-Employee Directors’ Stock Option Plans, as amended and restated May 29, 2009 (the “directors’ option plan”), a plan approved by our stockholders, each non-employee director automatically receives an option to purchase 3,500 shares of our common stock on the first business day following each annual meeting of our stockholders. The option exercise price is the fair market value of our common stock on that date. Payment of the exercise price can be made in cash or in shares of common stock that have been held by the director for at least one year. No stock option can be exercised during the first six months of its term except in the case of death. Each option has a ten-year term. Shares that are issued under the directors’ option plan can be clawed back in the event of certain specified instances of director misconduct.

 

In 2009, the number of stock options available for issuance under the directors’ option plan was insufficient to support the full award of 3,500 option shares per director. Instead, our directors were issued a pro-rated share of the 3,496 shares then available for issuance. Accordingly, in 2009, each director received a stock option covering 437 shares at $31.30 per share. The balance of shares that otherwise would have been issued but were not then available under the directors’ option plan (3,063 shares per director, or a total of 24,504 shares, at $33.51 per share) were issued as contingent stock option awards (the “catch-up options”). The catch-up options were contingent on stockholder approval of certain amendments to the directors’ option plan, which occurred at the 2010 annual meeting.

As of March 7, 2011, 161,000 shares were subject to outstanding options held by non-employee directors.

 

 

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The following table shows the outstanding options held by our current non-employee directors as of March 7, 2011:

 

Director    Date of Option      Shares Subject
to Option(#)
    

Exercise Price

($) 

 

J. Michael Adcock

     5/5/05         3,500         39.50   
       5/4/06         3,500         62.40   
       5/3/07         3,500         57.63   
       5/8/08         3,500         73.26   
       5/7/09         437         31.30   
       5/29/09         3,063         33.51   
       5/6/10         3,500         41.21   

John H. Williams

     5/2/02         3,500         20.10   
       5/8/03         3,500         20.46   
       5/6/04         3,500         28.23   
       5/5/05         3,500         39.50   
       5/4/06         3,500         62.40   
       5/3/07         3,500         57.63   
       5/8/08         3,500         73.26   
       5/7/09         437         31.30   
       5/29/09         3,063         33.51   
       5/6/10         3,500         41.21   

William B. Morgan

     5/8/03         3,500         20.46   
       5/6/04         3,500         28.23   
       5/5/05         3,500         39.50   
       5/4/06         3,500         62.40   
       5/3/07         3,500         57.63   
       5/8/08         3,500         73.26   
       5/7/09         437         31.30   
       5/29/09         3,063         33.51   
       5/6/10         3,500         41.21   

King P. Kirchner

     5/4/06         3,500         62.40   
       5/3/07         3,500         57.63   
       5/8/08         3,500         73.26   
       5/7/09         437         31.30   
       5/29/09         3,063         33.51   
       5/6/10         3,500         41.21   

John G. Nikkel

     5/5/05         3,500         39.50   
       5/4/06         3,500         62.40   
       5/3/07         3,500         57.63   
       5/8/08         3,500         73.26   
       5/7/09         437         31.30   
       5/29/09         3,063         33.51   
       5/6/10         3,500         41.21   

Gary R. Christopher

     5/4/06         3,500         62.40   
       5/3/07         3,500         57.63   
       5/8/08         3,500         73.26   
       5/7/09         437         31.30   
       5/29/09         3,063         33.51   
       5/6/10         3,500         41.21   

Robert J. Sullivan Jr.

     5/4/06         3,500         62.40   
       5/3/07         3,500         57.63   
       5/8/08         3,500         73.26   
       5/7/09         437         31.30   
       5/29/09         3,063         33.51   
       5/6/10         3,500         41.21   

Steven B. Hildebrand

     5/7/09         437         31.30   
       5/29/09         3,063         33.51   
       5/6/10         3,500         41.21   

 

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D IRECTOR COMPENSATION TABLE

The following table shows the total compensation received by each of our non-employee directors in 2010:

 

 

DIRECTOR COMPENSATION FOR 2010

 

Name   Fees Earned or
Paid in
Cash
($) (1)
  Stock
Awards
($)
  Option
Awards
($) (2)
  Non-Equity
Incentive Plan
Compensation
($)
 

Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings

($)

  All Other
Compensation
($)
   

Total

($)

(a)           (b)               (c)           (d)               (e)                     (f)                          (g)                        (h)       

J. Michael Adcock

  102,500   n/a   103,996   n/a   n/a     937 (3)     207,433

John H. Williams

    89,500   n/a   103,996   n/a   n/a     -      193,496

William B. Morgan

  102,500   n/a   103,996   n/a   n/a     3,869 (3)     210,365

King P. Kirchner

    70,500   n/a   103,996   n/a   n/a     -      174,496

John G. Nikkel

    70,500   n/a   103,996   n/a   n/a     70,003 (4)     244,499

Gary R. Christopher

    80,000   n/a   103,996   n/a   n/a     -      183,966

Robert J. Sullivan Jr.

    78,500   n/a   103,996   n/a   n/a     -      182,496

Steven B. Hildebrand

    98,500   n/a   103,996   n/a   n/a     3,013 (3)     205,509

Notes to table:

 

  (1) Represents cash compensation for board and committee meeting attendance, retainers and service as a committee chairman.

 

  (2) The amounts included in the “Option Awards” column are the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718 but does not include any impact of estimated forfeitures. This amount is higher for 2010 than in previous years because in 2010 our non-employee directors received both their 2010 option awards as well as a significant portion of their 2009 option award (the “catch-up option”). The catch-up option resulted from a shortfall in shares available under the directors’ option plan during 2009, requiring us to amend the plan and seek stockholder approval. The amended directors’ option plan was approved by our stockholders at the May 5, 2010 annual meeting. Of the figure in Column (d), $39,911 is the value of the catch-up option, and $64,085 is the value of the 2010 option. The value for both the options are calculated under FASB ASC Topic 718 using an exercise price of $33.51 for the catch-up option and $41.21 for the 2010 option, both reflecting the fair market value on the dates of grant. For a discussion of the valuation assumptions used in calculating these values, see Notes 2 and 12 to our 2010 Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2010. The non-employee directors had the following aggregate number of stock options outstanding at the end of 2010:

 

    Name   

Number

of Options

as of December 31, 2010

                      
 

J. Michael Adcock

   21,000                 
 

John H. Williams

   35,000                 
 

William B. Morgan

   31,500                 
 

King P. Kirchner

   17,500                 
 

John G. Nikkel

   21,000                 
 

Gary R. Christopher

   17,500                 
 

Robert J. Sullivan Jr.

   17,500                 
 

Steven B. Hildebrand

   7,000                 

 

  (3) Represents reimbursement for expenses.

 

  (4) Represents amounts paid under certain of our plans or retirement or consulting agreements as more fully discussed under, “Potential payments on termination or change-in-control—Retirement or consulting agreements.”

 

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OWNERSHIP OF OUR COMMON STOCK BY BENEFICIAL OWNERS AND MANAGEMENT

 

 

 

D IRECTORS AND EXECUTIVE OFFICERS

The following table shows the number of shares of our common stock beneficially owned as of March 7, 2011, by each director, nominee for director, each NEO and by all directors and executive officers as a group. Except as otherwise noted, all shares are directly owned.

 

STOCK OWNED BY OUR DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS AS OF MARCH 7, 2011   
Name of Beneficial
Owner*
 

Common

Stock (1)

   

Stock Appreciation

Rights and

Options Exercisable
within 60 days (3)

   

Shares of

Restricted

Stock (4)

 

King P. Kirchner

    148,820        17,500        -   

William B. Morgan

    7,500        28,000        -   

John G. Nikkel

    132,989 (2)       21,000        -   

John H. Williams

    1,000        31,500        -   

J. Michael Adcock

    17,891 (2)       21,000        -   

Larry D. Pinkston

    63,561        98,745        53,424   

Mark E. Schell

    67,502        47,449        16,700   

Davide T. Merrill

    17,937        34,772        16,153   

Gary R. Christopher

    6,000        17,500        -   

Robert J. Sullivan Jr.

    0        17,500        -   

Steven B. Hildebrand

    2,000 (2)       7,000        -   

John Cromling

    21,400        26,504        16,153   

Bradford J. Guidry

    11,381        28,631        16,153   

G. Bailey Peyton

    1,580        0        -   

Larry C. Payne

    -        0        -   

All directors and executive officers as a group*

    499,561        397,101        118,583   

 

  * Each named director and officer individually owns less than one percent of our outstanding shares of common stock and collectively the directors and officers own 0.02%. For purposes of calculating this percentage ownership, the total number of shares outstanding includes the shares previously issued and outstanding plus the number of shares that any named owner has the right to acquire within 60 days.

Notes to table:

 

  (1) Includes the following shares of common stock held under our 401(k) thrift plan as of March 7, 2011: Mr. Pinkston, 6,496 shares; Mr. Schell 35,729 shares; Mr. Merrill, 4,207 shares; Mr. Cromling, 2,221 shares; Mr. Guidry, 45 shares; and directors and officers as a group, 48,698 shares.

 

  (2) Of the shares listed as being beneficially owned, the following individuals disclaim any beneficial interest in shares held by spouses, trusts or for the benefit of family members: Mr. Adcock, 17,891 shares; Mr. Nikkel, 35,000 shares; and Mr. Hildebrand, 2,000 shares.

 

  (3) The stock appreciation rights (all settled in stock) and options have all vested but have not been exercised.

 

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  (4) These shares of restricted stock over which the executive officer has voting power but not investment power were awarded as follows:

 

  (a) On March 9, 2010, the following restricted stock awards were granted. The total amount of the awards and the vesting schedule is shown below. The unvested part of these awards is subject to the recipient’s continued employment with the company on the vesting date:

 

Name    Shares subject
to award
    Vesting schedule (#)  
     4/1/10     4/1/11     4/1/12     4/1/13  

Larry D. Pinkston

     37,018        (9,255     9,255        9,254        9,254   

Mark E. Schell

     10,334        (2,584     2,584        2,583        2,583   

David T. Merrill

     9,985        (2,497     2,496        2,496        2,496   

Bradford J. Guidry

     9,985        (2,497     2,496        2,496        2,496   

John Cromling

     9,985        (2,497     2,496        2,496        2,496   

 

  (b) On February 15, 2011, the following restricted stock awards were granted. Seventy percent of the total amount of the awards is time vested and will vest as shown in the first three columns of the vesting schedule shown below. The remaining thirty percent, shown in the fourth column of the vesting schedule below, is performance based and will vest, subject to adjustment based on achievement of certain performance criteria, on March 9, 2014. The unvested part of these awards is subject to the recipient’s continued employment with the company on the vesting date:

 

Name    Shares subject  to
award
     Vesting schedule (#)  
     

70%

     30%  
      3/9/12      3/9/13      3/9/14      3/9/14  

Larry D. Pinkston

     25,661         5,988         5,988         5,987         7,698   

Mark E. Schell

     8,950         2,089         2,088         2,088         2,685   

David T. Merrill

     8,665         2,022         2,022         2,021         2,600   

Bradford J. Guidry

     8,665         2,022         2,022         2,021         2,600   

John Cromling

     8,665         2,022         2,022         2,021         2,600   

S TOCKHOLDERS OWNING 5% OR MORE OF OUR COMMON STOCK

The following table sets forth information concerning the beneficial ownership of our common stock by stockholders who own at least five percent of our common stock.

 

            STOCKHOLDERS WHO OWN AT LEAST 5% OF OUR COMMON STOCK   
Name and Address    Amount and Nature of
Beneficial Ownership (1)
                    Percent of Class (2)          

George Kaiser Family Foundation

124 East Fourth Street, Suite 100

Tulsa, Oklahoma 74103

   6,224,023                       12.96        

Royce & Associates, LLC

1414 Avenue of the Americas

New York, New York 10019

   7,183,950                       14.96        

FMR LLC

82 Devonshire Street

Boston, MA 02109

   4,809,540                       10.02        

Notes to table:

 

  (1) Beneficial ownership is based on the Schedule 13G or 13G/A most recently filed by the stockholder or other information provided to us. Beneficial ownership may under certain circumstances include both voting power and investment power. Information is provided for reporting purposes only and should not be construed as an admission of actual beneficial ownership.

 

  (2) Based on the issued and outstanding shares of our common stock as of March 7, 2011.

 

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EXECUTIVE COMPENSATION

 

 

 

 

O VERVIEW OF NEOS ’ 2010 COMPENSATION

 

   

2010 base salary:

 

   

Larry D. Pinkston – $637,000

 

   

Mark E. Schell – $318,600

 

   

David T. Merrill – $308,000

 

   

John Cromling – $308,000

 

   

Bradford J. Guidry – $308,000

 

   

Cash bonuses awarded in 2011 as annual or short-term incentive compensation for 2010:

 

   

Larry D. Pinkston – $425,000

 

   

Mark E. Schell – $143,000

 

   

David T. Merrill – $138,000

 

   

John Cromling – $138,000

 

   

Bradford J. Guidry – $138,000

 

   

Number of shares of restricted common stock granted under awards in 2010:

 

   

Larry D. Pinkston – 37,018

 

   

Mark E. Schell – 10,334

 

   

David T. Merrill – 9,985

 

   

John Cromling – 9,985

 

   

Bradford J. Guidry – 9,985

H IGHLIGHTS OF 2010 F INANCIAL P ERFORMANCE

 

   

total annual revenues reached $881.8 million, up from $709.9 million in 2009;

 

   

net income of $146.5 million, compared to 2009 net loss of $55.5 million;

 

   

hedging program provided $53 million of cash;

 

   

ended year with only $163 million of long-term debt (debt to capital ratio of 9%);

 

   

EPS was $3.09 per share compared to ($1.18) per share for 2009; and

 

   

on December 31, 2010, the price of the company common stock closed at $46.48 per share, up $4.00 from the same date in 2009.

Unit Corporation

Financial Performance Markers

Fiscal Years 2009 and 2010

($ in millions)

LOGO

As the chart shows, our 2010 annual revenues, net income, and cash flow were all up compared to 2009.

The compensation committee looked very closely at all aspects of our performance during 2010 before making its executive compensation decisions. We believe those decisions resulted in a well-balanced executive compensation package that met our goals of competitively compensating our executives for performance while at the same time prudently managing the resources of the company, all of which serves to build shareholder value.

P ROTECTING THE INTEGRITY OF OUR COMPENSATION PRACTICES

Compensation practices, some new and some long-established, that we think bolster our efforts to make sound executive compensation decisions and thereby deliver stockholder value include:

 

   

Clawback rights – We have the right to “claw back” our long-term incentive compensation paid to any executive who commits specific acts of fraud or dishonesty;

 

   

Performance metrics – At its February 2011 meeting, the compensation committee as well as the board adopted certain metrics to be used with regard to 2011 compensation. These metrics were designed through a collaborative effort of management and the compensation committee, with advice from our compensation consultant. See “Adoption of performance metrics for 2011 incentive compensation,” page 31;

 

 

 

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Ongoing compensation risk assessment – As described in “Our compensation policies and practices as they relate to risk management” on page 25, our compensation committee continually evaluates the risk associated with the compensation decisions it makes, and our risk management plan addresses compensation risk; and

 

   

Trend toward longer-term and at-risk compensation for executives – Our practices with respect to the mix between long-term and short-term compensation, and between time-vested and performance-vested (“at risk”) compensation have shifted over the last several years. As recently as 2006, 82% of our executives’ compensation was in salary and short-term incentives, and only 18% was awarded as long-term incentives. In 2010, that ratio was 45.8% salary and short-term incentives to 54.2% long-term (equity) incentives.

C OMPENSATION COMMITTEE REPORT

The compensation committee has reviewed and discussed with our management the following compensation discussion and analysis. Based on that review and discussion, the compensation committee recommended to the board that the compensation discussion and analysis be included in this proxy statement and incorporated into our annual report on Form 10-K for fiscal year 2010 by reference to this proxy statement.

The members of the Compensation Committee are:

J. Michael Adcock – Chairman

William B. Morgan

John H. Williams

Steven B. Hildebrand

C OMPENSATION DISCUSSION AND ANALYSIS

To assist you in reviewing our compensation discussion and analysis, we have broken our discussion into the following sections, each of which may have its own subsections:

 

   

Our general compensation objectives

 

   

Elements of our compensation program

 

   

Our compensation policies and practices as they relate to risk management

 

   

Administration of our executive compensation program – overview of the process

   

Role of compensation consultant

 

   

Role of CEO

 

   

Salaries for 2010

 

   

2010 long-term incentive awards

 

   

2010 annual cash bonus awards paid in 2011

 

   

2011 compensation decisions

 

   

Adoption of performance metrics for 2011 incentive compensation

 

   

Executive stock ownership policy

 

   

No backdating, springloading or repricing of options

 

   

Non-employee director compensation

 

   

Accounting and tax considerations

 

   

No employment agreements

Our general compensation objectives.   The primary goals of our compensation program, both for executives and non-executives, is to attract, motivate, reward and retain competent employees. We try to apply our program in a way that joins our employees’ interests with our business and financial objectives, as well as the interests of our stockholders. To that end we work to:

 

   

offer a competitive compensation mix consisting of reasonable salaries, short-term and long-term incentives, as well as certain additional benefits;

 

   

reward performance that achieves our business objectives and enhances the performance of our common stock; and

 

   

link executive compensation to our stockholders’ interests by using equity awards based on the value of our common stock.

Elements of our compensation program.    As a general rule, our executive compensation program consists of salary, annual cash bonus, and certain forms of equity awards (the latter is sometimes referred to as “long-term incentive awards” in this proxy statement). In addition, we also make available health, disability and life insurance, indemnification protection, retirement i.e., 401(k), separation benefits, and certain limited perquisites. We use each of these elements because we believe they provide the compensation mix required to attract and retain talented executives, reward them for quality performance, and motivate them to focus on both the short-term and long-term performance of the

 

 

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company. Specifically, we believe a competitive salary is required to attract and retain qualified executives. When authorized, annual cash bonuses provide executives with potential earnings based on annual financial and operating results and reward them for short-term successes. Equity awards are used to motivate both long-term and short-term results and aid the long-term retention of our executives. Compensating our executives for

company performance in both the short term and the long term serves our goal of aligning executive compensation with the interests of our stockholders. Indemnification protections, retirement and separation benefits and general perquisites are commonly included in executive compensation packages offered by our competitors, and we believe that providing them helps achieve our compensation goals.

 

 

The following chart provides further details about what we pay (or offer) our executives and why we do so:

 

Form of compensation
or benefit
  Description   Purpose and
what it rewards
  Interaction with  other
elements of
compensation or benefits
Base Salary   Regular cash income, paid semi-monthly.   Provides competitive and predictable regular compensation and rewards core competence and experience.   Is a fundamental or foundation component of our overall competitive pay mix; serves as a short-term feature to balance long-term incentives.

Cash Bonus

(also referred to as

“short-term incentive compensation”)

  Discretionary cash awards.   Provides annual incentive in the form of cash compensation and rewards short-term corporate and individual performance.   Serves as a short-term incentive to balance long-term incentives; rewards short-term performance, aligning executives’ interests with those of the stockholders in the short term.
    Performance-based cash awards that may be made under the Unit Corporation Annual Performance Bonus Plan.   Provides an annual incentive award based on the attainment of previously designated performance measures.   Serves as a short-term incentive to balance long-term incentives; rewards short-term performance, aligning executive interests with those of the stockholders in the short term.

 

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Form of compensation
or benefit
  Description   Purpose and
what it rewards
  Interaction with  other
elements of
compensation or benefits
Long-term Incentives, continued   Before 2005, we used stock options as our long-term equity incentive. Starting in 2005, we awarded shares of restricted stock and in 2006 and 2007 we awarded a combination of shares of restricted stock and stock appreciation rights. Since 2009, we have awarded restricted common stock exclusively as long-term incentive compensation. Pay-out is generally staggered over a vesting period, although we have also awarded retention shares structured to have a one-time “cliff” vesting feature. For 2011, we have also tied a part of this award to attainment of certain performance criteria.   Provides long-term incentive to contribute to company performance and rewards corporate performance as well as continued service with company.   Balances the short-term features of our mix and motivates our executives to enhance corporate performance, further aligning executive interest with stockholder interests.
Indemnification   We indemnify our officers and directors to the fullest extent permitted by law. This is required by our charter, bylaws, and certain contracts.   We include this as a compensation element because it is commonly provided by peer organizations and is valued by our executives. We believe it allows our executives to be free from undue concern about personal liability in connection with their service to the company and it rewards willingness to serve in positions that carry exposure to liability.   Represents a significant component of a competitive executive compensation package.
Medical, Dental, Life and Disability   Available to full-time company employees through our benefit plans. The value of these is not included in the Summary Compensation Table, since they are available on a company-wide basis.   We include this as a compensation element as it is commonly provided by our competitors and it encourages the health of our employees, and adds to employee productivity and loyalty.   Represents a significant component of a competitive executive compensation package.

 

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Form of compensation
or benefit
  Description   Purpose and
what it rewards
  Interaction with  other
elements of
compensation or benefits
Other Paid Time-off Benefits   We provide vacation and other paid holidays to full-time employees, including the NEOs.   Rewards continuity of service and is a standard benefit comparable to the vacation benefits provided by competitors.   Works together with other elements to create a competitive compensation package.
Unit Corporation Employees’ Thrift Plan [401(k) plan]   Tax-qualified retirement savings plan under which participating employees can contribute up to 99% of their pre-tax compensation, a portion of which the company can match. Our match for 2010 was 117% of the first 6% of the participant’s salary. The company match is paid in stock.   A 401(k) plan is a standard corporate benefit and our match to the participants is a competitive feature of our plan. This type of benefit rewards continuity of service.   Works in combination with our other executive pay components to create a competitive overall executive compensation package.
Unit Corporation Salary Deferral Plan [Non-qualified plan]   Our non-qualified plan allows designated participants to defer salary and cash bonus for tax purposes until actual distribution at termination, death, or under defined hardship. We do not make a matching contribution to this plan.   This element of compensation is a standard benefit at executive levels, and is a component of our program that contributes to our competitiveness. This rewards continuity of service.   Works in combination with our other executive pay components to create a competitive overall executive compensation package.
Separation Benefits  

We provide payments to salaried full-time employees in cases of involuntary termination, change-in-control, or on retirement after 20 years of service with the company.

 

For specifics, see the narrative discussion at “Potential payments on termination or change-in-control.”

  This element of compensation is a standard benefit at executive levels. It is a component of our program that contributes to our competitiveness, and helps retain our employees. This benefit rewards length and continuity of service.   Works in combination with our other executive pay components to create a competitive overall executive compensation package.
Perquisites   We provide a car allowance to our NEOs and pay for certain club memberships.   We believe that compensating with certain perquisites adds to the general attractiveness and competitiveness of our compensation mix, and helps attract and retain the executive talent we value.   Works in combination with our other executive pay components to create a competitive executive compensation program.

 

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Our compensation policies and practices as they relate to risk management.   We have reviewed our compensation policies and practices for both executives and non-executives as they relate to risk and find that at this time they are not reasonably likely to have a material adverse effect on the company. To date, we have not had any measurable risk exposure tied to our compensation program because our compensation decisions have generally been made on a discretionary basis, and no salary or bonus amounts have been based on any formula with unknown variables that could yield future valuations or results that are unrestricted in either amount or scope. We have analyzed our newly-adopted performance metrics (to be used prospectively for aspects of 2011 compensation) in the context of our overall general compensation practices and find that they are not reasonably likely to have a material adverse effect on the company for the following reasons:

 

   

the committee retains discretion with respect to fifty-percent of any cash bonus award;

 

   

we spent over two years evaluating appropriate metrics for our particular business model, ultimately selecting diversified metrics with performance goals focused on varying measures of growth, performance, and cost control across the different segments of our company;

 

   

our equity awards generally have either long-range performance conditions attached to them or vest equally over several periods of time, so that they do not encourage short-term business decisions and instead encourage consistency and long-term performance; and

 

   

since 2006, we have added clawback provisions in our long-term equity awards that allow us to reclaim any compensation paid or payable to key employees and executives in the event of certain wrongful activity.

Our compensation committee addresses compensation risk each time it makes a decision about executive compensation or issuances under our restricted equity compensation plan.

Administration of our executive compensation program – overview of the process.   Our executive compensation program is administered by our compensation committee. Additional details about that committee are located in the corporate

governance provisions of this proxy statement, under “Compensation Committee.”

The chairman of the compensation committee, our CEO, the Director of Human Resources, and any compensation consultant we have retained, meet each year during the fourth quarter to analyze the current compensation package of our executive and non-executive employees. (See “Role of CEO,” and “Role of compensation consultant,” for greater detail on this process.) Our CEO ultimately makes recommendations for salary adjustments, any annual bonus awards, and any long-term incentive compensation awards for our non-executive employees and all executives besides himself. None of our NEOs has a role in recommending their own compensation.

The CEO’s salary recommendations are presented to the committee, and then the board, at the December committee and board meetings. Once approved, any salary adjustments are effective starting January 1 st of the new year.

No recommendations are made with respect to annual bonus and long-term incentive awards until after the first of the following year, in order to allow the decisions to take into account complete financial and operating performance results for the prior year. Consequently, salary decisions for 2010 were made in December 2009, while annual bonus and long-term incentive awards based on 2010 were not made until 2011.

Equity awards, if any, are effective as of the date of the committee’s approval of the award.

Generally, once the committee has approved the NEOs’ compensation, the only adjustments that might be made before the committee’s next annual review would be those deemed necessary or useful due to a change in circumstances (e.g., in the event of a promotion or material increase in responsibility, or in the event of a severe downturn in our industry). Under those changed circumstances, the decision to make any adjustments would be made on an ad hoc basis, and any or all elements of compensation could be adjusted based on the actual circumstances involved.

In making its compensation recommendations, both for salary increases and for incentive compensation (annual and long-term), the committee looks at the financial and operating results of the company. For salary decisions, the results reviewed are year-to-date results available at the time, and for annual bonus and

 

 

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long-term incentive decisions, the review considers completed results for the year. In both cases the committee generally takes into account:

 

   

the growth in each segment of the company;

 

   

net income, cash flow, and asset base growth;

 

   

long-term debt levels;

 

   

results of any acquisitions made during the year;

 

   

the attainment of any designated business objectives; and

 

   

the relationship of our compensation we pay to that offered by other companies.

In addition, the committee will also take into account any significant changes in or to the industry in which we operate and general economic conditions.

Other than its view of future industry and economic conditions, the committee’s review of these items has generally been a retrospective review of past performance or results. Beginning with 2011, some of the committee’s performance criteria will be made known in advance to our NEOs in the form of the metrics we detail at “Adoption of performance metrics for 2011 incentive compensation,” page 31, but the final application of those metrics will necessarily require a retrospective assessment of past performance.

In the past, individual performance would generally be taken into account in making executive compensation decisions for the NEOs other than our CEO only in the context of assessing corporate or segment performance, with any individual contributions noted in the context of the committee’s evaluation of the overall operational and financial results of the company, and our CEO’s individual performance was measured entirely based on overall operational and financial results. This will continue to be the way we handle individual performance, other than as specifically provided for under the newly-adopted performance metrics that will apply to components of our NEOs’ 2011 short- and long-term incentives awards. Again, see details of these metrics at “Adoption of performance metrics for 2011 incentive compensation.”

Except for those components of executive compensation subject to the 2011 metrics, the committee’s evaluation of the NEOs will be based on the committee’s discretion, with no weighting of

factors assessed, no formulaic modeling of how to tie company or individual achievement to awards, no fixed position on whether prior compensation should be considered in making compensation decisions or whether or how to incorporate any other such criteria-based measures into the compensation-setting process.

Role of compensation consultant.

2009.   The committee’s discussions in December 2009 regarding the NEO’s 2010 salaries were guided, in part, on information provided by Villareal and Associates (“Villareal”), an independent compensation consultant located in Tulsa, Oklahoma. Villareal provided the committee with reports comparing the average projected increases for 2010 salaries for certain peer company personnel in positions similar to those held by the NEOs. See the section below titled “Salaries for 2010” and “2010 annual cash bonus awards paid in 2011” for further information regarding the peer companies used and details on Villareal’s role in the decision-making process. Villareal also provided survey information indicating the ranges of salaries, annual cash bonuses, and other incentive awards being paid by certain industry peers, as further detailed and analyzed in the “2010 long-term incentive awards” and “2010 annual cash bonus awards paid in 2011” sections below.

2010.   The committee also used the services of Villareal in connection with its other 2010 compensation decisions. Villareal provided analyses of our NEOs’ 2007 – 2009 annual- and long-term incentive compensation, along with comparable peer-company data. See the section below titled “2010 annual cash bonus awards paid in 2011.” Villareal also assisted the committee in preparing short-term and long-term incentive performance metrics that will be used in connection with the incentive compensation decisions we make about 2011 performance. See the section below titled “Adoption of performance metrics for 2011 incentive compensation.”

Villareal provided both executive compensation and non-executive compensation consulting services to the committee and the company in 2009 and 2010. Villareal’s 2009 consulting fees amounted to a total of $21,999, $9,910 of which was for executive compensation consulting services performed for the compensation committee and the balance, or $12,089, was for services other than executive

 

 

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compensation consulting (mainly employee recruiting services). Villareal’s 2010 consulting fees were $64,060, $37,040 of which was for executive compensation consulting services for the committee, and $27,020 for other services. To the extent Villareal performed services for the committee, it was the committee’s decision to engage those services, and it was not based on any recommendation by management.

Role of CEO.   Before those meetings at which it evaluates our NEOs’ compensation, committee members receive and review the recommendations (and any information on which they are based) made by our CEO regarding the compensation of the other NEOs. The CEO does not evaluate or make a recommendation regarding his compensation. Additionally, our CEO meets with the committee and discusses his recommendations. The executives subject to the CEO’s recommendations are not usually present at the time of these deliberations. The compensation committee has the authority to accept, reject or adjust the recommendations made to it by the CEO or any other person. After the committee has reached its decisions regarding the NEOs’ compensation, its determinations are then submitted to the full board. The full board then ratifies (and approves, if required) the committee’s determinations. The full board does have authority to make any changes it feels are appropriate to the recommendations of the committee.

Salaries for 2010.   At the December 2009 compensation committee meeting, our CEO presented his recommendations for the 2010 salaries for the other NEOs. Consistent with past practice, he did not make a recommendation regarding his compensation. Our CEO had previously determined that the company’s other employees (excluding generally hourly field employees) would receive an overall average increase in their salary of 6.2% for 2010. His decision was based primarily on the total of the 2009 salary increases for non-executive employees at other energy sector companies, as reflected in the Mercer 2009 US MTCS Compensation Survey for the Energy Sector. Mr. Pinkston recommended that the other NEOs receive salary increases for 2010 consistent with the 6.2% average increase being made with respect to the company’s other employees. Mr. Pinkston’s recommendations for enterprise-wide salary increases of 6.2% took into consideration the fact that all current employees, both NEOs and otherwise, had

forgone raises for 2009 and had fallen behind as compared to peer pay levels. His recommendation was not based on specific individual performance reviews.

In view of the CEO’s recommendations, the committee analyzed the appropriateness of a 6.2% salary increase for our NEOs. As applied, a 6.2% salary increase for the NEOs would provide 2010 salary levels generally consistent with the salary levels of similar executives at the peer companies reflected in two reports prepared by Villareal for the committee, as discussed below.

Villareal’s first report analyzed the results of two surveys:

 

   

a survey by the Economic Research Institute, showing that 2009 salary increases, both in Oklahoma and nationally, had been between 2.6% and 2.7%, with management and executive increases between 2.5% and 2.8% both locally and nationally; and

 

   

a survey by World at Work, projecting salary increases for 2010 in the southern region of its survey at between 2.8% and 2.9%, and projecting national salary increases at between 2.8% (all industries) to 3.5% (extractive industries).

As among the companies represented in those surveys, the combined salary increases for years 2009 and 2010 were between 5.3% and 6.3%. This placed the 6.2% salary increase being considered by the committee within the aggregated two-year salary increase range reflected in the surveys.

Villareal also provided the committee members with a second report, comparing the actual 2009 salaries of our NEOs to the average projected 2010 salaries for similarly-situated executives in two additional groups:

 

   

The “Survey Group.” The data for this group is based on the average of comparable NEO salaries reflected under three different sets of surveys:

 

   

the Mercer Survey of Energy Companies in the U.S. (April 2009);

 

   

the Salary Assessor survey from the Economic Research Institute (dated October 2009 and covering 2,000 industries, 300 cities and 6,200 executives); and

 

 

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the Watson Wyatt Data Services ECS Industry Report on Top Management Compensation (April 2009).

 

   

The “Peer Group.” The data for this group was based on the average salaries for similar executives at a group of 15 companies whose proxies had been examined and who had been chosen because they were energy companies with revenues between $0.61 and $2.25 billion. Those companies are:

 

   

Newfield Exploration Company

 

   

Patterson – UTI Energy, Inc.

 

   

Helmerich & Payne

 

   

Cimarex Energy Company

 

   

Forest Oil Corporation

 

   

Denbury Resources, Inc.

 

   

St. Mary Land & Exploration

 

   

Whiting Petroleum Corporation

 

   

W&T Offshore

 

   

Petrohawk Energy

 

   

Precision Drilling Trust

 

   

Cabot Oil & Gas Corporation

 

   

Parker Drilling Company

 

   

Stone Energy Corporation

 

   

Pioneer Drilling Company

The table below reflects a comparison, by executive position, of our NEOs’ 2009 salaries as compared to these reflected in the Survey Group and Peer Group surveys. Also included is a comparison of how the NEOs’ 2010 salaries, if adjusted based on a 6.2% increase over 2009 levels, would compare to the two surveys.

 

Position   Unit
Corp
2009
Salary
($)
    Unit
Corp
as
proposed
2010
Salary
($)
    Survey
Group
Average
Salary
($)
    Proxy
Group
Average
Salary
($)
 
President/CEO     600,000        637,000        646,700        578,500   
Vice President/ Legal Counsel     300,000        318,600        319,900        268,700   
Chief Financial Officer     290,000        308,000        353,900        311,700   
Executive Vice President, Drilling     290,000        308,000        261,900        384,900   
Executive Vice President, Exploration     290,000        308,000        315,100        225,000   

Based on its review, the committee determined that a 6.2% salary increase was appropriate and approved the increase and recommended to the full board that it likewise approve a 6.2% salary increase for 2010 for each of the company’s NEOs, including that of our CEO. The board approved the committee’s recommendation. No detailed performance review was conducted as to the specific performance of the individual NEOs. The resulting 2010 salaries for our NEOs were:

 

   

Mr. Pinkston – $637,000

 

   

Mr. Schell – $318,600

 

   

Mr. Merrill – $308,000

 

   

Mr. Cromling – $308,000

 

   

Mr. Guidry – $308,000

2010 long-term incentive awards.   The committee members reviewed the equity awards made to our NEOs’ for 2008, 2007 and 2006. No awards were granted during 2009. To assist the committee, Villareal compiled survey and proxy data on the average ratio of the value of long-term incentives to salary amounts for executives. That data reflected the following:

 

Responsibility Level    Average Grant
Multiple Median (1)
 

CEO

     2.83   

NEOs (excluding CEO)

     1.58   

Other Executives

     0.78   

Department Heads

     0.38   

Managers

     0.25   

Note to table:

 

(1) Includes the average long-term incentives to salary multiple median of the following sources:

 

   

ECS Industry Report on Top Management Compensation, Watson Wyatt Data Services;

 

   

Energy Industry Report on Compensation Practices, Villareal & Associates;

 

   

Mercer – Survey of Energy Companies in the U.S.; and

 

   

Proxy analysis of the following 27 peer companies:

 

   

Atlas Pipeline Partners

 

   

Cimarex Energy Company

 

   

Newfield Exploration

 

   

Petrohawk Energy Corp.

 

   

PetroQuest Energy

 

   

Questar Corporation

 

   

St. Mary Land & Exploration

 

   

Williams Companies

 

   

Arena Resources

 

   

Ram Energy Resources

 

   

Southwestern Energy Co.

 

 

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Penn Virginia Resource

 

   

Sandridge Energy

 

   

Continental Resources, Inc.

 

   

Cabot Oil & Gas Co.

 

   

Bill Barrett Corporation

 

   

Petroleum Development Co.

 

   

Exco Resources

 

   

Markwest Energy Partners

 

   

Copano Energy

 

   

Crosstex Energy

 

   

Hiland Partners

 

   

Regency Energy Partners

 

   

Eagle Rock Energy Partners

 

   

Helmerich & Payne

 

   

Pioneer Drilling

 

   

Patterson – UTI Energy, Inc.

These companies differ from our peer group, and were chosen by our compensation consultant to provide a broader cross-section of companies than are in the peer group. The companies listed under “Salaries for 2010,” as modified due to merger activity (see “2010 annual cash bonus awards paid in 2011”), continue to be the companies our compensation committee will use as our peer group.

In view of the information examined, Mr. Pinkston recommended the balance between salary and long-term incentives for the other NEOs be consistent with the multiples reflected in that survey data. Mr. Pinkston made no recommendation with respect to his own salary-to-long-term-incentives ratio. In executive session, the committee decided to approve Mr. Pinkston’s recommendation as well as applying the survey data multiple to Mr. Pinkston’s long-term incentive award. Accordingly, the committee granted the following long-term incentive awards in the form of restricted stock awards to our NEOs:

 

Name    2010 Long-term
Incentive Awards
(# shares)
 

Mr. Pinkston

     37,018   

Mr. Schell

     10,334   

Mr. Merrill

     9,985   

Mr. Cromling

     9,985   

Mr. Guidry

     9,985   

The awards vest in four equal installments paid over a three-year period that began April 1, 2010.

2010 annual cash bonus awards paid in 2011.   The committee reviewed peer data provided by Villareal

comparing the relative scope of the company’s overall incentive compensation programs to those of its peer companies. The group of peer companies used were the same used in 2010 salary decisions, except that Stone Energy Company, St. Mary Land & Exploration, and Precision Drilling Trust were removed from the peer group due to merger and acquisition activity. Continental Resources and Sandridge Energy, Inc. were added to the peer group. As modified, the peer group consists of the following energy companies with a mid-size market capitalization of between $0.3 and $1.8 billion:

 

   

Cabot Oil & Gas Corporation

 

   

Cimarex Energy Company

 

   

Continental Resources, Inc.

 

   

Denbury Resources, Inc.

 

   

Forrest Oil Corporation

 

   

Helmerich & Payne, Inc.

 

   

Newfield Exploration Company

 

   

Parker Drilling Company

 

   

Patterson – UTI Energy, Inc.

 

   

Petrohawk Energy Corporation

 

   

Pioneer Drilling Company

 

   

SandRidge Energy, Inc.

 

   

SM Energy Company

 

   

Whiting Petroleum.

The Villareal materials demonstrated that the dollar value of our incentives program was low relative to our cash flow when compared to our peer group. For short-term incentives, the average bonus payout to NEOs for our peers was 0.29% of corporate cash flow for the period from 2007 – 2009, but our average bonus payout for this same period was 0.17%. For long-term incentives during this same period, the average award for NEOs in the peer group was 1.10% of cash flow, and ours was 0.56%.

In addition to the survey information, the committee considered the company’s positive corporate financial performance during 2010, as set forth in “Highlights of 2010 Financial Performance,” page 20. As well as the company’s positive operational results, for the year, including:

Drilling segment

 

   

sold 11 650-1000 hp mechanical rigs that had limited current market ability in order to refurbish other rigs;

 

   

increased operating rigs for horizontal drilling from 38 on January 1, 2010 to 72 on December 31, 2010;

 

 

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built a new 1500 hp rig that began operating in 1 st quarter 2010;

 

   

acquired one 1200 hp electric rig;

 

   

added 23 top drives to the fleet enhancing marketability of the fleet;

 

   

increased cash flow margin per rig per day from $4,200/day in January to $7,400/day in December; and

 

   

daily revenue increased from $657,000/day in January to $1,221,000/day in December.

Exploration and production segment

 

   

replaced 176% of annual production replacement with new reserves;

 

   

finished the year with 622 BCFE of oil and gas reserves;

 

   

annual production was 59 BCFE;

 

   

completed 167 gross wells with a 90% success rate; and

 

   

oil and gas reserves grew 8% during 2010, with a 50% increase in oil reserves and a 10% increase in NGL reserves.

Mid-stream segment

 

   

began construction of a 16-mile, 16-inch pipeline in Preston County, West Virginia;

 

   

increased 2010 processing volumes per day and liquids sold volume per day by 8% and 11%, respectively;

 

   

completed construction of a processing plant in Hemphill County, Texas with capacity to process 50 MMCF/day; and

 

   

obtained contract to enable our processing plants in Texas Panhandle to be operating at 70 – 80% of capacity by mid-year 2011.

 

Based on his evaluation of this information, our CEO proposed a cash bonus payout totaling $657,000 for the other NEOs. The compensation committee has previously established a 75%-of-salary goal for the CEO’s cash bonus, and a 50%-of-salary goal for the other NEOs’ bonuses. As set forth in the table below, the $657,000 total payout recommended by our CEO for our other NEOs put them at 44.8% of salary, or at 89% of the targeted 50%-of-salary goal:

 

CEO Bonus Recommendations For Other Neos  
Employee   Salary
2010
($)
    Target
Bonus
($)
    Annual
Bonus
Total
Award
($)
    Annual
Bonus
as % of
Target
    Annual
Bonus
as % of
Salary
 

Mark Schell

    318,600        159,300        143,000        89.8     44.88

John Cromling

    308,000        154,000        138,000        89.6     44.81

David Merrill

    308,000        154,000        138,000        89.6     44.81

Brad Guidry

    308,000        154,000        138,000        89.6     44.81

 

This recommendation maintained parity between our non-executive employees and our executives, as the bonuses recommended by our CEO for our non-executive employees was also at 89% of the particular percentage of salary that was targeted for those employees. In executive session, the committee discussed the cash bonus proposed by the CEO for the other NEOs, and determined that it was reasonable in view of the information they had considered. The committee members discussed the appropriate short-term incentive compensation package appropriate for the CEO, and ultimately

decided that, as for the other NEOs, a cash bonus at 89% of the target of 75%-of-salary for the CEO would be appropriate. The committee also decided that awarding a cash bonus to Mr. Pinkston that was at 89% of the target would be justified based on the same positive corporate and business unit performance that made it the appropriate level of compensation for the non-executive employees and the other NEOs. The following table reflects the targeted bonus compared to that approved by the committee:

 

 

Bonus Recommendation For CEO  
Employee   Salary
2010
($)
    Target
Bonus
($)
    Annual
Bonus
Total
Award
($)
    Annual
Bonus
as % of
Target
    Annual
Bonus
as % of
Salary
 

Larry Pinkston

    637,000      $ 477,750        425,000        89.0     66.72

 

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Accordingly, the committee approved the following as the NEOs’ 2010 cash bonus awards:

 

Name    2010 Cash Bonus
($)
 

Mr. Pinkston

     425,000   

Mr. Schell

     143,000   

Mr. Merrill

     138,000   

Mr. Cromling

     138,000   

Mr. Guidry

     138,000   

The cash bonus awards were paid in one lump sum in February 2011.

2011 compensation decisions.   The following is provided as supplemental information beneficial to stockholders. It provides additional context to our fiscal year 2010 compensation decisions. This information will be analyzed in detail in our proxy statement for our 2012 annual meeting, since the decisions detailed in this section involve compensation decisions for 2011 and are not considered to have been earned in 2010. These amounts will not appear in the summary compensation or other tables set forth in this proxy statement.

At the December 7, 2010 meeting of the compensation committee, 2011 salaries were approved for our NEOs, as follows:

 

Name    2011 Base Salary
($)
 

Mr. Pinkston

     684,000   

Mr. Schell

     342,600   

Mr. Merrill

     331,000   

Mr. Cromling

     331,000   

Mr. Guidry

     331,000   

Salary increases were effective on January 1, 2011.

At the February 15, 2011 meeting of the compensation committee, the following restricted stock awards were approved for our NEOs for 2011:

 

Name    2011 Long-term
Incentive Awards
(# shares)
 

Mr. Pinkston

     25,661   

Mr. Schell

     8,950   

Mr. Merrill

     8,665   

Mr. Cromling

     8,665   

Mr. Guidry

     8,665   

Seventy percent of the shares awarded will vest in equal one-third annual increments beginning March 9, 2012. The other 30% of the shares awarded will cliff vest on March 9, 2014, but only if applicable performance criteria are met.

Adoption of performance metrics for 2011 incentive compensation.    Also at its February 15, 2011 meeting, the compensation committee voted to adopt performance-based metrics to be used to determine a portion of our NEOs’ 2011 short- and long-term incentive awards. The metrics applicable to our short-term incentive (cash bonus) compensation were adopted under the Unit Corporation Annual Performance Bonus Plan adopted in 2008. We have not previously granted awards under this plan. The metrics for 2011 long-term incentive awards were adopted under the Unit Corporation Stock and Incentive Compensation Plan effective May 3, 2006.

Metrics for short-term incentives.   Under the new metrics, 50% of any short-term incentive compensation will be performance-based, and 50% will be awarded at the committee’s discretion. The committee recognizes the value of a formula-based, objective performance measure to be used in conjunction with bonus decisions, but it feels strongly that a discretionary component needs to remain in order to provide it with the tools it needs to control for any unforeseen circumstances that might render a strict application of the formula unfair or unwise. Accordingly, the committee chose a 50:50 discretionary-to-nondiscretionary allocation.

Performance-based short-term incentives will take the form of two separate awards, a “financial performance award,” and a “scorecard award,” each of which will be a separate award and paid independently of the other. The financial performance award will be computed in the same manner for all segments of the company, but will be weighted more heavily for the corporate NEOs (our CEO, General Counsel, and CFO) (60% of total performance-based bonus amount), and less heavily for the NEOs who head our operating segments (20% of total performance-based bonus amount).

 

 

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The total non-discretionary incentive available to the NEOs as performance-based short-term incentives for the year will be a multiplier of their salary that is based on the level of performance achieved, as follows:

 

Incentive range for non-discretionary total of
short-term incentives
(Financial Performance Award + Scorecard Award)
(% of salary)
 
Name    Threshold      Target      Outstanding  

Mr. Pinkston

     18.75      37.5      75.0

Mr. Schell

     12.5      25.0      50.0

Mr. Merrill

     12.5      25.0      50.0

Mr. Cromling

     12.5      25.0      50.0

Mr. Guidry

     12.5      25.0      50.0

The percentage of salary multipliers chosen for the CEO and other NEOs reflect the standard multiplier range for executives in similar positions as reflected in market-based survey data.

Financial performance award.    For purposes of the financial performance award, NEO performance will be measured in terms of the ratio of the company’s consolidated annual cash flow to its average total annual assets, as compared to that ratio for our peer group. Peer group performance will be determined based on analyst’s published projected 2011 financial performance levels. Performance at the 25 th percentile of the peer group will constitute “threshold” performance, 50 th percentile performance will constitute “target” performance, and 75 th percentile performance will constitute “outstanding” performance. Depending on the performance level achieved, the incentive opportunity for the NEOs is as follows for the financial performance award:

 

Name    Threshold      Target      Outstanding  

Mr. Pinkston

     11.25      22.5      45.0

Mr. Schell

     7.5      15.0      30.0

Mr. Merrill

     7.5      15.0      30.0

Mr. Cromling

     2.5      5.0      10.0

Mr. Guidry

     2.5      5.0      10.0

The incentive range reflected for Messrs. Pinkston, Schell, and Merrill is 60% of the total range available for the non-discretionary total short-term incentive, reflecting the 60% weighting of this factor for corporate NEOs. For Messrs. Cromling and Guidry, it is 20% of the total available incentive, reflecting the weighting for the business segments. If the threshold level of performance is not achieved, there will be no payout on the financial performance award.

Scorecard Award.   The scorecard component of the short-term incentive award will be based on the performance of the individual business units, and the metrics will differ for each segment.

Corporate scorecard .  The scorecard for Messrs. Pinkston, Schell, and Merrill will be a composite of the scorecards of the three business segments, weighted 60% for the petroleum segment, 30% for the drilling segment, and 10% for the mid-stream segment.

Depending on the performance level achieved, the incentive opportunity for the corporate NEOs is as follows, expressed as a percentage of their salary:

 

Name    Threshold      Target      Outstanding  

Mr. Pinkston

     7.5      15.0      30.0

Mr. Schell

     5.0      10.0      20.0

Mr. Merrill

     5.0      10.0      20.0

The incentive range for these awards is 40% of the total incentive opportunity range for the corporate, reflecting the weighting of the corporate scorecard award relative to the financial performance award.

Drilling segment scorecard .  The drilling segment’s scorecard award will be determined based on the segments performance on four factors:

 

   

accident rates;

 

   

total rig costs;

 

   

number of rigs operating; and

 

   

rig downtime.

For the head of our drilling segment, the incentive range for the scorecard award as a whole is 80% of the total incentive opportunity range for this performance-based incentive award.

Exploration and production segment scorecard .   This segments scorecard performance will be determined based on the segment’s performance on four factors:

 

   

net reserve increase;

 

   

capital cost;

 

   

production growth; and

 

   

operating costs.

The incentive range for the scorecard award as a whole is 80% of the total incentive opportunity range for this performance-based incentive award.

 

 

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Mid-stream segment scorecard .  This segment’s scorecard performance will be determined based on the segment’s performance on these three factors:

 

   

growth in invested capital;

 

   

return on invested capital; and

 

   

operating cost.

The incentive range for the scorecard award as a whole is 80% of the incentive opportunity range for this performance-based incentive award for the segment head.

Metrics for long-term incentives.   Thirty percent of the NEOs’ 2011 long-term incentive award will be performance-based, and 70% will be time vested. The committee believes both long-term time-vested awards as well as performance-based awards serve to encourage successful long-term performance and promote stockholder value over time. The 30%:70% ratio was selected as a reasonable starting point for implementing the performance-based metrics. The awards will be made in restricted stock.

All performance-based restricted stock issued to the NEOs for 2011 long-term incentive compensation will cliff vest after three years in an amount that will be determined based on application of the following formula, which measure total stockholder return as compared to peer companies:

Total Stockholder Return (“TSR”) =

Ending stock price – Beginning stock price + Dividends

beginning stock price

For purposes of the formula, the ending and beginning common stock price used will be calculated using the average of the closing price of our common stock on the NYSE for the fifteen day period ending on the start and end of the designated performance period (the cliff vesting date for this part of the award). The peer companies are the fourteen companies listed as peer companies earlier under our discussion “2010 annual cash bonus awards paid in 2011.” Peer companies’ stock prices will be determined in the same manner, using the 15-day trading averages for the same time period.

The number of performance-based shares that ultimately vest for the NEOs will be determined by the TSR of the company relative to the TSR of the peer companies at the end of the performance period as follows:

 

Percentile
(Unit TSR vs. peer TSR)
   Vesting
(% that will vest)
 

90

     150

75

     125

60

     100

50

     75

40

     50

If the company’s TSR is less than the 40 th percentile of peer TSR levels at the end of the performance period, the shares will not vest and will be void.

Executive stock ownership policy.   Although we encourage our NEOs to own company stock, we do not require them to do so. During the course of their employment, all NEOs have received compensation in the form of stock or other equity interests, and all executive officers currently own company stock. We have a policy of prohibiting our executive officers (and directors) from engaging in short-term or speculative transactions in our securities, including hedging activities.

No backdating, springloading or repricing of options.   We do not backdate options, grant options retroactively or reprice existing options. In addition, we do not coordinate grants of options so that they are made before announcement of favorable information, or after announcement of unfavorable information. Option and stock awards are granted at fair market value on the date the award is approved. Our general practice is to grant awards only on an annual grant basis, although there are occasions when grants have been made on other dates, such as in connection with a newly-hired employee.

Non-employee director compensation.   The compensation committee recommends the form and amount of compensation for our non-employee directors to the board and the board makes the final determination. In making its decisions, the compensation committee considers such factors as it deems appropriate, including historical compensation information, level of compensation necessary to attract and retain non-employee directors meeting our desired qualifications and market data.

Accounting and tax considerations.   Before 2006, the primary form of equity compensation that we awarded to our NEOs consisted of stock options. We selected this form of award because of the favorable accounting and tax treatment and the expectation of employees in our industry. However, beginning in 2006, the accounting treatment of stock options

 

 

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changed as a result of Statement of Financial Accounting Standards No. 123(R) (now replaced by FASB Accounting Standards Codification Topic 718), making the accounting treatment of stock options less attractive as a form of employee compensation. As a result, since 2006 we have used stock appreciation rights, restricted stock or a mix of the two for our NEOs, although we do continue to use option awards for our non-employee directors.

Section 162(m).   The committee considers the potential effects of Section 162(m) of the Internal Revenue Code on the compensation paid to our NEOs. Section 162(m) disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1.0 million in any taxable year for certain executive officers, unless the compensation is performance-based.

The committee has examined our current executive compensation program and understands that occasionally some of the compensation paid to our NEOs may not be deductible under Section 162(m). However, the committee does not believe that the loss of any deductions will be likely to have a material negative financial impact on the company.

The net impact on the company for 2010 was approximately $507,831, the amount of the taxes on compensation in excess of Section 162(m) limits. The committee also believes that it is important to retain the flexibility to motivate performance through awards or programs that do not meet all of the requirements of Section 162(m). The committee will continue to monitor the issue of deductibility, and make adjustments to our executive compensation programs as it feels appropriate and warranted.

Non-qualified deferred compensation.   On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law changing the tax rules applicable to non-qualified deferred compensation arrangements. A more detailed discussion of our non-qualified deferred compensation program is provided on page 39 under the heading “Non-qualified deferred compensation for 2010.”

No employment agreements.   We currently do not have employment contracts with our NEOs. But we have entered into key employee contracts with three of our NEOs. Additional information regarding those agreements is contained in the discussion under “Potential payments on termination or change-in-control” below.

 

 

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S UMMARY COMPENSATION TABLE

The following table sets forth information regarding the compensation paid, distributed, or earned by or for our NEOs for fiscal years 2008 through 2010.

 

SUMMARY COMPENSATION TABLE

  

Name and
Principal
Position
  Year     Salary
($) (1)
    Bonus
($) (1)(2)
  Stock
Awards
($) (3)
    Option
Awards
($)
    Non-
Equity
Incentive
Plan
Compensation
($)
    Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($) (4)
    All Other
Compensation
($) (5)
    Total
($)
 
(a)   (b)     (c)     (d)   (e)     (f)     (g)     (h)     (i)     (j)  

Larry D. Pinkston,

President and CEO

   
 
 
2010
2009
2008
  
  
  
   
 
 
637,000
600,000
600,000
  
  
  
  425,000
450,000
-
   

 

 

1,698,016

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   
 
 
24,699
24,699
24,413
  
  
  
   
 
 
2,784,715
1,074,699
624,413
  
  
  

Mark E. Schell,

Sr. V.P., Secretary and

General Counsel

   
 
 
2010
2009
2008
  
  
  
   
 
 
318,600
300,000
300,000
  
  
  
  143,000
150,000
-
   

 

 

474,021

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   
 
 
25,545
25,545
24,454
  
  
  
   
 
 
961,166
475,545
324,454
  
  
  

David T. Merrill,

CFO and Treasurer

   
 
 
2010
2009
2008
  
  
  
   
 
 
308,000
290,000
290,000
  
  
  
  138,000
145,000
-
   

 

 

458,012

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   
 
 
31,302
30,593
29,402
  
  
  
   
 
 
935,314
465,593
319,402
  
  
  

John Cromling,

Executive V.P. - Drilling

   
 
 
2010
2009
2008
  
  
  
   
 
 
308,000
290,000
290,000
  
  
  
  138,000
145,000
-
   

 

 

458,012

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   
 
 
29,744
27,499
25,822
  
  
  
   
 
 
933,756
462,499
315,822
  
  
  

Bradford J. Guidry,

Sr. V.P. - Exploration

   
 
 
2010
2009
2008
  
  
  
   
 
 
308,000
290,000
290,000
  
  
  
  138,000
145,000
-
   

 

 

458,012

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   

 

 

-

-

-

  

  

  

   
 
 
23,199
23,502
23,046
  
  
  
   
 
 
927,211
458,502
313,046
  
  
  

Notes to table:

 

  (1) Compensation deferred at the election of an executive is included in the year earned. During 2008, 2009, and 2010, the NEOs deferred, on a discretionary basis, the following amounts of salary or bonus into our compensation deferral plans:

 

Name    Amounts Deferred       
   Year      Salary($)      Bonus($)       

Larry D. Pinkston

     2010         4,247         17,753      
     2009         22,000         0      
     2008         96,000         20,280        

Mark E. Schell

     2010         10,715         20,280      
     2009         22,000         0      
     2008         26,345         20,354        

David T. Merrill

     2010         4,980         11,600      
     2009         68,700         0      
     2008         52,200         15,500        

John Cromling

     2010         10,400         11,600      
     2009         22,000         0      
     2008         300         20,200        

Bradford J. Guidry

     2010         10,267         11,733      
     2009         22,000         0      
     2008         17,400         20,500        

 

  (2) The amounts in column (d) reflect the bonus amount earned in the year without regard to the year(s) those amounts were actually paid, and do not include amounts, if any, earned in prior years but paid in the stated year. The amount for 2010 was both awarded and paid in 2011, but is included as 2010 income because it was deemed to be earned in 2010.

 

  (3) The amounts included in the “Stock Awards” column are the aggregate grant date fair value of these awards computed in accordance with FASB ASC Topic 718 “Stock Compensation,” which excludes the effect of estimated forfeitures. For a discussion of the valuation assumptions used in calculating these values for year 2010, see Notes 2 and 12 to our 2010 Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2010. The amount shown does not represent amounts paid to the NEOs.

 

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Table of Contents
       SEC Rule Change Impact Note :  Under generally accepted accounting principles, compensation expense with respect to stock awards and option awards granted to our employees is generally recognized over the vesting periods applicable to the awards. The SEC’s disclosure rules previously required that we present stock award and option award information for 2008 based on the amount recognized during the corresponding year for financial statement reporting purposes with respect to these awards (which meant, in effect, that in any given year we could recognize for financial statement reporting purposes amounts with respect to grants made in that year as well as with respect to grants from past years that vested in or were still vesting during that year). However, the changes in the SEC disclosure rules require that we now present the stock award and option award amounts in the applicable columns of the table above with respect to 2008 on a similar basis as the 2009 and 2010 presentation using the grant date fair value of the awards granted during the corresponding year (regardless of the period over which the awards are scheduled to vest). Since this requirement differs from the SEC’s past disclosure rules, the amounts reported in the table above for stock awards and option awards in 2008 differ from the amounts previously reported in our Summary Compensation Table for that year. As a result, to the extent applicable, each NEO’s total compensation amounts for 2008 also differ from the amounts previously reported in our Summary Compensation Table for that year.

 

  (4) We do not provide for preferential or above-market earnings on deferred compensation.

 

  (5) The table below shows the components of this column:

 

Name    Year      401(k) Match
for stated
Plan year
($)*
     Personal  Car
Allowance
($)
   Club
Membership
($)
     Total “All
Other
Compensation”
($)
 

Larry D. Pinkston

     2010         17,199       7,500                 0         24,699   
     2009         17,199       7,500                 0         24,699   
     2008         16,146       7,500             767         24,413   

Mark E. Schell

     2010         17,199       7,500             846         25,545   
     2009         17,199       7,500             846         25,545   
     2008         16,146       7,500             808         24,454   

David T. Merrill

     2010         17,199       6,000          8,103         31,302   
     2009         16,694       6,000          7,899         30,593   
     2008         16,146       6,000          7,256         29,402   

John Cromling

     2010         17,199       5,498**      7,047         29,744   
     2009         17,199       4,184**      6,116         27,499   
     2008         16,146       3,556**      6,120         25,822   

Bradford J. Guidry

     2010         17,199       6,000                 0         23,199   
     2009         17,199       6,000             303         23,502   
     2008         16,146       6,000             900         23,046   

 

  * Our matching contribution is made in shares of our common stock.

 

  ** This amount represents the imputed income attributable to Mr. Cromling’s use of a company vehicle.

 

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Table of Contents

G RANT OF PLAN - BASED AWARDS FOR 2010

In 2010, the NEOs received the following restricted stock awards:

 

GRANTS OF PLAN-BASED AWARDS FOR 2010  
Name   Grant
Date
    Estimated Possible
Payouts
Under Non-Equity
Incentive
Plan Awards
    Estimated Future Payouts
Under Equity Incentive
Plan Awards
    All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#)
    All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
    Exercise or
Base Price
of Option
Awards
($/sh)
    Grant Date
Fair Value
of Stock and
Option
Awards
($)
 
           

Thresh-

old

($)

    Target
($)
    Maxi-
mum
($)
   

Thresh-
old

(#

shares)

    Target
(# shares)
   

Maxi-
mum
(#

shares)

                         
(a)   (b) (1)     (c)     (d)     (e)     (f)     (g)     (h)     (i) (2)     (j)     (k)     (l)  

Larry D. Pinkston,
President and CEO

    3/9/2010                                                        37,018                        1,698,016   

Mark E. Schell,
Sr. V.P., Secretary and General Counsel

    3/9/2010                                                        10,334                        474,021   

David T. Merrill,
CFO and Treasurer

    3/9/2010                                                        9,985                        458,012   

John Cromling, Executive V.P. - Drilling

    3/9/2010                                                        9,985                        458,012   

Bradford J. Guidry, Sr. V.P. Exploration

    3/9/2010                                                        9,985                        458,012   

Notes to table:

 

  (1) All awards made under the company’s stock and incentive compensation plan.

 

  (2)

Represents restricted stock shares that vest in four installments of 25% each on April 1 st of each of the years 2010 through 2013.

 

For 2010, 45.8% of our NEOs’ total compensation consisted of their salaries and annual cash bonuses, and 54.2% consisted of their restricted stock awards. No plan-based grants were made to the NEOs during 2009, so for 2009 100% of our NEOs’ total compensation consisted of their salaries and annual bonuses. In 2008, no annual bonuses or equity awards were granted so salary alone accounted for 100% of our NEOs’ 2008 compensation.

There are no performance-based conditions that affect the vesting schedule for the awards described above. However, to receive the shares the employee must be in the employ of the company on the vesting date. In the event of a change-in-control of the company, any unvested shares immediately vest in the recipient. The recipient of each award of restricted stock has all of the rights of a holder of shares of the company’s common stock, including the right to vote such shares and to receive any cash

dividends paid on those shares. The compensation committee, however, may determine that cash dividends be automatically reinvested in additional shares which become shares of restricted stock and are subject to the same restrictions and other terms of the award. To date, the company has not issued dividends with respect to its common stock.

Amounts realizable from prior compensation did not affect the awards set forth above. There was no repricing involved with respect to any outstanding equity-based award or option. No targets factored into the compensation determinations reflected above. Allocation among the elements of compensation was determined in the compensation committee’s discretion, based on its general experience, prior practices, and data and recommendations provided by its compensation consultant.

 

 

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Table of Contents

O UTSTANDING EQUITY AWARDS AT END OF 2010

The following table shows outstanding equity awards at December 31, 2010 for each of the NEOs:

 

 

OUTSTANDING EQUITY AWARDS AT END OF 2010

 

      Option Awards     Stock Awards
Name   Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#) (1)
    Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
   

Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options

(#)

    Option
Exercise
Price
($)
  Option
Expiration
Date
    Number of
Shares or
Units of
Stock That
Have Not
Vested
(#) (2)
  Market
Value of
Shares or
Units of
Stock
That Have
Not
Vested
($) (3)
  Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
 

Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

($)

(a)   (b)     (c)     (d)     (e)   (f)     (g)   (h)   (i)   (j)

Larry D. Pinkston

    7,500          19.04     12/17/12             
      10,000          22.95     12/17/13             
      10,000          37.83     12/14/14             
      23,716          51.76     12/12/16             
      31,686 (4)       15,843 (4)             44.31     12/19/17                   
              30,883   1,435,442      

Mark E. Schell

    7,500          19.04     12/17/12             
      7,500          22.95     12/17/13             
      8,500          37.83     12/14/14             
      6,522          51.76     12/12/16             
      11,618        5,809 (4)       44.31     12/19/17             
                                        8,894   413,393        

David T. Merrill

    5,000          21.50     8/25/13             
      3,000          22.95     12/17/13             
      5,000          37.83     12/14/14             
      5,929          51.76     12/12/16             
      10,562 (4)       5,281 (4)       44.31     12/19/17             
                                        8,528   396,381        

John Cromling

    700          22.95     12/17/13             
      3,500          37.83     12/14/14             
      7,500          37.69     5/25/15             
      4,348          51.76     12/12/16             
      6,971 (4)       3,485 (4)       44.31     12/19/17             
                                        8,174   379,928        

Bradford J.

Guidry

    5,000          19.04     12/17/12             
      3,500          22.95     12/17/13             
      3,500          37.83     12/14/14             
      7,500          37.69     5/25/15             
      4,150          51.76     12/12/16             
      6,654 (4)       3,327 (4)       44.31     12/19/17