SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c)
of the Securities
Exchange Act of 1934
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Check the appropriate box:
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Preliminary Information Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))
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Definitive Information Statement
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Public Service Company of Oklahoma
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(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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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
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PUBLIC SERVICE COMPANY OF OKLAHOMA
1 Riverside Plaza
Columbus, Ohio 43215
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO THE
SHAREHOLDERS OF
PUBLIC SERVICE COMPANY OF OKLAHOMA:
The annual meeting of the shareholders of Public Service Company of Oklahoma will be held on Tuesday, May 5, 2009, at 11:00 a.m. at the principal office of American Electric Power Service Corporation, 1 Riverside Plaza, Columbus, Ohio,
for the following purposes:
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To elect ten directors of the Company to hold office for one year or until their successors are elected and qualified; and
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To transact such other business (none known as of the date of this notice) as may legally come before the meeting or any adjournment thereof.
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Only holders of record of Common Stock and Cumulative Preferred Stock, par value $100 per share, at the close of business on March 17, 2009 are
entitled to notice of and to vote at the annual meeting.
THERE WILL BE NO SOLICITATION OF PROXIES BY THE BOARD OF DIRECTORS OF THE
COMPANY.
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L. RAHMOND STAGGERS,
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Secretary
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March 20, 2009
INFORMATION STATEMENT
This information statement is being furnished in connection with the annual meeting of shareholders of Public Service Company of Oklahoma (the Company),
to be held on Tuesday, May 5, 2009 at 11:00 a.m. at the principal office of American Electric Power Service Corporation, 1 Riverside Plaza, Columbus, Ohio.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
Voting at Meeting
On March 17, 2009, the date for determining shareholders entitled to notice of and to vote at the meeting, there were 52,617
shares of Cumulative Preferred Stock, par value $100 per share, and 9,013,000 shares of Common Stock outstanding.
Each holder of
Cumulative Preferred Stock, par value $100 per share, and each holder of Common Stock has the right to one vote for each share outstanding in such holders name on the books of the Company at the close of business on March 17, 2009 for the
election of directors and on any other business which may come before the meeting.
Principal Shareholders
American Electric Power Company, Inc. (AEP), 1 Riverside Plaza, Columbus, Ohio 43215, a public utility holding company, owns all of the Companys
outstanding Common Stock. The Common Stock represents approximately 99% of the combined voting power of the capital stock of the Company entitled to vote at the meeting. As a result, the Company is a controlled company as defined by the
New York Stock Exchange (NYSE) listing standards. The Company lists only preferred stock on the NYSE. The Company does not have standing audit, nominating or compensation committees.
AEP also owns, directly or indirectly, all of the common stock of the other companies which constitute the American Electric Power System (the AEP
System). The AEP System is an integrated electric utility system and, as a result, the member companies of the AEP System, including the Company, have contractual, financial and other business relationships with the other member companies, such as
participation in the AEP System savings and retirement plans and tax returns; sales of electricity; and sales, transportation and handling of fuel. American Electric Power Service Corporation (the Service Corporation), a wholly-owned subsidiary of
AEP, renders management, advisory, engineering and other similar services at cost to the principal operating companies of the AEP System, including the Company.
ELECTION OF DIRECTORS
Ten directors are to be elected to hold office for one year or until their
successors are elected and qualified. The Company has been informed that AEP will nominate, and cast the votes of all of the outstanding shares of Common Stock for, the persons named below. In the event that any of such persons should unexpectedly
be unable to stand for election, AEP has informed the Company that it will cast its votes for a substitute chosen by the Board of Directors of the Company and approved by AEP.
The following brief biographies of the nominees include their ages as of March 1, 2009, an account of their business experience and the names of
certain publicly-held corporations of which they are also directors.
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Name
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Age
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Business Experience
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MICHAEL G. MORRIS
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Chairman of the board, chief executive officer and director of the Company and chairman of the board, chief executive officer, president and director of AEP and the Service Corporation. A
director of Alcoa Inc. and The Hartford Financial Services Group, Inc. Chairman of the board, chief executive officer and director of certain other AEP System companies.
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NICHOLAS K. AKINS
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Vice president and director of the Company, executive vice president of AEP and executive vice president-generation of the Service Corporation. Became vice president-energy delivery business
development of the Service Corporation in 2001, became vice president-energy market services in 2002, was appointed president and chief operating officer of Southwestern Electric Power Company in 2004 and assumed his current position in 2006. A vice
president and director of certain other AEP System companies.
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CARL L. ENGLISH
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Vice president and director of the Company, chief operating officer of AEP and chief operating officer and director of the Service Corporation. From 1999-2004 was president and chief
executive officer of Consumers Energy gas division. Joined AEP as president-utility group in 2004 and assumed his current position in 2008. A vice president and director of certain other AEP System companies.
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JOHN B. KEANE
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Vice president and director of the Company, executive vice president, general counsel and secretary of AEP and executive vice president, general counsel, assistant secretary and director of
the Service Corporation. Was president of Bainbridge Crossing Advisors from 2003-2004 and vice president-administration-Northeast Utilities from 1998-2002. A director of certain other AEP System companies.
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HOLLY K. KOEPPEL
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Vice president and director of the Company, executive vice president of AEP and executive vice president and chief financial officer of the Service Corporation. Joined AEP as vice
president-new ventures in 2000, became senior vice president-corporate development in 2002, executive vice president-commercial operations of the Service Corporation in 2002, executive vice president of AEP in 2002, executive vice president-AEP
utilities east in 2004 and assumed her present position in 2006. Vice president and director of certain other AEP System companies.
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VENITA MCCELLON-ALLEN
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Vice chairman of the board, vice president and director of the Company, executive vice president of AEP and executive vice president-AEP utilities west of the Service Corporation. Joined the
Service Corporation in 2004 as senior vice president-shared services, became president and chief operating officer of Southwestern Electric Power Company, an affiliate of the Company, in 2006 and assumed her present position in 2008. Vice chairman,
vice president and director of certain other AEP System companies.
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RICHARD E. MUNCZINSKI
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Vice president and director of the Company, senior vice president of AEP and senior vice president-shared services and director of the Service Corporation. Joined the Service Corporation in
1978, became vice president-regulatory services in 1996, senior vice president-corporate planning and budgeting in 1998 and assumed his current position in 2008.
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ROBERT P. POWERS
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Vice president and director of the Company, president-AEP utilities of AEP and president-AEP utilities and director of the Service Corporation. Joined the Service Corporation in 1998 as
senior vice president-nuclear generation, became senior vice president-nuclear operations in 2000, executive vice president-nuclear generation and technical services in 2001, executive vice president-generation in 2003, executive vice president of
AEP in 2006 and assumed his present position in 2008. Vice president and director of certain other AEP System companies.
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SUSAN TOMASKY
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Vice president and director of the Company, executive vice president of AEP, and president-AEP transmission and director of the Service Corporation. Joined the Service Corporation in 1998 as
senior vice president, general counsel and secretary, became executive vice president-legal, policy and corporate communications in 2000, vice president and chief financial officer of AEP and executive vice president-policy finance and strategic
planning of the Service Corporation in 2001, executive vice present and chief financial officer in 2004, executive vice president-shared services of the Service Corporation in 2006 and assumed her present position in 2008. A vice president and
director of certain other AEP System companies.
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DENNIS E. WELCH
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Vice president and director of the Company, senior vice president of AEP and executive vice president-environment, safety, health and facilities of the Service Corporation. Joined AEP in 2005
as senior vice president and senior vice president-environment and safety of the Service Corporation and assumed his current position in 2008. Was president and chief operating officer of Yankee Energy System, Inc. and Yankee Gas Services Company
from 2001 to 2005. A vice president and director of certain other AEP System companies.
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Messrs. Morris, Akins, English, Keane, Munczinski, Powers and Welch, Ms. Koeppel and
Ms. Tomasky are directors of AEP Texas Central Company, AEP Texas North Company, Appalachian Power Company, Columbus Southern Power Company, Kentucky Power Company, Ohio Power Company and Southwestern Electric Power Company, all of which are
direct or indirect subsidiaries of AEP and have one or more classes of publicly held preferred stock or debt securities. Ms. McCellon-Allen is a director of AEP Texas Central Company, AEP Texas North Company and Southwestern Electric Power
Company. Messrs. Morris, Akins, English and Powers and Ms. Koeppel and Ms. Tomasky are directors of Indiana Michigan Power Company. Messrs. Morris, Akins, Keane and Powers and Ms. Koeppel are also directors of AEP Generating Company,
another subsidiary of AEP.
3
GOVERNANCE POLICIES AND PROCESSES
The Company has reviewed the provisions of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), the rules of the Securities and Exchange Commission (SEC)
and the listing standards of the NYSE relating to corporate governance. Based on the SECs rule,
Standards Relating to Listed Company Audit Committees
, the Company is exempt from the audit committee requirements set forth in
Section 301 of the Sarbanes-Oxley Act and therefore is not required to have an audit committee or an audit committee report on whether it has an audit committee financial expert. The Company is also exempt from a majority of the NYSEs
listing standards relating to corporate governance. The Company has voluntarily complied with certain of the NYSEs listing standards relating to corporate governance where such compliance is in the best interest of the Companys
shareholders.
DIRECTOR NOMINATION PROCESS
The Company does not have a Nominating Committee. The full board identifies director nominees. AEP owns all of the Common Stock, and, as a result, AEPs affirmative vote is sufficient to elect director nominees.
Consequently, the board does not accept proposals from preferred shareholders regarding potential candidates for director nominees.
COMMUNICATIONS TO THE BOARD
Shareholders interested in communicating directly with the Companys board of directors
can contact them by writing c/o Corporate Secretary, Ohio Power Company, 1 Riverside Plaza, Columbus, Ohio 43215. The Corporate Secretary will forward the correspondence to the individual director or directors to whom the correspondence is directed.
BOARD ATTENDANCE AT ANNUAL MEETING OF SHAREHOLDERS
The Company does not have a policy relating to attendance at the Companys annual meeting of shareholders by directors. The Company does not solicit proxies for the election of directors because the affirmative
vote of AEP is sufficient to elect the nominees and, therefore, holders of the Companys preferred stock rarely attend the annual meeting. Consequently, a policy encouraging directors to attend the annual meeting of shareholders is not
necessary.
CODE OF ETHICS
All of the Companys directors and officers, including its principal executive, financial and accounting officers are subject to AEPs Code of Conduct. The AEP Code of Conduct is available on AEPs website:
www.AEP.com
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OTHER BUSINESS
Management does not intend to bring any matters before the meeting other than the election of directors and does not know of any matters that will be brought before the meeting by others.
COMPENSATION DISCUSSION AND ANALYSIS
For purposes of this section, we use the terms AEP, the Company, we, our and us to refer to American Electric Power Company, Inc. All references to board of directors,
board, or directors refer to the board of directors of AEP. All of the executive officers of the Company identified in the Summary Compensation Table are employees of the Service Corporation. The compensation of these
executive officers are paid by the Service Corporation. The AEP Human Resources Committee (HR Committee) is responsible for the oversight and administration of the Service Corporations executive compensation.
Overview
The HR Committee oversees AEPs
executive compensation program and determines the compensation for executives. In carrying out this responsibility, the HR Committee reviews and determines all compensation, significant benefit plan changes and perquisites for AEPs executive
officers. The HR Committee makes recommendations to the independent board members about the compensation of the Chief Executive Officer, and those independent board members determine the CEOs compensation.
4
AEPs executive compensation programs are designed to:
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Attract and retain a superb leadership team with market competitive compensation and benefits;
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Reflect AEPs financial and operational size and the complexity of its multi-state operations;
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Maximize shareholder value by emphasizing performance-based compensation over base salary, providing a substantial percentage of executive officers total
compensation opportunities in the form of stock-based compensation, and requiring executives to meet stock ownership requirements;
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Support the implementation of the Companys business strategy by tying annual incentive awards to earnings per share targets, and the achievement of specific
operating and strategic objectives;
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Motivate and reward outstanding individual performance; and
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Promote the stability of the management team by creating strong retention incentives with multi-year vesting schedules for long-term incentive compensation.
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Overall, AEPs executive compensation program is intended to create a total compensation opportunity that, on
average, is equal to the median of AEPs peer group of other utility companies and industrial companies, as described below under Compensation Peer Group. The HR Committees independent compensation consultant, Towers Perrin,
participates in HR Committee meetings, assists the HR Committee to develop the compensation program and meets with the HR Committee in executive session without management present during most meetings. See the Human Resources Committee Report on
page 20 for additional information about the independence of Towers Perrins advice to the HR Committee.
In light of extremely
difficult economic conditions the HR Committee, with managements agreement, made several recent changes to our executive compensation program. These steps were to:
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Freeze salaries, effective November 1, 2008, for executive officers and other employees,
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Freeze target annual incentive opportunities for each salary grade, expressed as a percentage of base pay, at 2008 levels,
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Reduce the grant date value of the long-term incentive opportunity granted to the CEO for the 2009-2011 performance period by 12% from the prior year grant value
and freeze the long-term incentive opportunities for all other salary grades, and
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Change the methodology for AEPs 2009 annual incentive compensation program to link target award funding to the achievement of earnings above the midpoint of
our earnings guidance range, rather than to the midpoint of our earnings guidance range, as has been the case for the last several years.
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Specifically, the HR Committee tied target funding for the 2009 annual incentive compensation program for
nearly all AEPs employees, including the executive officers, to AEPs ongoing EPS performance relative to the upper quartile of our 2009 earnings guidance as of December 2008, which was EPS of $3.30 per share, rather than to the midpoint
of our EPS guidance range of $3.20 per share.
The HR Committee selected the upper quartile of the earning guidance range as the target,
rather than the midpoint to require year over year improvement for target award funding. Despite deteriorating economic conditions that have led the Company to issue earnings guidance with a midpoint that was slightly lower than the prior
years results, the Committee also believed that a modest increase in the EPS target over the prior year struck an appropriate balance between employee and shareholder interests during these extremely difficult economic conditions.
Our 2008 earnings target was approximately 8.5% or $0.25 per share higher than our 2007 earnings target, and our 2009 earnings target is approximately
3.1% or $0.10 per share higher than our 2008 earnings target. Despite the reduced growth of the EPS target, the HR Committee believes AEPs 2009 EPS objective will be more difficult to achieve than the 2008 target due to very difficult economic
conditions.
Compensation Program Design
The compensation program for executive officers includes base salary, annual incentive compensation, long-term incentive compensation, a comprehensive benefits program and some perquisites that help executives conduct company business.
The HR Committee provides a balance of short-term and long-term incentive compensation that is consistent with the mix provided by
AEPs compensation peer group. The HR Committee chooses performance objectives for AEPs incentive program to better ensure that short-term performance is not encouraged or rewarded at the expense of long-term performance. In addition, the
HR Committee balances earnings objectives and other objectives in AEPs annual incentive compensation by tying awards to the
simultaneous achievement of AEPs earnings per share targets and a balanced scorecard of other objectives. For example, the annual incentive compensation opportunity provided to the executive officers named in the summary compensation table on
page 22 for 2008 was tied to the simultaneous achievement of AEPs ongoing 2008 earnings per share guidance and performance in four equally weighted categories: safety, operating performance, regulatory performance and strategic initiatives.
This approach keeps annual incentive compensation in step with the earnings of the Company while, at the same time, tying annual incentive compensation to other important objectives, including non-financial measures, such as safety.
Long-term incentive compensation is tied to longer-term shareholder return objectives to maintain an appropriate focus on creating sustainable long-term
shareholder value. Specifically, long-term compensation was tied to AEPs three-year total shareholder return and three-year cumulative earnings per share.
6
AEPs 2008 annual incentive compensation was awarded based on goals established and approved by the
HR Committee in January 2008. All funding of annual incentive compensation for nearly all AEP employees, including the named executive officers, was tied to AEPs ongoing earnings per share guidance (see Annual Incentive Compensation-Annual
Performance Objectives below for a detailed description of the performance measure).
The HR Committee chose earnings per share as the
funding factor because it is strongly correlated with shareholder returns, largely reflects managements performance in operating the Company and is the primary measure by which the Company communicates forward-looking financial information to
the investment community. The EPS measure is clearly understood by both our shareholders and employees. We also believe that EPS growth leads to the creation of long-term shareholder value.
AEPs long-term incentive program focuses on longer-term shareholder value objectives. In 2008 performance units awarded to executive officers were
linked to AEPs three-year total shareholder return relative to the utility companies in the S&P 500 Index and AEPs three-year cumulative ongoing earnings per share. Total shareholder return is generally the change in share price plus
the dividend payments over the performance period. A cumulative earnings measure was chosen to ensure that the total earnings for all three years contribute equally to the award calculations, as opposed to assessing performance for each of the three
years independently, which could encourage the sacrifice of earnings in one year to better ensure the achievement of earnings objectives in other years. The HR Committee also chose a total shareholder return measure for long-term incentive awards to
provide an external performance comparison that reflects the effectiveness of managements strategic decisions and actions over this period. The HR Committee also uses long-term incentives as a retention tool to foster management continuity by
subjecting these awards to a three-year vesting period.
AEPs compensation programs place a substantial amount of compensation at
risk in the form of variable incentive compensation instead of fixed or base pay, with a substantial portion of the variable compensation subject to the achievement of earnings objectives. For 2008, eighty-five percent of the total compensation
opportunity for the Chief Executive Officer and at least seventy-five percent of that for the other named executive officers was at risk in the form of incentive compensation. The HR Committee annually reviews the mix of base salary, annual
incentive and long-term incentive compensation opportunity provided to executives. Consistent with AEPs Compensation Peer Group, more than seventy percent of the 2008 target compensation opportunity for the CEO and between fifty-seven percent
and seventy-two percent of that for the other named executive officers is in the form of long-term, stock based incentive compensation. As a result, the value executives realize from their compensation opportunity is closely linked to AEPs
long-term total shareholder return.
The HR Committee believes that AEPs incentive structure provides an appropriate incentive for
executives to manage the Company in the long-term interests of its stockholders without encouraging inappropriate risk taking. The largest portion of the compensation for our executive officers focuses on the Companys long-term performance.
Since 2003, the HR Committee has chosen to use performance units as the primary form of long-term incentive awards, rather than other forms of compensation that may
7
encourage more risk taking, such as stock options. In addition, the Company maintains stock ownership requirements for its executives to ensure that large
amounts of compensation are equity-based and deferred until after the executive retires. This provides strong incentives to manage the Company in the long term interests of its shareholders and better ensures that executives are not encouraged to
take excessive risk in the short term.
The HR Committee also strives to establish performance measures that balance quantitative and
qualitative factors, avoid excessive weight on a single performance measure and that are achievable with high but sustainable levels of performance. The HR Committee also caps the potential payout score at 200% of target for all AEP performance
measures and retains discretion to adjust incentive awards to reflect qualitative performance factors, including adherence to company values.
The HR Committee also targets a total compensation opportunity for each individual executive that is within a market competitive range, which the HR Committee generally considers to be within 15% of the peer group median. Each element of
AEPs compensation program is structured to fit within this overall level of compensation opportunity. To the extent that the total compensation opportunity for an executive is above or below the peer group median, the HR Committee adjusts
elements of pay over time to bring the total compensation opportunity into the competitive range. For example, the HR Committee has offset the CEOs compensation opportunity by an amount approximately equal to the incremental cost to the
Company of his personal use of AEPs corporate aircraft.
Compensation Peer Group
The HR Committee annually reviews AEPs executive compensation relative to a peer group of companies that represent the talent markets with which AEP
must compete to attract and retain executives. This Compensation Peer Group is annually reviewed and adjusted as appropriate by the HR Committee in consultation with its independent compensation consultant. The Compensation Peer Group is chosen from
a broad list of companies provided by the HR Committees independent compensation consultant for which compensation data is available. The peer companies are chosen to provide a peer group that is, on average, comparable in size to AEP in
revenues, assets, market capitalization and number of employees. In addition, the HR Committee also considers the one and three year total shareholder return of the industrial companies when selecting the peer group. The Compensation Peer Group
currently consists of an approximately equal balance of utility and industrial companies. The HR Committee includes industrial companies outside the utility industry both because AEP must compete with industrial companies to attract and retain
executives and to increase the median level of assets and employees in the peer group to more closely compare to AEP. For 2008, the Compensation Peer Group consisted of 14 large and diversified energy services companies and 12 Fortune 500 companies
shown in the table below.
8
AEPs Compensation Peer Group
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Energy (14 Companies)
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General Industry (12 Companies)
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Centerpoint Energy, Inc.
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3M Company
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Constellation Energy Group, Inc.
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Bristol-Myers Squibb Company
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Dominion Resources, Inc.
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Caterpillar Inc.
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Duke Energy Corporation
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CSX Corporation
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Edison International
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Goodyear Tire & Rubber Company
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Entergy Corporation
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Northrop Grumman Corporation
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Exelon Corporation
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PPG Industries, Inc.
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FirstEnergy Corp.
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Schlumberger N.V.
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FPL Group, Inc.
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Sunoco, Inc.
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PG&E Corporation
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Textron Inc.
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Public Service Enterprise Group Incorporated
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Union Pacific Corporation
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Sempra Energy
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Weyerhaeuser Company
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The Southern Company
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Xcel Energy
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Towers Perrin annually provides the HR Committee with an executive compensation study covering all
executive officer positions and many other executive positions based on its survey information for the Compensation Peer Group. The methodology and job matches used in this study are determined by Towers Perrin based on descriptions of each
executives responsibilities and are reviewed with the HR Committee. The standard benchmark is the median value of compensation paid by the Compensation Peer Group. However, in 2008 Towers Perrin also used a regression analysis of all energy
companies in their database as the market benchmark for Mr. Powers (President AEP Utilities) because in Towers Perrins judgment, this provided the most accurate comparison. These are the only outside compensation surveys that the HR
Committee used in 2008. Differences in the compensation opportunity provided to our named executive officers generally reflect differences in their individual roles and responsibilities, as well as differences in individual performance over time and
other factors.
9
Executive Compensation Program Detail
AEP provides three primary elements of compensation to named executive officers: base salary, annual incentive compensation and long-term incentive
compensation. Each of these elements reflects individual performance and results.
Executive Compensation Component
Summary
. The following table summarizes the major components of our Executive Compensation Program.
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Component
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Purpose
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Key Attributes
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Base Salary
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To provide a market-competitive and
consistent minimum source of
income
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Salary increases established by HR Committee based
on:
Sustained individual performance as assessed in written evaluations,
The responsibilities, experience and future potential of each executive
officer,
Supervisor recommendations, which are constrained by the Companys merit budget,
Reporting relationships,
The
impact that any change in base salary may have on other pay elements,
Tally sheets, and
The competitiveness of each executives total compensation.
No
salary increases for 2009
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Component
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Purpose
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Key Attributes
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Annual Incentive
Compensation
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To intensify executive officer focus on annual
performance objectives that are critical to AEPs success
For 2008 these objectives were:
Ongoing earnings per share relative to our 2008 earnings guidance of $3.10-
$3.30 per share, as the funding measure,
Safety,
Operating performance,
Regulatory performance, and
Strategic initiatives.
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Provided under the Senior Officer
Incentive Plan
Maximum total award opportunity for all executive officers of 0.75% of income before discontinued operations, extraordinary items and the cumulative effect of accounting
changes
Annual incentive targets established by the HR Committee based on competitive compensation information provided by Towers Perrin
Actual
awards may generally vary from 0% to 200% of base salary
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Component
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Purpose
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Key Attributes
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The funding created by AEPs earnings per share
performance is allocated to each business unit and staff group, including the executive officer group, based on their performance toward their goals relative to the performance of all other groups
Individual awards are then determined by the HR Committee based on:
Each executives calculated bonus opportunity,
Individual performance for the prior year,
Market competitive compensation,
Tally
sheets, and
The limits of the overall bonus pool.
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Long-Term
Compensation
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To motivate AEP management to maximize shareholder
value by linking this potential compensation directly to shareholder returns
To help ensure that Company management remains focused on longer-term results, which the HR Committee considers to be essential given the large amount of long-term
investment required in our business
To reduce executive turnover and maintain management consistency
Specific performance objectives currently are:
Three-year cumulative earnings per share, and
|
|
The HR Committee currently provides long-term
incentive awards in the form of three-year performance units
The HR Committee establishes award guidelines for each executive salary grade based on total compensation practices for similar positions in AEPs
Compensation Peer Group
Individual long-term incentive awards are primarily based on:
Individual performance,
Award
guidelines for each salary grade established by the HR Committee,
|
12
|
|
|
|
|
|
|
Three-year total shareholder return relative to the
utilities in the S&P 500
|
|
Market competitive compensation levels,
Tally sheets,
The executive officers future potential for
advancement, and
The overall award budget
|
Base Salary
. AEP pays base salaries to provide a market-competitive and consistent
minimum source of income to executives. When determining the 2008 salaries for executive officers, the HR Committee considered:
|
|
|
Evaluations of their sustained individual performance in the following areas: integrity/ethics, communication, willingness to confront tough issues, business
acumen, strategic planning, teamwork, fostering a high performance culture and, for the CEO only, leadership of the board of directors,
|
|
|
|
The responsibilities, experience and future potential of each executive officer,
|
|
|
|
Reporting relationships,
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|
|
|
Supervisor recommendations, which are constrained by the Companys merit budget,
|
|
|
|
Tally sheets showing salary history and all other elements of total rewards,
|
|
|
|
The impact that any change in base salary may have on other pay elements, such as annual incentive compensation, and
|
|
|
|
The competitiveness of the executives total compensation, which includes annual incentive compensation and long-term incentive compensation.
|
Before determining base salaries, the individual performance of each executive officer is evaluated in the areas
described above by the senior executive to whom each reports. The CEOs performance is assessed by the independent members of the board of directors. To more fully assess the CEOs performance, the HR Committee Chairman annually solicits
confidential written evaluations from all board members, senior AEP executives and AEPs auditors.
To develop a base salary
recommendation for the CEO, the HR Committee, in executive session, subjectively weighs the CEOs performance along with the market compensation information provided by Towers Perrin. The HR Committee also reviews tally sheets showing the
CEOs total reward package, including perquisites. The HR Committee presents its recommendation to the independent members of AEPs Board, who make the final determination of the CEOs salary.
13
In determining the 2008 base salaries for the other named executive officers, the HR Committee reviews
Mr. Morris or Mr. Englishs written assessment of the other named executive officers performance and the market compensation benchmarks provided by Towers Perrin. The CEO presents base salary recommendations for the named
executive officers, other than himself, to the HR Committee, and the HR Committee makes the final determination.
Annual Incentive
Compensation
. AEP provides annual incentive compensation to executive officers to intensify their focus on annual performance objectives that are critical to AEPs success, such as obtaining rate recovery for our capital investment
program. Annual incentive compensation is paid under the Senior Officer Incentive Plan, which was approved by shareholders at the 2007 annual meeting. The HR Committee reviews and approves the annual compensation paid to the named executive
officers, other than the CEO. The independent members of the board review and approve the annual incentive compensation of the CEO.
The HR
Committee establishes one or more objective performance measures under the Senior Officer Incentive Plan each year. These objective measures establish the maximum award that each executive officer may receive for such year, although the HR Committee
generally expects to award less than this maximum, as was the case each year that this plan was in place.
Annual Incentive
Targets
. The HR Committee, in consultation with Towers Perrin and Company management, has established and periodically adjusts the annual incentive targets for executive positions and salary grades. Annual incentive targets are expressed as
a percentage of each participants base earnings. Actual awards can vary from 0% to 200% of the annual incentive target, although the HR Committee may approve larger awards, subject to the maximum award determined under the Senior Officer
Incentive Plan.
In setting annual incentive targets, the Company and the HR Committee consider:
|
|
|
The compensation survey information provided by Towers Perrin, which shows the competitiveness of AEPs annual incentive compensation targets, total cash
compensation and total compensation for the named executive officers relative to the Compensation Peer Group,
|
|
|
|
AEPs progression of incentive targets by salary grade, and
|
|
|
|
The expense implications of any changes.
|
For 2008 the HR Committee established the following annual incentive targets for the named executive officers:
|
|
|
110 percent of base salary for Mr. Morris,
|
|
|
|
100 percent of base salary for Mr. Tierney,
|
|
|
|
75 percent of base salary for Mr. English, and
|
14
|
|
|
70 percent of base salary for Ms. Koeppel and Mr. Powers.
|
Before 2008, Mr. Tierney oversaw AEPs Commercial Operation group, which includes our energy trading and marketing function. That position has a relatively high annual incentive target because it is market
competitive for similar positions. In order to develop executive talent and as part of AEPs succession planning, Mr. Tierney was elected to his current position in 2008. His annual incentive target was maintained at the previous level.
Annual Performance Objectives
. In January 2008 the HR Committee established AEPs 2008 ongoing earnings guidance of
$3.10- $3.30 per share as the funding measure for AEPs annual incentive compensation program. This performance measure required earnings per share equal to:
|
|
|
The low end of AEPs earnings guidance ($3.10 per share) for a threshold 20% of target score and award pool,
|
|
|
|
The mid-point of AEPs earnings guidance ($3.20 per share) for a 100% of target score and award pool, and
|
|
|
|
The high end of AEPs earnings guidance ($3.30 per share) for a maximum 200% of target score and award pool.
|
If ongoing earnings would have been less than $3.10 per share, no annual incentive compensation would have been paid out to the named executive officers
or to other employees. The 2008 EPS target was $0.25 (or approximately 8.5%) higher than the 2007 EPS target. This performance measure had the effect of sharing earnings with employees such that every one cent increase in ongoing earnings per share
above the mid-point resulted in an approximate 10% increase in incentive funding, up to a maximum 200% of target funding at earnings of $3.30 per share.
In 2008 AEP produced ongoing EPS of $3.24, which was in the higher end of this range. This resulted in a 2008 ongoing earnings per share score of 136.2%. For 2008, ongoing EPS was less than earnings per share reported
in AEPs financial statements primarily because of a favorable settlement of a lawsuit and an unfavorable regulatory order. See our Form 8-K filed on January 29, 2009 announcing 2008 fourth quarter and year-end earnings for a
reconciliation of ongoing and reported EPS.
For 2008 the HR Committee again used an Executive Council Scorecard to tie the annual
incentive awards for AEPs executive team to four areas of performance: safety, operating performance, regulatory performance and strategic initiatives.
Maintaining the safety of AEP employees, customers and the general public is always a primary consideration, and safety is an AEP core value. Accordingly, the HR Committee tied 25% of the scorecard to reducing
accidents and the severity of injuries across the AEP system. In addition, the HR Committee established a fatality deduction for 2008, such that any accidental work-related employee fatality in 2008 would have reduced the score for executive
officers by 25% and by lesser amounts for all other the
15
score for executive officers by 25% and by lesser amounts for all other employees. The frequency and severity of on-the-job injury accidents substantially
improved in 2008, which we believe was the result of our focus on preventing accidents. Most importantly, there were no fatal employee accidents on the job in 2008. Backto-back years without an employee fatality represent a first
for AEP during the many decades we have recorded safety data. As a result the overall 2008 safety score for the Executive Council was 181.6% of target.
The HR Committee also tied 25% of the scorecard to the operating performance of AEPs assets. This component measures the reliability of our wires assets, the availability of our generating plants and
environmental performance across the AEP system. In 2008 AEP achieved below target results for wires reliability and plant availability but above target results for environmental performance, which produced an overall operating performance score of
66.6% of target.
Since AEP has undertaken many major capital improvement projects, recovering these additional investments with
satisfactory returns through rate proceedings is imperative to AEPs near and long-term success. Therefore, the HR Committee tied 25% of the scorecard to AEPs overall success in achieving rate recovery in regulatory proceedings at the
Federal Energy Regulatory Commission and state public utility commissions. AEP had targeted $518 million of additional rate relief in 2008, but the Company exceeded that goal by achieving $526 million of rate relief. As a result, the HR Committee
subjectively scored this component at 125.0% of target.
For 2008 the strategic initiatives category included performance measures related
to improving workforce diversity and regulatory filings regarding rate restructuring in Ohio. AEPs overall performance towards these goals in 2008 produced a score of 100.9% of target.
The scores for the safety, operating performance, regulatory performance and strategic initiatives goals for 2008 combined to produce an above target
Executive Council Scorecard result of 118.5% of target.
In order to allocate the award pool created by AEPs EPS to each incentive
group (typically a business unit or staff function), the resulting scores are divided by the weighted average performance score for all groups. For 2008 the average performance score for all groups in AEPs annual incentive compensation program
was 133.9% of target. This same weighted average performance score is applied to the group that includes the named executive officers. The chart below shows the calculation of the overall performance score for the named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Council
Score
|
|
|
|
|
EPS Score
|
|
|
|
|
Average
Performance
Score
|
|
|
|
|
Overall
Performance
Score*
|
|
118.5
|
%
|
|
×
|
|
136.2
|
%
|
|
÷
|
|
133.9
|
%
|
|
=
|
|
120.5
|
%
|
*
|
The maximum overall performance score is 200%
|
16
The annual incentive opportunity for each employee for a given year is calculated by multiplying their
base earnings by their annual incentive target and the overall award score for their group. This calculated bonus opportunity, shown in the chart below for each named executive officer, is the starting point for determining annual incentive awards.
The HR Committee then evaluates the individual performance of each named executive officer to determine the final award.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
2008
Base
Earnings
|
|
|
|
Annual
Incentive
Target %
|
|
|
|
|
Overall
Performance
Score
|
|
|
|
|
Calculated
Bonus
Opportunity
|
|
Actual
Awards
|
Michael G. Morris
|
|
$
|
1,247,885
|
|
x
|
|
110
|
%
|
|
x
|
|
120.5
|
%
|
|
=
|
|
$
|
1,654,071
|
|
$
|
1,654,071
|
Holly K. Koeppel
|
|
$
|
497,885
|
|
x
|
|
70
|
%
|
|
x
|
|
120.5
|
%
|
|
=
|
|
$
|
419,966
|
|
$
|
450,000
|
Carl L. English
|
|
$
|
548,308
|
|
x
|
|
75
|
%
|
|
x
|
|
120.5
|
%
|
|
=
|
|
$
|
495,533
|
|
$
|
450,000
|
Brian X. Tierney
|
|
$
|
398,181
|
|
x
|
|
100
|
%
|
|
x
|
|
120.5
|
%
|
|
=
|
|
$
|
479,808
|
|
$
|
665,000
|
Robert P. Powers
|
|
$
|
509,154
|
|
x
|
|
70
|
%
|
|
x
|
|
120.5
|
%
|
|
=
|
|
$
|
429,471
|
|
$
|
415,000
|
The sum of the calculated bonus opportunity for all employees is the overall bonus pool for the
Company. The use of this overall bonus pool generally ensures a disciplined award allocation process, since higher awards must be offset by lower awards to avoid exceeding the bonus pool.
The HR Committee believes that annual incentive compensation should not be purely based on a formulaic calculation, but should instead be adjusted from
this starting point to reflect better each executives individual performance, contribution and situation. Therefore, the HR Committee considers the following factors in determining the amount of annual incentive compensation to be paid to each
executive officer, up to the maximum amount available under the Senior Officer Incentive Plan:
|
|
|
The calculated bonus opportunity,
|
|
|
|
The CEOs award recommendation, which is primarily based on a subjective assessment of each executives relative individual performance for the prior
year, focusing particularly on those goals for which the executive had primary responsibility,
|
|
|
|
The formal written performance assessment discussed above under Base Salary,
|
|
|
|
Compensation information provided by the HR Committees independent compensation consultant,
|
|
|
|
The limits of the overall bonus pool.
|
As a result of this subjective assessment of the above factors for each named executive officer, the HR Committee awarded annual incentive compensation for 2008 that varied from the calculated bonus opportunity. In no case did the amounts
exceed the maximum award opportunity created by objective performance measures under the Senior Officer Incentive Plan. The HR Committee establishes performance measures that are intended to provide maximum award opportunities that allow the HR
Committee to award annual incentive compensation to executive officers in an amount that they subjectively determine to be commensurate with each
17
executives individual performance up to the executives maximum award opportunity. In this way, the HR Committee retains the flexibility to make
awards that are based on individual performance, while still allowing the Company to deduct such compensation as performance based compensation under Section 162(m) of the Internal Revenue Code.
For 2008, the HR Committee established income before discontinued operations, extraordinary items and the cumulative effect of accounting changes
(Adjusted Income) as the 2008 performance objective under the Senior Officer Incentive Plan. The maximum dollar value available for awards under this plan was point seventy five percent (0.75%) of 2008 Adjusted Income. The HR Committee further
allocated a specific percentage of this amount to each executive officer.
In determining the amount of Mr. Morriss annual
incentive award, the independent members of the Board considered AEPs EPS, which was above target, despite difficult economic conditions.
In addition, there were no work related fatalities of AEP employees in 2008. It is only the second year since 1997, and only the third year since 1970 that the Company has completed a calendar year without a fatal employee accident. In
addition, this is the first time since we began permanently maintaining safety records that we have had two consecutive years without a fatal employee accident.
The annual incentive awards made to Ms. Koeppel and Messrs. English and Powers were generally in line with the calculated bonus opportunity. The annual incentive award made to Mr. Tierney also reflected his
successful efforts in negotiating a settlement of a complex lawsuit in 2008 that resulted in the Companys receipt of $255 million.
The actual annual incentive compensation earned for 2008 by the named executive officers is shown in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table on page 22.
For 2009 the HR Committee froze AEPs annual incentive targets at the same percentages of salary for each salary grade as we used for 2008. The HR
Committee also added a credit rating deduction to the funding measure for AEPs annual incentive program. The credit rating deduction will reduce the overall score for executive officers and all employees by 10% at the HR Committees
discretion if one of the major credit rating agencies reduces the rating on the Companys senior unsecured debt during the year. The HR Committee added this new potential deduction in 2009 because the Company needs good credit quality to
efficiently access the financial markets during these difficult economic times.
For 2009, the HR Committee established the same four
categories of performance measures, which are safety, operating performance, regulatory performance and strategic initiatives, (see page 12 for a description of the Executive Council Scorecard), although, the weighting of these categories was
changed slightly for 2009.
Long-Term Incentive Compensation. The HR Committee uses equity-based long-term incentive awards to
motivate AEP management to maximize shareholder value by linking this potential compensation directly to shareholder returns. These awards also help ensure that Company management remains focused on longer-term results, which the HR Committee
considers to be essential
18
given the large amount of long-term investment required in our business. In addition, the three-year vesting requirements of these awards are a retention
incentive that helps reduce executive turnover and maintain management consistency.
AEP annually reviews the mix of long-term incentive
compensation it provides its executives. The HR Committee has not granted stock options as part of its regular annual grant cycle for long-term incentive awards since 2003 because of employee, investor and public concerns about stock options.
Revised accounting standards also eliminated the preferential accounting treatment of stock options.
The HR Committee primarily grants
long-term incentive awards on a fixed annual cycle that currently takes place at its December meeting, following its annual executive compensation review. The HR Committee also grants long-term incentive awards, such as restricted stock unit awards,
at other times of the year to provide a timely special reward for key contributors and for specific employment offers. It is a long-standing HR Committee practice to consider the impact of any recent and upcoming Company announcements and financial
disclosures that may impact AEPs share price, as well as AEPs current stock price itself, when determining the number of shares or units to grant under AEPs long-term incentive program.
The HR Committee establishes award guidelines for each executive salary grade based on market competitive total compensation for similar positions in
AEPs Compensation Peer Group. Individual long-term incentive awards are determined by the HR Committee, or, for the CEO, by the independent members of the Board. These determinations are made based on:
|
|
|
Individual performance assessments (described under Base Salary above),
|
|
|
|
Award guidelines for each salary grade established by the HR Committee,
|
|
|
|
Survey information for the Compensation Peer Group,
|
|
|
|
Managements recommendations for awards to employees under their purview,
|
|
|
|
The executive officers future potential for advancement, and
|
|
|
|
Other factors, all within the context of an overall award budget.
|
The HR Committee also regularly reviews tally sheets for the executive officers, which provide information about the performance and potential future payout of outstanding equity awards to assess their ongoing
effectiveness in meeting the programs objectives. The HR Committee also determines whether the value of the potential award payout appropriately reflects the Companys performance and condition. Otherwise, the HR Committee may reduce the
award score. The HR Committee also considers whether the value that executive officers have received from vested equity awards and the potential value from outstanding equity awards is so large as to reduce significantly the need for or
effectiveness of any future equity awards. To date, the HR Committee has not found this to be the case.
19
Performance Units
Currently, the HR Committees practice is to grant long-term incentive awards annually in the form of performance units with a three-year performance and vesting period. Long-term incentive awards have been
granted to executive officers exclusively in the form of performance units since 2006. For 2008, performance units were the only type of long-term incentive awarded to executive officers.
The HR Committee granted performance unit awards, effective January 1, 2008, as follows:
|
|
|
Name
|
|
Number of
Performance
Units Granted
|
Mr. Morris
|
|
125,000
|
Ms. Koeppel
|
|
28,090
|
Mr. English
|
|
44,840
|
Mr. Tierney
|
|
17,140
|
Mr. Powers
|
|
29,320
|
Recipients must remain employed by AEP through the end of the vesting period to receive a full
payout, but payouts are prorated for retiring executives. Dividends are reinvested in additional performance units. The maximum score for each performance measure is 200 percent. The value of each performance unit that is earned is based on the
average closing price of AEP common stock for the last 20 trading days of the performance period. The total number of performance units held at the end of the performance period is multiplied by the weighted score for the two performance measures
shown below to determine the award payout.
Performance Measures for 2008 2010 Performance Units
|
|
|
|
|
|
|
|
|
Performance Measure
|
|
Weight
|
|
Threshold
Performance
|
|
Target
Performance
|
|
Maximum
Payout
Performance
|
3-Year Cumulative Earnings Per Share
|
|
50%
|
|
$9.11
(25% payout)
|
|
$10.13
(100% payout)
|
|
$11.14
(200% payout)
|
3-Year Total Shareholder Return vs. S&P Electric Utilities
|
|
50%
|
|
20
th
Percentile
(0% payout)
|
|
50
th
Percentile
(100% payout)
|
|
80
th
Percentile
(200% payout)
|
In December 2005 the HR Committee also established the three-year cumulative EPS and the three
year total shareholder return as the performance measures for performance units awarded for the 2006-2008 performance period. The cumulative three-year EPS target for these performance units was set at $7.92 for this performance period, which, at
the time, was equal to the sum of our earnings guidance for 2006 and the earnings included in our board approved strategic plan for 2007 and 2008. The total shareholder return target was the same as described above for the 2008-2010 performance
period. The final score calculation for these performance measures is shown in the chart below.
20
2006 2008 Performance Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Measures
|
|
Threshold
Performance
|
|
Target
Performance
|
|
Maximum
Payout
Performance
|
|
Actual
Performance
|
|
Score
|
|
Weight
|
|
Weighted
Score
|
3-Year Cumulative Earnings Per Share
|
|
$7.29
(25% payout)
|
|
$7.92
(100% Payout)
|
|
$8.55
(200% Payout)
|
|
$9.01
|
|
200.0%
|
|
50%
|
|
100.0%
|
3-Year Total Shareholder Return vs. S&P Electric Utilities
|
|
20
th
Percentile
(0% Payout)
|
|
50
th
Percentile
(100% Payout)
|
|
80
th
Percentile
(200% Payout)
|
|
32
nd
Percentile
|
|
40.7%
|
|
50%
|
|
20.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite Result
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120.3%
|
Performance units awarded to named executive officers are deferred mandatorily into AEP Career
Shares under AEPs Stock Ownership Requirement Plan, to the extent necessary to meet all of the named executive officers stock ownership requirements. AEP Career Shares are not paid until after the participants termination of
employment. See Stock Ownership Requirements on page 18 for further details.
Restricted Stock and Restricted Stock Units
AEP primarily issues restricted stock or restricted stock units to:
|
|
|
Provide special rewards for key contributors,
|
|
|
|
Create long-term retention incentives, or
|
|
|
|
Offset compensation and benefits from a prior employer that a prospective hire would forfeit by accepting AEPs employment offer.
|
The Company and the HR Committee believe that using restricted stock or restricted stock units in such situations, in lieu of cash, ties the value of
such compensation to AEPs long-term share price and helps motivate the recipient to act in the interests of shareholders. These awards generally vest over three or more years and, therefore, also provide a retention incentive that helps reduce
executive turnover and provide consistent management. The HR Committee generally considers grants of restricted stock and restricted stock units to be one-time events for special circumstances and generally does not consider the value of such awards
to be an ongoing element of executive pay. No restricted stock or restricted stock units have been awarded to any of the named executive officer since 2005. For a description of restricted stock outstanding for Mr. Morris, see the Employment
Agreements discussion on page 26.
21
Benefits
. AEP provides health and welfare benefits, retirement benefits and deferred
compensation programs with market-based rates of return to named executive officers and other eligible employees. In evaluating potential changes to AEPs executive benefit programs, the Company and the HR Committee consider:
|
|
|
Changes to non-contractual benefit programs in the context of AEPs total executive compensation and benefits program as well as within the constraints of
applicable law, such as ERISA and Section 409A of the Internal Revenue Code,
|
|
|
|
Benefit design trends among large utility and U.S. industrial companies, and
|
|
|
|
Tally sheets showing each named executive officers total compensation and benefit opportunity.
|
AEP generally provides the same health and welfare benefits to executives as it provides to other employees. AEP also provides the named executive
officers with either four or five weeks of paid vacation.
AEPs named executive officers participate in the same pension and savings
plans as other eligible employees. These include tax-qualified and non-qualified defined contribution and defined benefit plans. AEPs non-qualified retirement benefit plans are largely designed to provide supplemental benefits that
would otherwise be offered through the tax-qualified plans except for the limits imposed by the Internal Revenue Code on those tax-qualified plans. As a result, the non-qualified plans allow the eligible employees to accumulate higher levels of
replacement income upon retirement than would be allowed under the tax-qualified plans alone.
The HR Committee recognizes that the
non-qualified plans result in the deferral of the Companys income tax deduction equal in value to the amount credited to the participant accounts, until such benefits are paid. The HR Committee chooses to provide these supplemental benefits
because it believes that (i) executives generally should be entitled to the same retirement benefits, as a percentage of their eligible pay, as other employees and (ii) such benefits are part of a market competitive benefits program.
The non-qualified plans also allow flexibility to structure individualized benefit packages that help in recruiting and retaining key
executives. For example, a starting balance credit of $2,100,000 and an increased credit rate were provided to Mr. Morris under AEPs pension program pursuant to his negotiated employment contract. The increased pension benefits were
provided to Mr. Morris to recruit him to AEP and to make up for pension benefits that he otherwise could have earned from his prior employer. Other executive officers received additional years of credited service or an increased credit rate for
their pension benefits in recognition of their many years of experience at prior employers. The HR Committee believes that the Company needs to be able to offer these enhanced pension benefits to persuade experienced executives to leave their
current employers to accept positions at the Company.
AEPs non-qualified plans also provide certain benefit enhancements to
executives as a group, such as the grandfathered final average pay formula in AEPs non-qualified pension plan (not available to new hires at any level), which provides a benefit based on the total of base pay and annual incentive compensation,
rather than base pay alone.
22
The Company and the HR Committee believe that AEPs continued use of its qualified and non-qualified
retirement plans (including the enhancements offered through the nonqualified plans) is consistent with competitive practice and necessary to attract and retain essential executive talent. The HR Committee does, however, put limits on these plans
because it believes that compensation above these limits should not be further enhanced by including those amounts in retirement benefit calculations. Therefore,
|
|
|
Long-term incentive compensation is not in the calculations that determine benefits under AEPs benefit plans,
|
|
|
|
The cash balance formula of the AEP Supplemental Benefit Plan limits eligible compensation to the greater of $1 million or twice the participants base salary,
and
|
|
|
|
Eligible compensation is also limited to $2 million under the non-qualified Supplemental Retirement Savings Plan.
|
AEP provides group term life insurance benefits to all employees, including the named executive officers, in the amount of two times their base salary.
In addition to the life insurance benefit provided to the other named executive officers, AEP provides Mr. Morris with a cash value life insurance policy with a face value of $3,000,000, along with a tax gross-up for the imputed income,
pursuant to his negotiated employment agreement. The final payment on this policy was made in 2008.
Perquisites
. AEP generally
provides perquisites that help executives conduct Company business. The HR Committee annually reviews the perquisites provided by the Company to ensure that they are efficient and effective uses of AEPs resources. The HR Committee also
periodically reviews the value of perquisites provided to each named executive officer, in the context of total compensation, as part of its review of tally sheets. The incremental cost of perquisites for named executive officers is included in the
Summary Compensation Table on page 22.
In 2008 AEP provided a country club and a dining club membership to executive officers who have a
need to use such facilities for business entertainment purposes because the HR Committee believes such business entertainment is valuable for the Company. The Company reimburses executives for business expenses incurred at these clubs. In 2008 the
Company also reimbursed executives for initiation fees, assessments and dues incurred at these clubs and provided a tax gross-up on these amounts. Due to economic conditions, AEP will no longer reimburse or gross-up country club dues, and is not
currently providing any new memberships to executive officers.
For executives who relocate, AEP provides relocation assistance that
includes travel costs, costs associated with the purchase and sale of a home, a fixed payment associated with miscellaneous relocation expenses, limited temporary living expenses and gross-up for taxes on these amounts. AEPs relocation package
is intended to offset nearly all of the cost of a move for AEP executives. This policy is market competitive and is necessary to obtain high quality new hires and internal candidates for assignments that require relocation.
23
The HR Committee is sensitive to concerns over the expense of corporate aircraft. However, the HR
Committee believes that use of these aircraft for business travel is critical to the successful management of the Companys affairs because it greatly increases the opportunity for the Companys executives to have personal contact with
regulators, government officials, union leaders, business partners, customers and employees located throughout AEPs eleven state system. This personal contact requires travel to many locations that are not quickly accessible via other types of
transportation, and, as a result, such travel would often be prohibitively time consuming without the use of corporate aircraft. The Company provides personal use of corporate aircraft to Mr. Morris and, in rare circumstances, to other
executives. Mr. Morris negotiated the use of corporate aircraft for personal travel as part of his employment agreement, since he maintains his permanent residence outside of Ohio. The HR Committee believes that the enhanced security, travel
flexibility and reduced travel time that corporate aircraft provide for personal travel benefits the Company. However, the HR Committee has offset Mr. Morriss compensation opportunity by an amount approximating the value of his personal
use of corporate aircraft. Taxes are withheld on the value of executive personal use of corporate aircraft in accordance with IRS standards. AEP does not provide a gross-up for these taxes.
The Company occasionally transports spouses of executives to business meetings that spouses are invited to attend. The HR Committee believes that such
travel is a necessary business expense and, therefore, the Company provides a gross-up to executives on the taxes associated with such spousal travel. The Company does not gross-up imputed income for executives when traveling to personal
destinations.
In addition, AEP also provides executives with independent financial counseling and tax preparation services to assist
executives with financial planning and tax issues. These services help reduce the amount of assistance AEPs human resource staff needs to provide in these areas and ensures that these services are provided by someone familiar with AEPs
executive compensation and benefit programs. It also provides the Company with a source of information from the executives perspective on executive compensation and benefits. Income is imputed to executives and taxes are withheld for financial
counseling and tax preparation services.
Role of the CEO with Respect to Determining Executive Compensation.
The HR Committee
has invited the CEO to attend all HR Committee meetings. The HR Committee regularly holds executive sessions without the CEO or other management present to provide a confidential avenue for any concerns to be expressed. The CEO, in his role as
Chairman of the Board, has the authority to call a meeting of the HR Committee.
The CEO has assigned AEPs Senior Vice
PresidentShared Services, Vice PresidentHuman Resources and Director of Compensation and Executive Benefits to support the HR Committee. These individuals work closely with the HR Committee Chairman, the CEO and the Committees
independent compensation consultant (Towers Perrin) to research and develop requested information, prepare meeting materials, implement the HR Committees actions and administer the Companys executive compensation and benefit programs in
keeping with the objectives established by the HR Committee. The management supporting the HR Committee also meets with the CEO, the HR Committee Chairman and Towers Perrin prior to meetings to review and finalize the meeting materials.
24
The CEO regularly discusses his strategic vision and direction for the Company during HR Committee
meetings with Towers Perrin in attendance. Likewise, Towers Perrin regularly discusses compensation strategy alternatives, in light of the CEOs strategic vision and direction, during HR Committee meetings with the CEO in attendance. The HR
Committee believes that this open dialog and exchange of ideas is important to develop and implement a successful executive compensation strategy. The CEO did not retain any outside compensation consulting services or otherwise seek compensation
advice regarding AEPs executive compensation and benefits.
The CEO, as with all AEP managers, is responsible for assessing and
rating the performance of his subordinates. Mr. Morris also discusses the individual performance of all the named executive officers with the HR Committee and recommends their compensation to the HR Committee. As CEO, he also has substantial
input into the development of employment offers for outside candidates for executive positions, although all employment offers for executive officer positions require the approval of the HR Committee.
The CEO does not play any role in determining or recommending director compensation. The Directors and Corporate Governance Committee is responsible for
developing a recommendation as to the compensation of non-management directors. To help it meet this responsibility, the Directors and Corporate Governance Committee has hired an outside compensation consultant who is independent from both the
Company and the HR Committees executive compensation consultant. The Board of Directors makes the final determination on directors compensation. The CEO attends the Directors and Corporate Governance Committee meetings.
Other Compensation Policies and Practices
Recoupment of Incentive Compensation.
Consistent with the requirements of the Sarbanes-Oxley Act, the Board believes that incentive compensation should be reimbursed to the Company if, in the Boards view:
|
|
|
Such incentive compensation was predicated upon the achievement of financial or other results that were subsequently materially restated or corrected,
|
|
|
|
The officer from whom such reimbursement is sought engaged in misconduct that caused or partially caused the need for the restatement or correction, and
|
|
|
|
A lower payment would have been made to the executive based upon the restated or corrected financial results.
|
Based on a policy adopted by the Board in February 2007, the HR Committee directed the Company to design and administer all of the Companys
incentive compensation programs in a manner that provides for and preserves the Companys ability to obtain such reimbursement if and to the extent that, in the Boards view, such reimbursement is warranted by the facts and circumstances
of the particular case.
25
Change In Control Agreements.
The HR Committee provides change in control agreements to all
the named executive officers to help align the interests of these executives with those of AEPs shareholders by mitigating the financial impact if their employment is terminated as a result of a change in control. The HR Committee also
considers change in control agreements as an important tool in recruiting external candidates for certain executive positions. The HR Committee limits participation to those executives whose full support and sustained contribution would be critical
to the successful completion of a change in control.
While the HR Committee believes these agreements are consistent with the practices of
its peer companies, the most important reason for these agreements is to protect the Company and the interests of shareholders in the event of an anticipated or actual change in control. During such transitions, retaining and continuing to motivate
the Companys key executives would be critical to protecting shareholder value. In a change of control situation, outside competitors are more likely to try to recruit top performers away from the Company, and our executive officers may
consider other opportunities when faced with uncertainty about retaining their positions. Therefore, the HR Committee uses these agreements to provide security and protection to officers in such circumstances for the long-term benefit of the Company
and its shareholders.
In response to a shareholder proposal that was approved at the 2004 annual meeting, the Board adopted a policy that
requires shareholder approval of future executive severance agreements that provide benefits generally exceeding 2.99 times the sum of the named executive officers salary plus bonus. In consultation with Towers Perrin, the HR Committee
periodically reviews change in control agreement practices for similar companies, including the companies in our Compensation Peer Group. The HR Committee has found that change in control agreements are common among these companies, and that 2.99 is
the most common multiple for executive officers. Therefore, the HR Committee approved change in control multiples of 2.99 times base and bonus for all of the named executive officers. The HR Committee has also structured AEPs change in control
agreements to include a double trigger, which is a change in control accompanied by an involuntary termination or constructive termination within two years.
If the payments made to a named executive officer on account of his or her termination exceed certain amounts, the Company may not be able to deduct the payments for federal income tax purposes and the named executive
officer could be subject to a 20% excise tax on such payments. The excise tax is in addition to the executives regular payroll and income taxes. To offset the effect of the excise tax, AEPs change in control agreements provide
gross-up payments to reimburse executives for the excise tax. This allows the executive to retain the same amount that he or she would have received had the excise tax not been imposed. However, the gross-up payment will be reduced by up
to 5% if that reduction would avoid the excise tax.
Other compensation and benefits provided to executive officers in the event of a
change in control are consistent with that provided in the event a participants employment is terminated due to a consolidation, restructuring or downsizing as described below.
26
Other Employment Separations.
AEP maintains a severance plan that provides two weeks of base pay
per year of service to all employees, including executive officers, if their employment is terminated due to a restructuring or downsizing, subject to the employees agreement to waive claims against AEP. Mr. Morriss employment
agreement, however, provides him a severance payment equal to two times his annual base salary in the event of his severance, subject to his agreement to waive claims against AEP. In addition, our severance benefits for all employees include
outplacement services and access to health benefits at a reduced cost for up to 18 months (or until age 65 for employees who are at least age 50 with 10 years of service at the time of their severance).
Named executive officers and all other employees who separate from service after year-end, other than for cause, remain eligible for a discretionary
annual incentive award for the completed year. The amount of such awards for the named executive officers remains discretionary and is determined in accordance with the award process described under Annual Incentive Compensation on page 10. Named
executive officers and other employees remain eligible for a prorated portion of their annual incentive award if they separate from service prior to year-end due to their retirement, severance or death.
The Company also prorates the vesting of performance units and provides one year of continued financial counseling services to all participants in the
event of their severance or death. A prorated portion of outstanding performance units also vests if a participant retires, which is defined as a termination other than for cause after the executive reaches age 55 with five years of service. None of
the executive officers named in the Summary Compensation Table were retirement eligible in 2008, although Mr. Morris and Mr. Powers became retirement eligible in early 2009.
Stock Ownership Requirements
The HR Committee believes that linking a significant portion of an
executives financial rewards to the Companys success, as reflected by the value of AEP stock, gives the executive a stake similar to that of the Companys shareholders and encourages long-term management strategies for the benefit
of shareholders. Therefore, the HR Committee requires senior executives to accumulate and hold a specific amount of AEP common stock or stock equivalents. The HR Committee annually reviews the minimum stock ownership levels for each executive salary
grade and periodically adjusts these levels. Executives generally are expected to achieve their required stock ownership level within five years of the date it is assigned. Due to promotions and changes in ownership requirements, executives may have
multiple stock ownership requirements, each of which they are expected to achieve within five years of the date it is assigned.
AEPs
stock ownership requirements are specified as a fixed number of shares or share equivalents for executives in each salary grade. At the time the stock ownership requirements were established, their value was equal to three times base salary for the
CEO and two to two and one-half times base salary for the other named executive officers. The HR Committee believes that its stock ownership requirements are consistent with best practices and the stock ownership practices of the companies in
AEPs Compensation Peer Group. The highest minimum stock ownership requirement assigned to each of the named executive officers is shown in the table below.
27
|
|
|
|
|
|
Name
|
|
Highest
Minimum
Stock
Ownership
Requirement
as of
12/31/2008
(Shares)
|
|
AEP Stock and
Share Equivalent
Holdings on
12/31/2008
|
|
Mr. Morris
|
|
109,300
|
|
473,647
|
(1)
|
Ms. Koeppel
|
|
52,700
|
|
57,102
|
|
Mr. English
|
|
62,900
|
|
79,403
|
|
Mr. Tierney
|
|
29,900
|
|
31,587
|
|
Mr. Powers
|
|
52,700
|
|
55,964
|
|
(1)
|
Includes 200,000 unvested restricted shares that vest in approximately equal thirds, subject to Mr. Morriss continued employment, on November 30 of 2009, 2010 and
2011.
|
AEP maintains the Stock Ownership Requirement Plan to provide a tax deferred method to senior executives for meeting
their minimum stock ownership requirements. Performance units are mandatorily deferred into AEP Career Shares under the Stock Ownership Requirement Plan for participants who have not met all of their minimum stock ownership requirements. In
addition, to the extent an executive has not met a minimum stock ownership requirement within five and one-half years of the date it was assigned, the executive is subject to:
|
|
|
Mandatory deferral of up to 50% of the executives next annual incentive compensation award into AEP Career Shares, and
|
|
|
|
A requirement to retain the AEP shares realized through stock option exercises (net of shares redeemed to satisfy exercise costs and tax withholding requirements).
|
AEP Career Shares are not paid to participants until after their AEP employment ends. In addition to AEP Career Shares,
executives may satisfy their minimum stock ownership requirements with personal AEP stock holdings owned directly or with funds held in the AEP Stock Fund option in the qualified Retirement Savings Plan, the Supplemental Retirement Savings Plan and
the Incentive Compensation Deferral Plan.
Insider Trading Policy
The Company maintains an insider trading policy that prohibits directors and officers from directly hedging their AEP stock holdings through short sales and the use of options, warrants, puts and calls or similar
instruments. The policy also prohibits directors and officers from placing AEP stock in margin accounts without the approval of the Company. The Company is unaware of any executive officer who has attempted to directly or indirectly hedge the
economic risk associated with minimum stock ownership requirements. The Company is also not aware of any executive officer or director who has pledged or otherwise encumbered their shares of AEP stock.
28
Tally Sheets
The HR Committee uses tally sheets to evaluate the total rewards package for the named executive officers, particularly to monitor the accumulation of equity compensation and retirement benefits. These tally sheets include all
significant aspects of AEPs total reward program and illustrate the potential value provided to executives under various performance, termination and stock price scenarios. Tally sheets also show the extent to which changes made to some
elements of pay, such as base salary, or changes in AEPs stock price, affect the value of other elements of pay and the executives total reward package.
Tax Considerations
Section 162(m) of the Internal Revenue Code limits the Companys
ability to deduct compensation in excess of $1,000,000 paid in any year to the Companys CEO or any of the next three highest paid named executive officers, other than the Chief Financial Officer named in the Summary Compensation Table. The HR
Committee considers the limits imposed by Section 162(m) when designing compensation and benefit programs for the Company and its executive officers. Because the annual incentive compensation awarded in 2008 was performance based and awarded by
a committee of independent outside directors pursuant to a plan that was approved by shareholders (the Senior Officer Incentive Plan), its deductibility is not subject to the Section 162(m) limit. Amounts paid to the named executive officers
for vested performance units also are not subject to the deductibility limit for the same reasons.
AEPs restricted shares and
restricted stock units are not considered to be performance based under Section 162(m), and therefore any amounts paid are not tax deductible to the extent that the covered executive officer receives total non-performance based compensation in
excess of $1,000,000.
By meeting the requirements for performance based compensation under Section 162(m) for annual incentive
compensation and performance units, the Company saved approximately $6.9 million for 2008. The HR Committee intends to continue to utilize shareholder approved plans and performance based awards to allow the Company to deduct most annual and
long-term incentive compensation paid to named executive officers, while maintaining sufficient flexibility to award appropriate incentives to named executive officers.
Human Resources Committee Report
Membership and Independence.
The HR Committee has four
members. The Board has determined that each member of the HR Committee is an independent director, as defined by the New York Stock Exchange listing standards.
29
Purpose.
The primary purpose of the HR Committee is to provide independent oversight of the
compensation and human resources policies and practices of the Company. The primary objective of the HR Committee with respect to executive compensation is to ensure that the executive officers and other key employees are compensated in a manner
that is consistent with the business strategy of the Company, competitive practices, internal equity considerations, Company and Board policies and the requirements of appropriate regulatory bodies.
Functions and Process.
The HR Committee operates under a written charter adopted by the Board. This charter is available on AEPs
web-site at
www.AEP.com/investors/corporategovernance
.
The HR Committee annually reviews AEPs executive compensation in the
context of the performance of management and the Company. The HR Committee reviews and approves the compensation for all officers at the senior vice president level and above and other key employees. With respect to the compensation for the CEO, the
HR Committee is responsible for making compensation recommendations to the independent members of the Board, who review and approve the compensation for the CEO. Neither the CEO nor any other non-independent director is present when CEO compensation
is discussed and approved by the independent members of the Board.
In carrying out its responsibilities, the HR Committee addressed many
aspects of AEPs human resource and executive compensation programs and practices in 2008, including:
|
|
|
Establishing annual and long-term performance objectives for senior executives as a group and individual performance objectives for the CEO,
|
|
|
|
Assessing the performance of the CEO, other senior executives and the Company relative to established performance objectives,
|
|
|
|
Determining the mix of base salary, short-term incentives and long-term equity based compensation to be provided to executives and other employees,
|
|
|
|
Reviewing an analysis of executive compensation for all senior executives, including the named executive officers, and other key employees,
|
|
|
|
Reviewing and approving the salaries, annual incentive awards and long-term incentive award opportunities for all senior executives, including the named executive
officers, and other key employees,
|
|
|
|
Reviewing and approving the major elements of the Companys compensation and benefit programs, including special and supplemental benefits provided to
executives,
|
|
|
|
Reviewing and approving the major terms of employment, change in control and any other special agreements with executives,
|
30
|
|
|
Reviewing the Companys workforce safety efforts and results,
|
|
|
|
Reviewing the senior management succession plan,
|
|
|
|
Reviewing workforce diversity efforts and results,
|
|
|
|
Reviewing and approving reports to shareholders regarding executive compensation, and
|
|
|
|
Selecting and engaging a compensation consultant to provide objective and independent advice to the HR Committee.
|
In establishing performance objectives, the HR Committee considers the interests of other major AEP stakeholders, such as AEPs employees, customers
and the communities in which AEP operates, in addition to those of AEPs shareholders. For example, the HR Committee tied both 2008 and 2009 annual incentive compensation for all executive officers and other key employees to employee safety,
customer reliability, environmental stewardship, and diverse candidate hiring goals while also tying funding for annual incentive compensation to AEPs earnings per share.
In determining executive compensation, the HR Committee considers all relevant factors, including:
|
|
|
Individual performance, particularly in the areas of integrity/ethics, communication, willingness to confront tough issues, business acumen, strategic planning,
teamwork, fostering a high performance culture and, for the CEO only, leadership of the board of directors,
|
|
|
|
Compensation survey information,
|
|
|
|
The responsibilities and experience of each senior officer,
|
|
|
|
Supervisor recommendations,
|
|
|
|
The impact compensation changes may have on other elements of total rewards,
|
|
|
|
The expense implications of any changes, and
|
|
|
|
Tally sheets, showing each of the named executive officers total compensation in multiple scenarios.
|
The HR Committees Independent Compensation Consultant.
The HR Committee has hired a nationally recognized consultant (Richard Meischeid
of Towers Perrin) to provide recommendations to the HR Committee regarding AEPs executive compensation and benefits programs and practices. Towers Perrin also provides information on current trends in executive
31
compensation and benefits within the electric utility industry and among U.S. industrial companies in general. The HR Committee annually assesses and
discusses the performance and independence of its executive compensation consultant. As part of this assessment, the HR Committee considers the extent of other business that Towers Perrin performs for AEP and reviews the safeguards that are in place
to ensure the independence of the advice they receive. Towers Perrin does perform actuarial and benefits consulting services for the Company related to pension plans for the Company, but does not have any role in recommending director compensation.
In January 2008 and again in January 2009, the HR Committee concluded that, although Towers Perrin does perform an extensive amount of other services for AEP, there were adequate barriers and safeguards in place to ensure that Towers Perrins
executive compensation recommendations were not in any way influenced by this other business. In both years, the HR Committee concluded that Towers Perrin was not unduly influenced by management and was providing objective and independent advice.
The HR Committee has also instructed management to avoid engaging Towers Perrin for any new non-recurring work without the HR Committees approval. The HR Committee regularly holds executive sessions with Towers Perrin to help ensure that it
receives full and independent advice.
In fulfilling its oversight responsibilities, the HR Committee reviewed and discussed with
management the Compensation Discussion and Analysis set forth in this Proxy Statement. Based on its review and these discussions, the HR Committee recommended to the Board that the Compensation Discussion and Analysis be included in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and the Companys proxy statement to be filed in connection with the Companys 2009 Annual Meeting of Shareholders, each of which will be filed with
the Securities and Exchange Commission.
Human Resources Committee Members
Donald M. Carlton
Ralph D. Crosby, Jr.
Thomas E. Hoaglin
Lester A. Hudson, Jr., Chair
32
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
(a)
|
|
Year
(b)
|
|
Salary
($)
(c)
|
|
Bonus
($)
(d)
|
|
Stock
Awards
($)(1)
(e)
|
|
|
Option
Awards
($)(2)
(f)
|
|
Non-
Equity
Incentive
Plan
Compen-
sation
($)(3)
(g)
|
|
Change in
Pension
Value
and
Non-
qualified
Deferred
Compen-
sation
Earnings
($)(4)
(h)
|
|
All
Other
Compen-
sation
($)(5)
(i)
|
|
Total
($)
(j)
|
Michael G. Morris
Chairman of the board, president and chief executive officer
|
|
2008
2007
2006
|
|
1,259,615
1,204,615
1,200,000
|
|
|
|
(43,132
15,564,436
9,816,570
|
)
|
|
100,327
|
|
1,654,071
1,800,000
2,200,000
|
|
330,564
446,677
229,096
|
|
818,438
643,748
676,014
|
|
4,019,556
19,659,477
14,222,007
|
Holly Keller Koeppel
Executive vice president and chief financial officer
|
|
2008
2007
2006
|
|
503,846
451,731
440,000
|
|
10,000
|
|
(43,316
2,139,592
1,395,396
|
)
|
|
14,640
|
|
450,000
400,000
415,000
|
|
168,745
89,224
233,832
|
|
68,342
59,721
60,886
|
|
1,147,617
3,140,267
2,569,754
|
Carl L. English
Chief operating officer
|
|
2008
2007
2006
|
|
554,231
511,961
500,000
|
|
10,000
|
|
(130,697
3,166,371
1,613,224
|
)
|
|
|
|
450,000
400,000
510,000
|
|
88,541
99,096
81,899
|
|
69,837
59,844
73,979
|
|
1,031,912
4,237,272
2,789,102
|
Brian X. Tierney
Executive vice president(6)
|
|
2008
|
|
403,077
|
|
|
|
8,234
|
|
|
|
|
665,000
|
|
117,421
|
|
61,134
|
|
1,254,866
|
Robert P. Powers
President-AEP Utilities
|
|
2008
2007
2006
|
|
513,923
491,885
475,000
|
|
|
|
(117,629
2,414,018
1,546,591
|
)
|
|
14,640
|
|
415,000
400,000
431,200
|
|
175,962
32,981
391,032
|
|
84,475
67,916
80,341
|
|
1,071,731
3,406,800
2,938,804
|
(1)
|
As is required, the amounts reported in this column are the expense recognized or reversed in our financial statements for 2008, 2007 and 2006 pursuant to FASB 123R for stock awards
granted in the current and prior years. The amounts shown in this column for 2008 were negative for Messrs. Morris, English and Powers and Ms. Koeppel, which is primarily due to the decline in our stock price. The negative amounts are the
result of our performance unit awards being classified as liabilities for financial reporting purposes, which requires us to re-measure the cost of such awards at each financial statement reporting date. As a result, the performance unit
compensation costs recognized by the Company and attributed to each executive officer for purposes of this column will fluctuate from year to year based on AEPs stock price and other factors.
|
For Messrs. Morris and English, this column also includes the expense for restricted stock and restricted stock units granted in 2004 and 2005, which were
granted upon their hire. These awards were granted as replacements for certain long-term compensation that they forfeited from a prior employer and as an inducement to accept our employment offer. See Note 15 to the Consolidated Financial Statements
included in our Form 10-K for the year ended December 31, 2008, and Note 16 for years ended December 31, 2007 and December 31, 2006 for a discussion of the relevant assumptions used in calculating these amounts. For further
information on these awards, see the Grants of Plan-Based Awards Table on page 24, the Outstanding Equity Awards at Fiscal Year-End Table on page 28 and the Option Exercises and Stock Vested Table on page 29.
(2)
|
We did not grant any stock options in 2008 or 2007 or recognize any expense in our 2008 or 2007 financial statements for stock options for the named executive officers. The amounts
reported in 2006 represent the expense recognized in 2006 pursuant to FASB 123R related to stock options granted in years prior to 2006. See Note 16 to the Consolidated Financial Statements included in our Form 10-K for the year ended
December 31, 2006 for a discussion of the relevant assumptions used in calculating these amounts. For information on stock options, see the Outstanding Equity Awards at Fiscal Year-End Table on page 28.
|
(3)
|
The amounts shown in this column are annual incentive awards made under the Companys Senior Officer Incentive Plan for the year shown. At the outset of each year, the HR
Committee sets target bonuses and performance criteria that will be used to determine whether and to what extent executive officers will receive payments under this plan. For further information on these payments, see Annual Incentive Compensation
beginning on page 10 of the Compensation Discussion and Analysis.
|
33
(4)
|
The amounts shown in this column are attributable to the increase in the actuarial values of each of the named executive officers combined benefits under AEPs qualified
and non-qualified defined benefit plans determined using interest rate and mortality assumptions consistent with those used in the Companys financial statements. No named executive officer received preferential or above-market earnings on
deferred compensation. See detailed discussion of Pension Benefits on page 30 and Note 8 to the Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2008, and Note 9 for the years ended December 31,
2007 and December 31, 2006 for a discussion of the relevant assumptions.
|
(5)
|
A detailed breakout of the amounts shown in the All Other Compensation column for 2008 is shown below. These amounts include subsidiary director fees, tax gross-ups, and Company
contributions to the Companys Retirement Savings Plan and the Companys Supplemental Retirement Savings Plan. This column also includes $142,206 of premiums for life insurance that the Company funds on Mr. Morris behalf and a
tax gross-up payment of $99,693 to Mr. Morris on the value of this benefit.
|
For Mr. Morris, Ms. Koeppel and
Mr. Powers, the amount shown for 2008 includes the aggregate incremental cost associated with their personal use of Company-provided aircraft of $443,916, $4,375 and $9,949, respectively. This amount is the incremental cost to the Company for
their personal use of Company-provided aircraft, including all operating costs such as fuel, trip-related maintenance, on-board catering, landing/ramp fees and other miscellaneous variable costs. Fixed costs that do not change based on usage, such
as pilot salaries, the lease costs for Company aircraft and the cost of maintenance not related to personal trips, are excluded. For proxy reporting purposes, personal use of corporate aircraft includes the incremental cost of relocating aircraft to
accommodate personal trips and the incremental costs of flights for Mr. Morris and Ms. Koeppel to attend outside board meetings for the public companies at which they serve as outside directors.
34
The Company reimbursed executives for expenses for spouse travel to events that the Company invited the
executives spouse to attend. A tax gross-up on the value of such spousal travel in Company aircraft is included under tax gross-ups below. The Company does not gross-up for expenses when executives travel for personal purposes.
(6)
|
Mr. Tierney became an executive officer of AEP in 2008 so only his compensation for that year is shown.
|
All Other Compensation for 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Michael G.
Morris
|
|
Holly
Keller
Koeppel
|
|
Carl L.
English
|
|
Brian X.
Tierney
|
|
Robert P.
Powers
|
Retirement Savings Plan Match
|
|
$
|
7,362
|
|
$
|
7,393
|
|
$
|
10,350
|
|
$
|
10,350
|
|
$
|
10,167
|
Supplemental Retirement Savings Plan Match
|
|
|
82,638
|
|
|
33,011
|
|
|
32,324
|
|
|
40,193
|
|
|
30,745
|
Tax Gross-Ups (a)
|
|
|
104,362
|
|
|
3,850
|
|
|
799
|
|
|
2,460
|
|
|
4,061
|
Subsidiary Company Directors Fees
|
|
|
14,850
|
|
|
14,750
|
|
|
11,400
|
|
|
7,850
|
|
|
11,200
|
Life and Director Accident Insurance
|
|
|
142,206
|
|
|
|
|
|
|
|
|
|
|
|
|
Country and Dining Club Dues and Airline Club Dues
|
|
|
2,065
|
|
|
2,013
|
|
|
2,264
|
|
|
281
|
|
|
7,265
|
Financial Counseling and Tax Preparation
|
|
|
20,950
|
|
|
2,950
|
|
|
12,700
|
|
|
|
|
|
11,088
|
Personal Use of Company Aircraft
|
|
|
443,916
|
|
|
4,375
|
|
|
|
|
|
|
|
|
9,949
|
Personal Services of Employees
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Of the amount shown for Mr. Morris, $99,693 relates to a gross-up provided on life insurance.
|
35
Grants of Plan Based Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
(a)
|
|
Grant Date
Approval(1)
|
|
Grant Date
(b)
|
|
Estimated Possible
Payouts Under Non-Equity
Incentive Plan Awards(2)
|
|
Estimated Future
Payouts Under
Equity Incentive Plan
Awards(4)
|
|
Grant Date
Fair Value of
Stock and
Option
Awards(5)
($)
(h)
|
|
|
|
Threshold
($)
(c)
|
|
Target
($)
(d)
|
|
Maximum(3)
($)
(e)
|
|
Threshold
(#)
(f)
|
|
Target
(#)
(g)
|
|
Maximum
(#)
(h)
|
|
Michael G. Morris
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Senior Officer Incentive Plan
|
|
|
|
1/1/2008
|
|
|
|
1,372,674
|
|
2,745,347
|
|
|
|
|
|
|
|
|
2008 2010 Performance Units
|
|
12/12/07
|
|
1/1/2008
|
|
|
|
|
|
|
|
15,625
|
|
125,000
|
|
250,000
|
|
5,955,000
|
Holly Keller Koeppel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Senior Officer Incentive Plan
|
|
|
|
1/1/2008
|
|
|
|
348,519
|
|
697,038
|
|
|
|
|
|
|
|
|
2008 2010 Performance Units
|
|
12/12/07
|
|
1/1/2008
|
|
|
|
|
|
|
|
3,511
|
|
28,090
|
|
56,180
|
|
1,338,208
|
Carl L. English
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Senior Officer Incentive Plan
|
|
|
|
1/1/2008
|
|
|
|
411,231
|
|
822,462
|
|
|
|
|
|
|
|
|
2008 2010 Performance Units
|
|
12/12/07
|
|
1/1/2008
|
|
|
|
|
|
|
|
5,605
|
|
44,840
|
|
89,680
|
|
2,136,178
|
Brian X. Tierney
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Senior Officer Incentive Plan
|
|
|
|
1/1/2008
|
|
|
|
398,181
|
|
796,362
|
|
|
|
|
|
|
|
|
2008 2010 Performance Units
|
|
12/12/07
|
|
1/1/2008
|
|
|
|
|
|
|
|
2,143
|
|
17,140
|
|
34,280
|
|
816,550
|
Robert P. Powers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Senior Officer Incentive Plan
|
|
|
|
1/1/2008
|
|
|
|
356,408
|
|
712,816
|
|
|
|
|
|
|
|
|
2008 2010 Performance Units
|
|
12/12/07
|
|
1/1/2008
|
|
|
|
|
|
|
|
3,665
|
|
29,320
|
|
58,640
|
|
1,396,805
|
(1)
|
Effective on December 12, 2007, the HR Committee and the independent members of the board approved the 2008 performance unit awards under AEPs long-term incentive plan.
The performance and vesting period for these awards is January 1, 2008 through December 31, 2010.
|
(2)
|
Consists of potential payouts under the Senior Officer Incentive Plan. The amount actually earned by each of the named executive officers is reported as Non-Equity Incentive Plan
Compensation in the Summary Compensation Table.
|
(3)
|
The amount shown in this column represents 200% of the target award for each of the named executive officers, which is generally the maximum annual incentive award for all AEP
executives and other employees. However, under the Senior Officer Incentive Plan the HR Committee may make awards on an exception basis up to the limits pertaining to this plan. Award payments for 2008 cannot exceed the value determined based on the
performance objective established for 2008 by the HR Committee. This performance objective was 0.75% of income before discontinued operations, extraordinary items and the cumulative effect of accounting changes, a percentage of which was further
allocated to each executive officer. In addition, the maximum award payment is the lesser of:
|
|
(ii)
|
400% of the executives base salary (prior to any salary reduction or deferral elections) as of the date of grant of the award.
|
(4)
|
Consists of performance units awarded under our Long-Term Incentive Plan for the three-year performance period 2008 2010. For further information on these awards, see the
description under 2008 Stock Award Grants on page 24.
|
(5)
|
The amounts shown in this column relate to performance units granted under our Long-Term Incentive Plan. The amounts are valued based on the aggregate grant date fair value of the
award determined pursuant to FASB 123R. See Note 15 to the Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2008. The value is computed by multiplying the closing price of AEP common stock on
December 12, 2007 ($47.64) by the target number of performance units granted. The actual number of performance units earned will depend on AEPs performance over the 2008 through 2010 period and could vary from zero percent (0%) to
two-hundred percent (200%) of the target award plus reinvested dividends.
|
36
2008 Stock Award Grants
The named executive officers were awarded performance units effective as of January 1, 2008. These performance units were granted for a three-year
performance period (2008-2010) and generally vest, subject to the participants continued employment, at the end of the performance period. Performance units are generally equivalent in value to shares of AEP common stock. Dividends are
reinvested in additional performance units. The 2008-2010 performance units are subject to two equally weighted performance measures for the three-year performance period, which are:
|
|
|
Three-year total shareholder return measured relative to the Utility Sector of the S&P 500 Index, and
|
|
|
|
Three-year cumulative earnings per share measured relative to the Companys ongoing earnings guidance as of the grant date for the performance period.
|
These performance measures are described in detail in Compensation Discussion and Analysis-Performance Units on page 14.
The scores for these performance measures determine the percentage of the performance units earned at the end of the performance period and can range from zero percent to 200 percent of the target. The value of each performance unit that is earned
equals the average closing price of AEP common stock for the last twenty trading days of the performance period.
Effective January 1,
2009, the named executive officers were also awarded performance units for the 2009-2011 three-year performance period under terms that are otherwise similar to those described above for the 2008-2010 performance period. The three-year cumulative
earnings per share target for the 2009-2011 performance units has not been set as the Company anticipates issuing updated earnings guidance in March 2009, after the Company receives and reviews its order in the Ohio rate case. It is anticipated that
the HR Committee will establish this goal in March 2009. The relative total shareholder return performance measure for these performance units is identical to that for the previously granted performance units.
2008 Non-Equity Incentive Compensation.
For 2008 the HR Committee established the following annual incentive targets for the named executive
officers:
|
|
|
110 percent of base salary for Mr. Morris,
|
|
|
|
100 percent of base salary for Mr. Tierney,
|
|
|
|
75 percent of base salary for Mr. English, and
|
|
|
|
70 percent of base salary for Ms. Koeppel and Mr. Powers.
|
Actual awards generally may vary from 0% to 200% of the annual incentive target.
37
In January 2008 the HR Committee established AEPs 2008 ongoing earnings guidance of $3.10- $3.30
per share as the funding measure for AEPs annual incentive compensation program. This performance measure required earnings per share equal to:
|
|
|
The low end of AEPs earnings guidance ($3.10 per share) for a threshold 20% of target score and award pool,
|
|
|
|
The mid-point of AEPs earnings guidance ($3.20 per share) for a 100% of target score and award pool, and
|
|
|
|
The high end of AEPs earnings guidance ($3.30 per share) for a maximum 200% of target score and award pool.
|
In 2008 AEP produced ongoing EPS of $3.24, which was in the higher end of this range. This resulted in a 2008 ongoing earnings per share score of 136.2%
of target and an award pool equal to 136.2% of the target award pool for the Company as a whole. For 2008, ongoing EPS differed from earnings per share reported in AEPs financial statements. See our Form 8-K filed on January 29, 2009
announcing 2008 fourth quarter and year-end earnings for a reconciliation of on-going and reported EPS.
For 2008 the HR Committee again
used an Executive Council Scorecard with four equally weighted performance categories: safety, operating performance, regulatory performance and strategic initiatives. In addition, the HR Committee established a fatality deduction that would have
reduced the overall score for executive officers by 25% of target if AEP had experienced an accidental work related employee fatality in 2008. The scores for the safety, operating performance, regulatory performance and strategic initiatives goals
for 2008 combined to produce an Executive Council Scorecard result of 118.5% of target.
In order to allocate the award pool created by
AEPs EPS to each incentive group, including the group that includes the named executive officers, the resulting score for each group is multiplied by the EPS score and divided by the weighted average performance score for all groups in
AEPs annual incentive compensation program, which was 133.9% of target. This produced an Overall Performance Score for the named executive officers of 120.5% of target (118.5% x 136.2% / 133.9% = 120.5%).
The annual incentive opportunity for each employee is calculated by multiplying their base earnings by their annual incentive target and the overall
award score for their group. This calculated bonus opportunity, as shown in the chart on page 12, is the starting point from which actual annual incentives are awarded. The actual annual incentives also reflect individual performance.
AEP provides annual incentive compensation to executive officers through the Senior Officer Incentive Plan, which was approved by shareholders at the
2007 annual meeting. This plan establishes the maximum annual incentive award opportunity for each executive officer but actual awards are generally expected to be less than the maximum award available under this plan. The Senior Officer Incentive
Plan also has an absolute maximum individual award of the lesser of $6,000,000 or 400% of the executives base salary at the time of grant.
38
For 2008 the HR Committee chose a performance objective under the Senior Officer Incentive Plan that the
Company achieve positive income before discontinued operations, extraordinary items and the cumulative effect of accounting changes (Adjusted Income). It also established the maximum amount available for awards under the Senior Officer Incentive
Plan as point seventy five percent (0.75%) of that Adjusted Income for 2008. The HR Committee further allocated a percentage of this maximum to each executive officer, as shown in the table below.
|
|
|
|
Name
|
|
2008
SOIP Funding
Allocation
|
|
Mr. Morris
|
|
32.3
|
%
|
Ms. Koeppel
|
|
8.2
|
%
|
Mr. English
|
|
8.8
|
%
|
Mr. Tierney
|
|
9.4
|
%
|
Mr. Powers
|
|
8.4
|
%
|
The annual incentive payment for each executive officer under the plan may not exceed either the
result of the annual incentive opportunity created by the executive officers allocation of the performance measure or the absolute maximum individual award.
In addition to the award calculation described above, consideration was given to a subjective assessment of each executives performance in determining their annual incentive award. The 2008 annual incentives
awarded are shown in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table for 2008. These awards were each less than the maximum available for each executive officer under the Senior Officer Incentive Plan and were
paid in March 2009. For additional analysis of AEPs annual incentive program see the Compensation Discussion and Analysis beginning on page 10.
Employment Agreements
The Company entered into an employment agreement (Agreement) with
Mr. Morris that became effective January 1, 2004 for a three-year period. The Agreement is automatically renewed for additional one-year periods unless Mr. Morris or the Company takes specific action to terminate it. Mr. Morris
is eligible to receive an annual bonus under the Senior Officer Incentive Plan and his target percentage will be equal to at least 100% of his base salary.
The Agreement awarded Mr. Morris a nonqualified stock option grant for 149,000 shares, a performance unit grant for 119,000 units, 100,000 restricted shares as a bonus and an additional 200,000 restricted shares
as a replacement for certain long-term compensation that Mr. Morris forfeited from his prior employer in order to accept employment with the Company. One-half of the restricted shares awarded to Mr. Morris as a bonus (50,000 shares) vested
on January 1, 2005 and the remaining 50,000 shares vested
39
on January 1, 2006. The restricted shares awarded to Mr. Morris as a replacement for forfeited compensation will vest, subject to his continued
employment, in three approximately equal components of 66,666, 66,667 and 66,667 shares on November 30, 2009, November 30, 2010 and November 30, 2011, respectively.
The Agreement provides that Mr. Morris may use the Company aircraft for personal use in accordance with Company policies in effect for senior
executives. Mr. Morris is entitled to use memberships sponsored by the Company at a local country club and a luncheon club and to participate in the Companys financial counseling program.
The Company purchased a life insurance policy for Mr. Morris with a $3 million death benefit, and paid annual premiums for five years through 2008
to maintain that policy. Mr. Morris was provided an opening balance in the AEP Supplemental Retirement Plan of $2.1 million. Mr. Morris vested in this plan in 20% increments on each of the first five anniversary dates of his employment.
Mr. Morris is credited with the maximum rate permitted under the AEP Supplemental Retirement Plan (currently at 8.5%) on all eligible earnings. For further information, see Pension Benefits on page 30. If the Company terminates the Agreement
for reasons other than cause, Mr. Morris will receive a severance payment equal to two times his annual base salary.
The Company
entered into an employment agreement with Mr. English (English Agreement) that became effective August 2, 2004. Mr. English is eligible to receive an annual bonus under the Senior Officer Incentive Plan, and his target percentage will
be equal to at least 65% of his base salary. The English Agreement awarded Mr. English 30,000 restricted stock units, which vested in equal thirds in August 2005, 2006 and 2007. Mr. Englishs cash balance account under the AEP
Supplemental Retirement Plan is credited with the maximum rate permitted (currently at 8.5%) on all eligible earnings. For further information, see Pension Benefits on page 30.
Ms. Koeppel and Mr. Powers each have agreements with the Company, which result in their being credited with 15.25 and 17 years, respectively,
of additional service under AEPs pension plans. For further information on these agreements, see the Pension Benefits Table on page 30.
In addition to these agreements, each of the named executive officers has entered into a Change In Control Agreement with AEP. For further information about these Change In Control Agreements see Potential Payments upon Termination or
Change in Control on page 33.
40
Outstanding Equity Awards at Fiscal Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
Name
(a)
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(b)
|
|
Option
Exercise
Price ($)
(c)
|
|
Option
Expiration
Date
(d)
|
|
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
(e)
|
|
Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested
($)
(f)
|
|
Number of
Unearned
Shares, Units
or Other
Rights That
Have
Not Vested
(#)
(g)
|
|
Market or
Payout Value
of Unearned
Shares,
Units or
Other Rights
That Have Not
Vested
($)
(h)(3)
|
Michael G. Morris
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
149,000
|
|
30.76
|
|
1/2/2014
|
|
|
|
|
|
|
|
|
Restricted Shares(1)
|
|
|
|
|
|
|
|
200,000
|
|
6,656,000
|
|
|
|
|
2007 2009 Performance Units(2)
|
|
|
|
|
|
|
|
|
|
|
|
140,555
|
|
9,355,341
|
2008 2010 Performance Units(2)
|
|
|
|
|
|
|
|
|
|
|
|
130,599
|
|
8,692,669
|
Holly Keller Koeppel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 2009 Performance Units(2)
|
|
|
|
|
|
|
|
|
|
|
|
21,148
|
|
1,407,611
|
2008 2010 Performance Units(2)
|
|
|
|
|
|
|
|
|
|
|
|
29,348
|
|
1,953,403
|
Carl L. English
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 2009 Performance Units(2)
|
|
|
|
|
|
|
|
|
|
|
|
21,148
|
|
1,407,611
|
2008 2010 Performance Units(2)
|
|
|
|
|
|
|
|
|
|
|
|
46,848
|
|
3,118,203
|
Brian X. Tierney
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 2009 Performance Units(2)
|
|
|
|
|
|
|
|
|
|
|
|
8,455
|
|
562,765
|
2008 2010 Performance Units(2)
|
|
|
|
|
|
|
|
|
|
|
|
17,908
|
|
1,191,956
|
Robert P. Powers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
29,334
|
|
27.06
|
|
9/25/2012
|
|
|
|
|
|
|
|
|
Stock Options
|
|
16,667
|
|
27.95
|
|
12/10/2013
|
|
|
|
|
|
|
|
|
2007 2009 Performance Units(2)
|
|
|
|
|
|
|
|
|
|
|
|
21,148
|
|
1,407,611
|
2008 2010 Performance Units(2)
|
|
|
|
|
|
|
|
|
|
|
|
30,633
|
|
2,038,932
|
(1)
|
Mr. Morris has 200,000 restricted shares that he received upon his hire that will vest, subject to his continued employment, in three approximately equal components of 66,666,
66,667 and 66,667 shares on November 30, 2009, November 30, 2010 and November 30, 2011, respectively. He receives dividends on these restricted shares.
|
41
(2)
|
AEP currently grants performance units at the beginning of each year with a three-year performance and vesting period. This results in awards for overlapping successive three-year
performance periods. The performance unit awards for the 2006 2008 performance period vested at year-end and are shown in the Options Exercises and Stock Vested table below. The awards shown for the 2007 2009 and 2008 2010
performance periods consist of the target number of performance units awarded under our Long-Term Incentive Plan plus additional performance units resulting from reinvested dividends. Another award for the 2009 2011 performance period was
effectively granted on January 1, 2009.
|
(3)
|
The market value of the performance units reported in this column was computed by multiplying the closing price of AEPs common stock on December 31, 2008 ($33.28) by the
maximum number of performance units issueable (200% of the target amount set forth in column g). The actual number of performance units issued upon vesting will be based on AEPs performance over the applicable 3 year period.
|
42
Option Exercises and Stock Vested
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
Name
(a)
|
|
Number
of Shares
Acquired
on
Exercise
(#)
(b)
|
|
Value
Realized
on
Exercise
($)
(c)
|
|
Number
of Shares
Acquired
on
Vesting
(#)
(d)
|
|
|
Value
Realized on
Vesting ($)
(e)(3)
|
Michael G. Morris
|
|
|
|
|
|
182,847
|
(1)
|
|
6,085,148
|
|
|
|
|
|
|
2,021
|
(2)
|
|
85,488
|
Holly Keller Koeppel
|
|
|
|
|
|
25,328
|
(1)
|
|
842,916
|
Carl L. English
|
|
|
|
|
|
46,646
|
(1)
|
|
1,552,379
|
Brian X. Tierney
|
|
|
|
|
|
12,312
|
(1)
|
|
409,743
|
Robert P. Powers
|
|
|
|
|
|
33,319
|
(1)
|
|
1,108,856
|
(1)
|
Represents performance units under the Companys Long-Term Incentive Plan for the 2006 2008 performance period that vested on December 31, 2008.
|
(2)
|
Represents vesting of restricted stock units under the Companys Long Term Incentive Plan. Includes 2,021 restricted stock units that vested on February 22, 2008.
|
(3)
|
As is required, the value shown in this column is computed by multiplying the number of performance units by the market value of these shares on the vesting date; however, the
actual value realized from these shares was based on the previous 20-day average closing market price of AEP common stock as of the vesting date. For a more detailed discussion of vesting of performance units, see the Long-Term Incentive
Compensation section of the Compensation Discussion and Analysis beginning on page 13.
|
Executive officers may only exercise
stock options pursuant to AEPs Insider Trading Policy. In addition, an attorney from AEPs legal department must approve in advance each sale of AEP stock by an executive officer.
The HR Committee established performance unit targets in December 2005 for the 2006 through 2008
performance period. The HR Committee established two equally weighted performance measures for this performance period: Total Shareholder Return measured relative to the Utility Companies in the S&P 500 Index and cumulative earnings per share
measured relative to a Board-approved target. AEPs total shareholder return for this performance period was at the 32
nd
percentile of the
Utility Companies in the S&P 500, which produced a score of 40.7%. AEPs cumulative earnings per share was $9.01 for this performance period, which was 114% of the earnings target. This produced a maximum earnings per share score of 200%.
The average of these two scores produced a composite score of 120.3% of the target award. These performance units vested on December 31, 2008.
The performance units quantified in columns (d) and (e) are described in the Long-Term Incentive Compensation section of the Compensation Discussion and Analysis. The vesting of restricted stock units quantified in columns
(d) and (e) relates to units provided to Mr. Morris as a supplemental 2004 annual incentive award.
43
Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
Name
(a)
|
|
Plan Name
(b)
|
|
Number of
Years
Credited
Service
(c)
|
|
|
Present Value
of
Accumulated
Benefits(1)
(d)
|
|
Payments
During
Last
Fiscal
Year
(e)
|
Michael G. Morris
|
|
AEP Retirement Plan
|
|
5
|
|
|
$
|
78,302
|
|
|
|
|
AEP Supplemental Benefit Plan
|
|
|
(2)
|
|
|
3,489,763
|
|
|
Holly Keller Koeppel
|
|
AEP Retirement Plan
|
|
8.5
|
|
|
|
140,496
|
|
|
|
|
AEP Supplemental Benefit Plan
|
|
23.75
|
(3)
|
|
|
1,383,117
|
|
|
Carl L. English
|
|
AEP Retirement Plan
|
|
4.5
|
|
|
|
77,564
|
|
|
|
|
AEP Supplemental Benefit Plan
|
|
|
(2)
|
|
|
261,014
|
|
|
Brian X. Tierney
|
|
AEP Retirement Plan
|
|
10.7
|
|
|
|
101,695
|
|
|
|
|
AEP Supplemental Benefit Plan
|
|
10.7
|
|
|
|
356,043
|
|
|
Robert P. Powers
|
|
AEP Retirement Plan
|
|
10.5
|
|
|
|
219,386
|
|
|
|
|
AEP Supplemental Benefit Plan
|
|
27.5
|
(3)
|
|
|
1,959,243
|
|
|
(1)
|
The Present Value of Accumulated Benefits is based on the benefit accrued under the applicable plan through December 31, 2008, and the following assumptions (which are
consistent with those used in AEPs financial statements):
|
|
|
|
The named executive officer retires at age 65 (or, for Ms. Koeppel, Mr. Tierney and Mr. Powers, their age 62, when unreduced benefits would be
payable), and commences the payment of benefits (the accrued benefit).
|
|
|
|
The value of the annuity benefit at the named executive officers assumed retirement age is determined based upon the accrued benefit, an assumed interest rate
of 5.95% and assumed mortality based upon the IRS 2009 sex-distinct mortality tables. The value of the lump sum benefit at that assumed retirement age is determined based upon the accrued benefit, an assumed interest rate of 6.50% and assumed
mortality based on the 2009 IRS Applicable Mortality table. The present value of both the annuity benefit and the lump sum benefit at each executives current age is based upon an assumed interest rate of 5.95%.
|
|
|
|
The present value of the accrued benefit is weighted based on 75% lump sum and 25% annuity, based on the assumption that participants elect those benefit options in
that proportion.
|
(2)
|
Mr. Morris and Mr. English each has an individual agreement that provides for annual credits at the maximum rate provided (currently 8.5%). If not for their agreements,
their combined age and service at December 31, 2008 would have entitled each of them to an annual credit at only 7.0% of eligible pay. Mr. Morris agreement further provided him an opening cash balance credit of $2,100,000 as of
January 1, 2004. The higher crediting rate for Mr. Morris and Mr. English, and Mr. Morris opening cash balance credit, have augmented the present value of their accumulated benefits under the AEP Supplemental Benefit Plan
by $2,792,647 and $63,153, respectively.
|
44
(3)
|
Ms. Koeppel and Mr. Powers each has an individual agreement with AEP that credits them with years of service in addition to their actual years of service with AEP. Their
additional years of service credit have augmented the present value of their accumulated benefits under the AEP Supplemental Benefit Plan by $935,333, and $1,231,490, respectively.
|
Overview.
AEP maintains tax-qualified and nonqualified defined benefit pension plans for eligible employees. The nonqualified plans
provide (i) benefits that cannot be paid under the respective tax-qualified plans because of maximum limitations imposed on such plans by the Internal Revenue Code and (ii) benefits pursuant to individual agreements with certain of the
named executive officers. The plans are designed to provide a source of income upon retirement to executives and their spouses, as well as a market competitive benefit opportunity as part of a market competitive total rewards package.
AEP Retirement Plan.
The AEP Retirement Plan is a tax-qualified defined benefit pension plan. As a general matter, the benefits
available under the AEP Retirement Plan are determined by reference to a cash balance formula. In addition, employees who have continuously participated in the AEP Retirement Plan since December 31, 2000 (called Grandfathered AEP
Participants) remain eligible for an alternate pension benefit calculated by reference to a final average pay formula. Ms. Koeppel, Mr. Tierney and Mr. Powers are Grandfathered AEP Participants.
A.
|
Cash Balance Formula. Under the cash balance formula, each participant has an account established to which dollar amount credits are allocated each year.
|
|
1.
|
Company Credits.
Each year, the plan credits each participant with an amount equal to a percentage of the participants current year salary and prior year earned
annual incentive pay. The applicable percentage is based on the participants age and years of vesting service. The following table shows the applicable percentage:
|
|
|
|
|
Sum of Age Plus
Years of Service
|
|
Applicable
Percentage
|
|
Less than 30
|
|
3.0
|
%
|
30-39
|
|
3.5
|
%
|
40-49
|
|
4.5
|
%
|
50-59
|
|
5.5
|
%
|
60-69
|
|
7.0
|
%
|
70 or more
|
|
8.5
|
%
|
Each year, the IRS calculates a limit on the amount of eligible pay that can be used to calculate
pension benefits in a qualified plan. For 2008, the limit was $230,000.
45
|
2.
|
Interest Credits.
All amounts in the cash balance accounts earn interest at the average interest rate on 30-year Treasury securities for the month of November of the
prior year. For 2008, the interest rate was 4.52%.
|
B.
|
Final Average Pay Formula. The Grandfathered AEP Participants also remain eligible for a pension benefit using the final average pay formula. Grandfathered AEP Participants
will receive their benefits under the formula that provides the higher benefit.
|
The formula used to calculate the final
average pay benefit for the applicable named executive officers is the participants years of service times the sum of (i) 1.1% of the participants high 36 consecutive months of base pay (High 36); plus
(ii) 0.5% of the amount by which the participants High 36 exceeds the participants average Social Security covered compensation.
As of December 31, 2010, each Grandfathered AEP Participants final average pay benefit payable at the participants normal retirement age will be frozen and unaffected by the participants subsequent service or
compensation.
C.
|
Vesting. As of December 31, 2008, each of the named executive officers was vested.
|
AEP Supplemental Benefit Plan.
The AEP Supplemental Benefit Plan is a nonqualified defined benefit pension plan. It generally provides
eligible participants with benefits that are calculated under the terms of the AEP Retirement Plan with certain modifications: (i) additional years of service or benefit credits are taken into account; (ii) annual incentive pay is taken
into account for purposes of the final average pay formula; and (iii) the limitations imposed by the Internal Revenue Code on annual compensation and annual benefits are disregarded. However, eligible pay taken into account under the cash
balance formula is limited to the greater of $1 million or two times the participants year-end base pay.
AEP has granted certain
named executive officers additional years of credited service, an opening balance credit, special crediting rates and special vesting schedules under the AEP Supplemental Benefit Plan. These special items are further described under Employment
Agreements on page 26.
As of December 31, 2008, Ms. Koeppel and Messrs. English, Tierney and Powers were fully vested in
their AEP Supplemental Benefit Plan benefit. Mr. Morris was 80% vested in his AEP Supplemental Benefit Plan benefit. As of January 1, 2009, Mr. Morris became fully vested in his Supplemental Benefit Plan benefit.
46
Nonqualified Deferred Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
(a)
|
|
Plan
Name(1)
(b)
|
|
Executive
Contributions
in Last FY(2)
($)
(c)
|
|
Registrant
Contributions
in Last FY(3)
($)
(d)
|
|
Aggregate
Earnings
in Last
FY(4)
($)
(e)
|
|
|
Aggregate
Withdrawals/
Distributions
($)
(f)
|
|
Aggregate
Balance at
Last FYE(5)
($)
(g)
|
Michael G. Morris
|
|
SRSP
|
|
384,500
|
|
82,638
|
|
(580,328
|
)
|
|
|
|
1,447,027
|
|
|
SORP
|
|
|
|
|
|
(2,537,091
|
)
|
|
|
|
5,238,436
|
Holly Keller Koeppel
|
|
SRSP
|
|
164,077
|
|
33,011
|
|
(212,111
|
)
|
|
|
|
901,138
|
|
|
SORP
|
|
|
|
|
|
(541,897
|
)
|
|
|
|
1,118,878
|
Carl L. English
|
|
SRSP
|
|
43,098
|
|
32,324
|
|
15,449
|
|
|
|
|
326,391
|
|
|
SORP
|
|
|
|
|
|
(872,268
|
)
|
|
|
|
1,801,007
|
Brian X. Tierney
|
|
SRSP
|
|
98,381
|
|
40,193
|
|
(92,057
|
)
|
|
|
|
814,271
|
|
|
SORP
|
|
|
|
|
|
(196,683
|
)
|
|
|
|
406,099
|
Robert P. Powers
|
|
SRSP
|
|
57,232
|
|
30,745
|
|
(730,958
|
)
|
|
|
|
1,416,665
|
|
|
ICDP
|
|
|
|
|
|
20,237
|
|
|
|
|
507,068
|
|
|
SORP
|
|
|
|
|
|
(555,968
|
)
|
|
|
|
1,147,930
|
(1)
|
SRSP is the American Electric Power System Supplemental Retirement Savings Plan. ICDP is the American Electric Power System Incentive Compensation Deferral
Plan. SORP is the American Electric Power System Stock Ownership Requirement Plan.
|
(2)
|
The amounts set forth under Executive Contributions in Last FY are reported in either (i) the Salary column of the Summary Compensation Table as compensation for
2008; or (ii) the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table as compensation for 2007.
|
(3)
|
The amounts set forth under Registrant Contributions in Last FY for the Supplemental Retirement Savings Plan are also reported in the Other Compensation column of the
Summary Compensation Table.
|
(4)
|
No amounts set forth under Aggregate Earnings in Last FY have been reported in the Summary Compensation Table as there were no above market or preferential earnings
credited to any named executive officers account in any of the plans.
|
(5)
|
The amounts set forth under Aggregate Balance at Last FYE include amounts reported in the Summary Compensation Table in previous years, and previous year earnings on
such amounts, in addition to the current year amounts shown in columns c, d and e.
|
47
Overview.
AEP maintains non-qualified deferred compensation plans that allow eligible
employees, including the named executive officers, to defer receipt of a portion of their base salary, annual incentive and performance unit payments. The plans are unfunded, and participants have an unsecured contractual commitment from the Company
to pay the amounts due under the plans from the general assets of the Company. AEP maintains the following plans:
|
|
|
The American Electric Power System Supplemental Retirement Savings Plan,
|
|
|
|
The American Electric Power System Incentive Compensation Deferral Plan, and
|
|
|
|
The American Electric Power System Stock Ownership Requirement Plan.
|
Supplemental Retirement Savings Plan
.
This plan allows eligible participants to save on a pre-tax basis and to continue to
receive Company matching contributions beyond the limits imposed by the Internal Revenue Code.
|
|
|
Participants may defer up to 20% of the first $2,000,000 of their base pay and annual incentive pay.
|
|
|
|
The Company matches 75% of the participants contributions up to 6% of eligible compensation.
|
|
|
|
Participants may not withdraw any amount credited to their account until their termination of employment with AEP. Participants may elect a distribution of their
account as a lump-sum or annual installment payments over a period of up to 10 years. Participants may delay the commencement date for up to five years from the date of their termination of employment.
|
|
|
|
Participants may direct the investment of their plan account. There were no above-market or preferential earnings with respect to the Supplemental Retirement
Savings Plan. The investment options are the same as those available in AEPs qualified Retirement Savings Plan and one additional option providing interest at a rate set each December at 120% of the Applicable Federal Long-Term Rate with
monthly compounding.
|
Incentive Compensation Deferral Plan
.
This plan allows eligible employees
to defer taxes on annual incentive pay and earned performance units.
|
|
|
Participants may defer up to 80% of the full incentive award.
|
|
|
|
AEP does not offer any matching contributions.
|
|
|
|
Participants may direct the investment of their plan accounts. There were no above-market or preferential earnings with respect to the Supplemental Retirement
Savings Plan. The investment options are the same as those available in AEPs qualified Retirement Savings Plan.
|
48
|
|
|
Generally, participants may not withdraw any amount credited to their account until their termination of employment with AEP. However, participants may withdraw
amounts attributable to their pre-2005 contributions one time prior to termination of employment, but subject to a 10% withdrawal penalty. Participants may elect to take distributions from their account in the same manner as the Supplemental
Retirement Savings Plan.
|
Stock Ownership Requirement Plan
.
This plan assists executives in
achieving their minimum stock ownership requirements. It does this primarily by tracking the executives AEP Career Shares. AEP Career Shares are a form of deferred compensation, which are unfunded and unsecured general obligations of AEP. The
rate of return on AEP Career Shares is equivalent to the total return on AEP stock with dividends reinvested.
|
|
|
If a participant has not satisfied all of his or her stock ownership requirements, he or she must defer into AEP Career Shares the portion of earned performance
units equal to the shortfall.
|
|
|
|
If a participant has not satisfied all of his or her stock ownership requirements within 5 years, he or she must remove the shortfall by:
|
|
|
|
deferring up to 50% of annual incentive pay into AEP Career Shares, and
|
|
|
|
retaining AEP shares realized through stock option exercises, except for shares that are sold to cover the exercise costs and taxes applicable to the exercise.
|
|
|
|
AEP Career Shares become payable in cash following the participants termination of employment. Participants may elect to take distribution of their AEP Career
Shares in the same manner as the Supplemental Retirement Savings Plan.
|
Potential Payments upon Termination or Change in Control
The Company has entered into agreements and maintains plans that will require the Company to provide compensation to the named executive
officers in the event of a termination of employment or a change in control of the Company.
SEVERANCE
AEP currently provides full-time employees, including the named executive officers, with severance benefits in the event their employment is terminated as
the direct result of a restructuring or downsizing (Severance-Eligible Employees) if the employee releases AEP from any and all claims. These severance benefits include:
|
|
|
A lump sum severance payment equal to two weeks of base pay for each year of Company service,
|
|
|
|
Continued eligibility for medical and dental benefits at the active employee rates for eighteen months or until the participant becomes eligible for coverage from
another employer, whichever occurs first,
|
49
|
|
|
For employees who are at least age 50 with 10 years of AEP service and who do not qualify for AEPs retiree medical benefits or to be bridged to age 55
(described below), AEP also provides medical and dental benefit eligibility at rates equivalent to those provided to retirees until age 65 or until the participant becomes eligible for coverage from another employer, whichever occurs first, and
|
|
|
|
Outplacement services with an incremental cost to the Company of up to $30,000.
|
Severance-Eligible Employees who are within one year of becoming eligible for retiree medical benefits (which is available to those employees who are at
least age 55 with at least 10 years of service Retirement-Eligible Employees) are retained as active employees on a paid leave of absence until they become retirement eligible. This benefit applies in lieu of severance and unused vacation
payments for employees who would otherwise receive severance and vacation pay sufficient to offset their base pay for this period. The Company pays any remaining severance and vacation pay at the time of their retirement. This delay of an
employees termination date does not apply to the plans providing nonqualified deferred compensation, which define a participants termination date by reference to Code Section 409A.
Although employees generally must be employed through yearend to be eligible for annual incentive compensation, Severance-Eligible Employees and
Retirement-Eligible Employees remain eligible for annual incentive compensation, to the extent of their eligible earnings, for the year of their termination. The target award for these employees reflects their cumulative base earnings for the plan
year, which will be lower if the employee was not employed by the Company for the full plan year. Annual incentive awards for named executive officers continue to be subject to the performance-based maximum award limits of the Senior Officer
Incentive Plan and the discretion of the HR Committee. Any annual incentive awards for severed or retired executive officers would be paid at approximately the same time as the awards for active employees.
If a Severance-Eligible Employee is terminated, a pro-rata portion of any outstanding performance units which the executive has held for at least six
months remains eligible for payout. These prorated performance units will not vest until the vesting date set forth in the award agreement and remain subject to all performance objectives.
Severance-Eligible executives are also eligible for financial counseling and tax preparation services during the remainder of the year of their
termination and the following calendar year. These services currently have a maximum annual incremental cost to the Company of $15,300.
CHANGE IN
CONTROL
AEP defines change in control under its change in control agreements and long term incentive plan as:
|
|
|
The acquisition by any person of the beneficial ownership of securities representing more than one-third of AEPs voting stock,
|
50
|
|
|
A merger or consolidation of AEP with another corporation unless AEPs voting securities outstanding immediately before such merger or consolidation continue
to represent at least two-thirds of the total voting power of the surviving entity outstanding immediately after such merger or consolidation, or
|
|
|
|
Approval by the shareholders of the liquidation of AEP or the disposition of all or substantially all of the assets of AEP.
|
AEP has a change in control agreement with each of the named executive officers, which is triggered if there is a change in control of AEP
and the named executive officers employment is terminated in connection with that change in control (i) by AEP without cause or (ii) by the named executive officer for good reason. These agreements provide
for:
|
|
|
A lump sum payment equal to 2.99 times the named executive officers annual base salary plus target annual incentive under the annual incentive program,
|
|
|
|
Payment, if required, to make the named executive officer whole for any excise tax imposed by Section 4999 of the Internal Revenue Code, and
|
The HR
Committee may reduce the amount of the lump sum payment by up to 5% for an executive officer if that reduction would avoid the 4999 excise tax.
The term cause with respect to AEPs change in control agreements means:
|
(i)
|
The willful and continued failure of the executive to perform the executives duties after a written demand for performance is delivered to the executive by the Board, or
|
|
(ii)
|
The willful conduct or omission by the executive, which the Board determines to be illegal; gross misconduct that is injurious to the Company; or a breach of the executives
fiduciary duty to the Company.
|
The term good reason with respect to AEPs change in control agreements
means:
|
(i)
|
An adverse change in the executives status, duties or responsibilities from that in effect immediately prior to the change in control,
|
|
(ii)
|
The Companys failure to pay in a timely fashion the salary or benefits to which the executive is entitled under any employment agreement in effect on the date of the change in
control,
|
|
(iii)
|
The reduction of the executives salary as in effect on the date of the change in control,
|
51
|
(iv)
|
Any action taken by the Company that would substantially diminish the aggregate projected value of the executives awards or benefits under the Companys benefit plans or
policies,
|
|
(v)
|
A failure by the Company to obtain from any successor the assent to the change in control agreement, or
|
|
(vi)
|
The relocation, without the executives prior approval, of the office at which the executive is to perform services to a location that is more than fifty (50) miles from
its location immediately prior to the change in control.
|
The Company has an opportunity to cure any of these circumstances
before they may be considered good reason.
Also, award agreements issued under the Long-Term Incentive Plan provide that all
outstanding awards will vest immediately upon a change in control. In addition, each type of long-term incentive award will be subject to special payment and valuation provisions upon a change in control as follows:
Stock Options
Participants with outstanding stock options are permitted to exercise any of their options in advance of the change in control
and, thereby, receive cash equal to the value received by other AEP shareholders as a result of the change in control transaction (less applicable tax withholdings).
Performance Unit Awards
The performance unit awards will be deemed to have been fully earned at 100% of the target score, and all outstanding performance unit awards would be paid in a lump sum in cash at
the higher of (i) the average closing price of a share of AEP common stock for the last 20 trading days prior to the change in control or (ii) if the change in control is the result of a tender offer, merger, or sale of all or
substantially all of the assets of AEP, the highest price paid per share of common stock in that transaction.
Restricted Stock
Units
Participants receive one share of AEP common stock for each outstanding restricted stock unit as the result of a change in control.
Restricted Stock
No special provisions apply to AEPs restricted stock in the event of a change in control, although the HR Committee has the authority to accelerate the vesting of any and all equity awards.
The AEP Supplemental Benefit Plan also provides that all accrued supplemental retirement benefits become fully vested upon a change in control.
Termination Scenarios
The following
tables show the incremental compensation and benefits that would have been paid to each named executive officer on December 31, 2008 under the circumstances cited in each column.
52
The values shown in the change in control column are triggered only if both of the following events occur
(which is often referred to as a double trigger), except as noted for long-term incentives:
|
1)
|
There is a change in control of the Company, and
|
|
2)
|
The named executive officers employment is terminated by the Company without cause or by the executive with good reason.
|
No information is provided for terminations due to disability, because it is not AEPs practice to terminate the employment of any employee so long
as they remain eligible for AEPs long-term disability benefits. AEP successively provides sick pay and then long-term disability benefits for up to two years to employees with a disability that prevents them from returning to their job. Such
disability benefits continue (generally until the employee reaches age 65) for employees that cannot perform any occupation for which they are reasonably qualified. AEP treats a participants disability as a termination to the extent required
by the regulations issued under Code Section 409A, but such terminations only trigger the payment of benefits that had previously vested.
53
Potential Incremental Compensation and Benefits
That Would Have Been Provided as the Result of Employment Termination
as of December 31, 2008
For Michael G. Morris
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Benefits and Payments Upon Termination
|
|
Voluntary
Termination or
Retirement
|
|
Severance
|
|
|
For Cause
Termination
|
|
Change-In-
Control
|
|
Death
|
Compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary ($1.25 million)
|
|
$
|
0
|
|
$
|
2,500,000
|
1
|
|
$
|
0
|
|
$
|
3,737,500
|
|
$
|
0
|
Annual Incentive for Completed Year
2
|
|
$
|
1,654,071
|
|
$
|
1,654,071
|
|
|
$
|
0
|
|
$
|
1,654,071
|
|
$
|
1,654,071
|
Other Payment for Annual Incentives
3
|
|
$
|
0
|
|
$
|
0
|
|
|
$
|
0
|
|
$
|
4,111,250
|
|
$
|
0
|
Long-Term Incentives:
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Shares (200,000)
5
|
|
$
|
0
|
|
$
|
0
|
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
Unvested 2007-2009 Performance Units
6
|
|
$
|
0
|
|
$
|
3,118,447
|
|
|
$
|
0
|
|
$
|
4,677,670
|
|
$
|
3,118,447
|
Unvested 2008-2010 Performance Units
6
|
|
$
|
0
|
|
$
|
1,448,778
|
|
|
$
|
0
|
|
$
|
4,346,335
|
|
$
|
1,448,778
|
Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
7,8
|
|
$
|
0
|
|
$
|
0
|
|
|
$
|
0
|
|
$
|
711,411
|
|
$
|
711,411
|
Health and Welfare Benefits
9
|
|
$
|
0
|
|
$
|
6,297
|
|
|
$
|
0
|
|
$
|
6,297
|
|
$
|
0
|
Life Insurance Proceeds
10
|
|
$
|
0
|
|
$
|
0
|
|
|
$
|
0
|
|
$
|
0
|
|
$
|
8,000,000
|
Financial Counseling
|
|
$
|
0
|
|
$
|
15,905
|
|
|
$
|
0
|
|
$
|
15,905
|
|
$
|
15,905
|
Outplacement Services
11
|
|
$
|
0
|
|
$
|
30,000
|
|
|
$
|
0
|
|
$
|
30,000
|
|
$
|
0
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Gross-up upon change in control
12
|
|
$
|
0
|
|
$
|
0
|
|
|
$
|
0
|
|
$
|
7,010,345
|
|
$
|
0
|
Total Incremental Compensation And Benefits
|
|
$
|
1,654,071
|
|
$
|
8,773,498
|
|
|
$
|
0
|
|
$
|
26,300,784
|
|
$
|
14,948,612
|
Notes for the Potential Incremental Termination Scenario tables are provided collectively following the last such
table.
54
Potential Incremental Compensation and Benefits
That Would Have Been Provided as the Result of Employment Termination
as of December 31, 2008
For Holly Keller Koeppel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Benefits and Payments Upon Termination
|
|
Voluntary
Termination
or Retirement
|
|
Severance
|
|
For Cause
Termination
|
|
Change-In-
Control
|
|
Death
|
Compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary ($500,000)
|
|
$
|
0
|
|
$
|
173,077
|
|
$
|
0
|
|
$
|
1,495,000
|
|
$
|
0
|
Annual Incentive for Completed Year
2
|
|
$
|
419,966
|
|
$
|
419,966
|
|
$
|
0
|
|
$
|
419,966
|
|
$
|
419,966
|
Other Payment for Annual Incentives
3
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
1,046,500
|
|
$
|
0
|
Long-Term Incentives:
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested 2007-2009 Performance Units
6
|
|
$
|
0
|
|
$
|
469,204
|
|
$
|
0
|
|
$
|
703,805
|
|
$
|
469,204
|
Unvested 2008-2010 Performance Units
6
|
|
$
|
0
|
|
$
|
325,567
|
|
$
|
0
|
|
$
|
976,701
|
|
$
|
325,567
|
Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
8
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
Health and Welfare Benefits
9
|
|
$
|
0
|
|
$
|
18,592
|
|
$
|
0
|
|
$
|
18,592
|
|
$
|
0
|
Life Insurance Proceeds
10
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
5,500,000
|
Financial Counseling
|
|
$
|
0
|
|
$
|
15,905
|
|
$
|
0
|
|
$
|
15,905
|
|
$
|
15,905
|
Outplacement Services
11
|
|
$
|
0
|
|
$
|
30,000
|
|
$
|
0
|
|
$
|
30,000
|
|
$
|
0
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Gross-up upon change in control
12
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
1,812,423
|
|
$
|
0
|
Total Incremental Compensation and Benefits
|
|
$
|
419,966
|
|
$
|
1,452,311
|
|
$
|
0
|
|
$
|
6,518,892
|
|
$
|
6,730,642
|
Notes for the Potential Incremental Termination Scenario tables are provided collectively following the last such
table.
55
Potential Incremental Compensation and Benefits
That Would Have Been Provided as the Result of Employment Termination
as of December 31, 2008
For Carl L. English
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Benefits and Payments Upon Termination
|
|
Voluntary
Termination
or Retirement
|
|
Severance
|
|
For Cause
Termination
|
|
Change-In-
Control
|
|
Death
|
Compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary ($550,000)
|
|
$
|
0
|
|
$
|
105,769
|
|
$
|
0
|
|
$
|
1,644,500
|
|
$
|
0
|
Annual Incentive for Completed Year
2
|
|
$
|
495,533
|
|
$
|
495,533
|
|
$
|
0
|
|
$
|
495,533
|
|
$
|
495,533
|
Other Payment for Annual Incentives
3
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
1,233,375
|
|
$
|
0
|
Long-Term Incentives:
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested 2007-2009 Performance Units
6
|
|
$
|
0
|
|
$
|
469,204
|
|
$
|
0
|
|
$
|
703,805
|
|
$
|
469,204
|
Unvested 2008-2010 Performance Units
6
|
|
$
|
0
|
|
$
|
519,700
|
|
$
|
0
|
|
$
|
1,559,101
|
|
$
|
519,700
|
Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
8
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
Health and Welfare Benefits
9
|
|
$
|
0
|
|
$
|
13,951
|
|
$
|
0
|
|
$
|
13,951
|
|
$
|
0
|
Life Insurance Proceeds
10
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
2,200,000
|
Financial Counseling
|
|
$
|
0
|
|
$
|
15,905
|
|
$
|
0
|
|
$
|
15,905
|
|
$
|
15,905
|
Outplacement Services
11
|
|
$
|
0
|
|
$
|
30,000
|
|
$
|
0
|
|
$
|
30,000
|
|
$
|
0
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Gross-up upon change-in control
12
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
2,238,160
|
|
$
|
0
|
Total Incremental Compensation and Benefits
|
|
$
|
495,533
|
|
$
|
1,650,062
|
|
$
|
0
|
|
$
|
7,934,330
|
|
$
|
3,700,342
|
Notes for the Potential Incremental Termination Scenario tables are provided collectively following the last such
table.
56
Potential Incremental Compensation and Benefits
That Would Have Been Provided as the Result of Employment Termination
as of December 31, 2008
For Brian X. Tierney
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Benefits and Payments Upon Termination
|
|
Voluntary
Termination
or Retirement
|
|
Severance
|
|
For Cause
Termination
|
|
Change-In-
Control
|
|
Death
|
Compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary ($400,000)
|
|
$
|
0
|
|
$
|
169,231
|
|
$
|
0
|
|
$
|
1,196,000
|
|
$
|
0
|
Annual Incentive for Completed Year
2
|
|
$
|
479,808
|
|
$
|
479,808
|
|
$
|
0
|
|
$
|
479,808
|
|
$
|
479,808
|
Other Payment for Annual Incentives
3
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
1,196,000
|
|
$
|
0
|
Long-Term Incentives:
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested 2007-2009 Performance Units
6
|
|
$
|
0
|
|
$
|
187,588
|
|
$
|
0
|
|
$
|
281,382
|
|
$
|
187,588
|
Unvested 2008-2010 Performance Units
6
|
|
$
|
0
|
|
$
|
198,659
|
|
$
|
0
|
|
$
|
595,978
|
|
$
|
198,659
|
Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
8
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
Health and Welfare Benefits
9
|
|
$
|
0
|
|
$
|
18,592
|
|
$
|
0
|
|
$
|
18,592
|
|
$
|
0
|
Life Insurance Proceeds
10
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
3,500,000
|
Financial Counseling
|
|
$
|
0
|
|
$
|
15,905
|
|
$
|
0
|
|
$
|
15,905
|
|
$
|
0
|
Outplacement Services
11
|
|
$
|
0
|
|
$
|
30,000
|
|
$
|
0
|
|
$
|
30,000
|
|
$
|
0
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Gross-up upon change-in control
12
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
1,241,673
|
|
$
|
0
|
Total Incremental Compensation and Benefits
|
|
$
|
479,808
|
|
$
|
1,099,783
|
|
$
|
0
|
|
$
|
5,055,338
|
|
$
|
4,366,055
|
Notes for the Potential Incremental Termination Scenario tables are provided collectively following the last such
table.
57
Potential Incremental Compensation and Benefits
That Would Have Been Provided as the Result of Employment Termination
as of December 31, 2008
For Robert P. Powers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Benefits and Payments Upon Termination
|
|
Voluntary
Termination
or Retirement
|
|
Severance
|
|
For Cause
Termination
|
|
Change-In-
Control
|
|
Death
|
Compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary ($510,000)
|
|
$
|
0
|
|
$
|
215,769
|
|
$
|
0
|
|
$
|
1,524,900
|
|
$
|
0
|
Annual Incentive for Completed Year
2
|
|
$
|
429,471
|
|
$
|
429,471
|
|
$
|
0
|
|
$
|
429,471
|
|
$
|
429,471
|
Other Payment for Annual Incentives
3
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
1,067,430
|
|
$
|
0
|
Long-Term Incentives:
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested 2007-2009 Performance Units
6
|
|
$
|
0
|
|
$
|
469,204
|
|
$
|
0
|
|
$
|
703,805
|
|
$
|
469,204
|
Unvested 2008-2010 Performance Units
6
|
|
$
|
0
|
|
$
|
339,822
|
|
$
|
0
|
|
$
|
1,019,466
|
|
$
|
339,822
|
Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
8
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
Health and Welfare Benefits
9
|
|
$
|
0
|
|
$
|
12,323
|
|
$
|
0
|
|
$
|
12,323
|
|
$
|
0
|
Life Insurance Proceeds
10
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
4,560,000
|
Financial Counseling
|
|
$
|
0
|
|
$
|
15,905
|
|
$
|
0
|
|
$
|
15,905
|
|
$
|
15,905
|
Outplacement Services
11
|
|
$
|
0
|
|
$
|
30,000
|
|
$
|
0
|
|
$
|
30,000
|
|
$
|
0
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Gross-up upon change-in control
12
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
1,028,830
|
|
$
|
0
|
Total Incremental Compensation and Benefits
|
|
$
|
429,471
|
|
$
|
1,512,494
|
|
$
|
0
|
|
$
|
5,832,130
|
|
$
|
5,814,402
|
(1)
|
Mr. Morris employment agreement provides a severance benefit equal to two times his base pay in the event his employment is terminated not for cause, as defined therein.
|
(2)
|
Executive officers are eligible for an annual incentive award if they remain employed with AEP through year-end unless their employment is terminated for cause. The amount shown is
the calculated bonus opportunity, as shown on page 12, but all annual incentives for executive officers are awarded at the discretion of the HR Committee or independent members of the board pursuant to the award determination process described in
Compensation Discussion and Analysis.
|
(3)
|
Represents a severance payment of 2.99 times each named executive officers current target annual incentive as of December 31, 2008.
|
58
(4)
|
The long-term incentive values shown represent the values that would be paid under such circumstances shown in each column, which are different from the values calculated in
accordance with FAS 123R. The amounts shown in the change in control column are payable upon the change in control regardless of whether the executives employment has been terminated.
|
(5)
|
Mr. Morris restricted shares will be forfeited upon termination prior to vesting unless the HR Committee determines that the circumstances of the termination warrant
otherwise.
|
(6)
|
Except in the event of a change in control, performance criteria continue to apply to performance units that are vested early. Award payments are not accelerated.
|
(7)
|
As of December 31, 2008, pursuant to his employment agreement, Mr. Morris was 80% vested in his pension benefits and was eligible to take a distribution of such benefit
upon the termination of his employment for any reason through the non-qualified AEP Supplemental Benefit Plan. The last 20% of this benefit vested on January 1, 2009.
|
59
(8)
|
The amounts shown are the lump sum pension benefits that vest only under the circumstances described. AEPs pension benefits fully vest upon death or a change in control. If
full vesting occurs by reason of death, then a portion of such benefit would be funded by the qualified AEP Retirement Plan trust rather than the Company itself. The value of non-incremental pension benefits is included in the Non-Incremental
Post-Termination Compensation and Benefits table below.
|
(9)
|
Represents the cost to the Company of providing subsidized medical and dental insurance at employee rates for 18 months.
|
(10)
|
Represents the total death benefit potentially available from unaffiliated insurance carriers for both Company-paid and participant-paid life and AD&D insurance.
|
(11)
|
Represents the maximum cost of Company paid outplacement services, which the Company provides through an unaffiliated third party vendor.
|
(12)
|
Represents a tax gross-up for the excise tax under section 4999 of the Internal Revenue Code, including all applicable taxes on this tax gross-up itself. The amount does not reflect
any reductions attributable to non-compete agreements or other provisions to which the executive must agree to be eligible for change in control benefits.
|
The following table shows the value of additional compensation and benefits as of December 31, 2008 that would have been provided to each named executive officer after a termination of his or her employment on
such date. These amounts were generally earned or vested over multiple years of service to AEP and only a portion is attributable to compensation for 2008.
Non-Incremental Post-Termination Compensation and Benefits as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
(a)
|
|
Long-Term Incentives
|
|
Benefits
|
|
|
|
Vested Stock
Options
(b)(1)
|
|
Vested
Performance
Units
(c)(2)
|
|
AEP Career
Shares
(d)(3)
|
|
Vacation
Payout
(e)(4)
|
|
Post Retirement
Benefits
(f)(5)
|
|
Deferred
Compensation
(g)(6)
|
Michael G. Morris
|
|
$
|
375,480
|
|
$
|
6,085,148
|
|
$
|
5,663,173
|
|
$
|
55,288
|
|
$
|
2,925,456
|
|
$
|
1,447,027
|
Holly Keller Koeppel
|
|
$
|
|
|
$
|
842,916
|
|
$
|
1,209,597
|
|
$
|
61,538
|
|
$
|
1,590,202
|
|
$
|
901,138
|
Carl L. English
|
|
$
|
|
|
$
|
1,552,379
|
|
$
|
1,947,035
|
|
$
|
82,500
|
|
$
|
344,726
|
|
$
|
326,391
|
Brian X. Tierney
|
|
$
|
|
|
$
|
409,743
|
|
$
|
439,026
|
|
$
|
16,154
|
|
$
|
514,850
|
|
$
|
814,271
|
Robert P. Powers
|
|
$
|
271,293
|
|
$
|
1,108,856
|
|
$
|
1,241,005
|
|
$
|
4,904
|
|
$
|
2,247,648
|
|
$
|
1,923,733
|
(1)
|
Represents the value that would have been realized had the named executive officer exercised his or her vested and outstanding stock options at the closing price of AEP common stock
on December 31, 2008.
|
60
(2)
|
Represents the value of performance units that vested on December 31, 2008 calculated, as is required, using the market value of these shares on December 31, 2008.
However, the actual value realized from these shares in February 2009 was based on the previous 20-day average closing market price of AEP common stock as of the vesting date. For a more detailed discussion of vesting of performance units, see the
Long-Term Incentive Compensation section of the Compensation Discussion and Analysis beginning on page 13.
|
(3)
|
Represents the value of AEP share equivalents deferred mandatorily into AEPs Stock Ownership Requirement Plan using the market value of these shares on December 31, 2008.
|
(4)
|
Represents payment of accumulated but unused vacation for the current year and any carry-over from prior years.
|
(5)
|
Represents the lump sum of pension benefits available to each executive.
|
(6)
|
Includes balances from the Supplemental Retirement Savings Plan and Incentive Compensation Deferral Plans, but does not include AEP Career Share balances, which are reported in
column (d).
|
61
SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the beneficial ownership of AEP Common Stock and stock-based units as of January 1, 2009 for all nominees to the
Board of Directors, each of the persons named in the Summary Compensation Table and all such directors and executive officers as a group. Unless otherwise noted, each person had sole voting and investment power over the number of shares of AEP
Common Stock and stock-based units of AEP set forth across from his or her name. Fractions of shares and units have been rounded to the nearest whole number.
|
|
|
|
|
|
|
|
|
|
Name
|
|
Shares
|
|
|
Stock
Units(a)
|
|
Options
Exercisable
Within 60 Days
|
|
Total
|
N. K. Akins
|
|
|
|
|
12,736
|
|
5,900
|
|
18,636
|
C. L. English
|
|
20,899
|
|
|
58,505
|
|
|
|
79,404
|
J. B. Keane
|
|
11,071
|
|
|
29,956
|
|
|
|
41,027
|
H. K. Koeppel
|
|
20,757
|
(b)
|
|
36,346
|
|
|
|
57,103
|
M. G. Morris
|
|
303,480
|
(c)
|
|
170,167
|
|
149,000
|
|
622,647
|
V. McCellon-Allen
|
|
8,333
|
(b)
|
|
30,814
|
|
|
|
39,147
|
R. E. Munczinski
|
|
10,428
|
(b)
|
|
2,949
|
|
|
|
13,377
|
R. P. Powers
|
|
18,674
|
(b)
|
|
37,290
|
|
46,001
|
|
101,965
|
J. S. Solomon
|
|
777
|
|
|
13,070
|
|
5,000
|
|
18,847
|
S. Tomasky
|
|
10,702
|
(b)
|
|
102,644
|
|
|
|
113,346
|
D. E. Welch
|
|
|
|
|
27,105
|
|
|
|
27,105
|
All directors, nominees and executive
officers as a group (11 persons)
|
|
405,121
|
(d)
|
|
521,582
|
|
205,901
|
|
1,132,604
|
(a)
|
This column includes amounts deferred in Stock Units and held under AEPs various officer benefit plans. Includes the following numbers of career shares: Mr. Morris,
170,167; Mr. English, 58,505; Ms. Koeppel, 36,346; Mr. Powers, 37,290; Ms. Tomasky, 102,644; and all directors and executive officers as a group, 510,340.
|
(b)
|
Includes the following numbers of share equivalents held in the AEP Retirement Savings Plan: Ms. Koeppel, 288; Mr. Powers, 770; Ms. Tomasky, 4,569; and all directors
and executive officers as a group, 15,300.
|
(c)
|
Includes restricted shares with different vesting schedules.
|
(d)
|
Represents less than 1% of the total number of shares outstanding.
|
MEETINGS OF THE BOARD OF DIRECTORS
Regular meetings of the Board of Directors were held once each month during the year.
In addition, the Board of Directors holds special meetings from time to time as required. During 2009, the Board held twelve regular meetings.
Directors of the Company receive a fee of $50 for each meeting of the Board of Directors attended in addition to their salaries.
The Board of Directors of the Company has no committees.
62
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm of Deloitte & Touche LLP has been selected as the independent registered public accounting
firm of the Company for the year 2009.
A representative of Deloitte & Touche LLP will not be present at the meeting unless prior
to the day of the meeting the Secretary of the Company has received written notice from a shareholder addressed to the Secretary at 1 Riverside Plaza, Columbus, Ohio 43215, that such shareholder will attend the meeting and wishes to ask questions of
a representative of the firm.
Audit and Non-Audit Fees
The following table presents fees for professional audit services rendered by Deloitte & Touche LLP for the audit of the Companys annual financial statements for the years ended December 31, 2008
and December 31, 2007, and fees billed for other services rendered by Deloitte & Touche LLP during those periods. The fees listed below also include an allocated portion of Deloitte & Touche LLP fees paid by the AEP System.
While the Company has neither an Audit Committee nor pre-approval procedures, AEPs Audit Committee pre-approval procedures are applicable to the Company.
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Audit Fees
|
|
$
|
791,546
|
|
$
|
807,663
|
Audit-Related Fees
|
|
|
79,679
|
|
|
31,855
|
Tax Fees
|
|
|
46,906
|
|
|
48,108
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
918,131
|
|
$
|
887,626
|
|
|
|
|
|
|
|
AEPs Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The
AEP Audit Committees policy is to pre-approve all audit and non-audit services provided by the independent auditor. These services may include audit services, audit-related services, tax services and other services. Pre-approval is provided
for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific limitation. The independent auditor and management are required to report to the AEP Audit Committee at each
regular meeting regarding the extent of services provided by the independent auditor in accordance with this pre-approval policy, and the fees for the services performed to date. The AEP Audit Committee may also pre-approve particular services on a
case-by-case basis. In 2008, all Deloitte & Touche LLP services were pre-approved by the AEP Audit Committee.
FORM 10-K
A copy of the Companys 2008 Annual Report to the SEC, including the Companys financial statements for the year ended
December 31, 2008, is being furnished with this information statement. The 2008 Annual Report is also available on AEPs website at
www.AEP.com
.
|
|
|
L RAHMOND STAGGERS,
|
Secretary
|
March 20, 2009
63
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