Windstream 2006 Annual Report Download - page 19

Short-Term Cash Incentive Payments. Windstream maintains short-term cash incentive plans which are
designed primarily to motivate executives to achieve company-wide performance goals over annual or quarterly
periods. Under these plans, the Compensation Committee sets different target payout amounts (as a percentage of
base salary) for Mr. Gardner and other executive officers in order to reflect such individual’s contributions to
Windstream and the market level of compensation for such position. The Compensation Committee has adopted
short-term incentive plans as part of its goal to make a substantial portion of total direct compensation at risk.
The Compensation Committee determines the target payout percentages for Mr. Gardner and other executive
officers primarily based upon benchmark surveys provided by its compensation consultant that compare the
target payouts for each Windstream executive to the short term incentive payments to executives in similar
positions at comparable companies. During 2006, the target payout percentage for the short-term incentives to
each executive officer was set at the median level of percentages for officers in similar positions at comparable
companies, but the amount of such target incentive payments to Windstream executives were at approximately
the 25th percentile level of payouts because the base salary levels of Windstream executives were also at
approximately the 25th percentile level.
During 2006, Messrs. Gardner and Frantz participated in a cash short-term incentive plan based on
Windstream’s achievement of annual performance goals of operating income before depreciation and
amortization (“OIBDA”) and net additions of broadband subscribers. OIBDA is a non-GAAP financial measure
that can be calculated from Windstream’s consolidated financial statements by taking operating income and
adding depreciation and amortization. Because Windstream existed during only a portion of 2006 commencing
on the completion of the spin-off, all performance measures and payouts for the annual incentive plan were
adjusted to reflect this partial period. All other executive officers participated in a cash short-term incentive plan
based on Windstream’s achievement of quarterly performance goals of OIBDA, total revenue, net additions of
broadband subscribers, and net additions of digital TV subscribers. Prior to the spin-off, executive officers of
Spinco participated in similar Alltel incentive plans whose performance goals were earnings per share
(consolidated), wireline division broadband net adds, wireline revenue, and wireline OIBDA.
Under these Windstream short-term incentive plans, executive officers were eligible to receive payments
in proportion to Windstream’s achievement of performance goals that were set at minimum (or threshold), target
and maximum levels. Mr. Gardner was eligible to receive 100% of base salary if target levels of performance
objectives were achieved, and 50% to 200% of this target payout amount if threshold or maximum levels,
respectively, were achieved. No payout would be made if performance was below the threshold level. During
2006, the target performance goal was the achievement of performance measures of OIBDA of $1,652 million
and net additions of broadband subscribers of 200,000, and target payouts were equally weighted at 50% to
achievement of these performance measures, except that no payouts were to be made unless the threshold level of
performance was achieved for the OIBDA performance measure. Windstream exceeded these target performance
goals, and Mr. Gardner received $735,222 in annual incentive compensation or 105% of the target payout award
for 2006. During 2006, all other named executive officers had target payout percentages ranging from 90% to
70% of base salary. During 2007, all executive officers will participate in the Windstream Performance Incentive
Compensation Plan and will be eligible for payouts based on annual performance goals.
Equity-Incentive Awards. Windstream maintains an equity-compensation program for executive
officers to provide long-term incentives, to better align the interests of executives with stockholders and to
provide a retention incentive. The Compensation Committee has implemented its equity-compensation program
as part of its goal to make a substantial portion of total direct compensation at risk. The Compensation
Committee also prefers equity incentives over cash as a method of providing long-term compensation incentives.
All Windstream equity compensation awards have been issued as either restricted stock or performance-
based restricted stock under the Windstream 2006 Equity Incentive Plan. Windstream has not issued any stock
options or other forms of equity compensation to its directors, executive officers or other employees. The
Compensation Committee believes that restricted stock or performance-based restricted stock awards are a
preferred mechanism of equity compensation compared to stock options or other devices that derive value from
future stock price appreciation due to the high-dividend,low-growth profile of Windstream.
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