Windstream 2007 Annual Report Download - page 18

Elements of Compensation. The compensation of Windstream’s executive officers consists of three
principal components:
• Base salary;
• Short-term (annual) cash incentive payments; and
• Long-term incentives in the form of equity-based compensation.
The compensation program for all executive officers also includes the Windstream 2007 Deferred
Compensation Plan, the Windstream 401(k) Plan, a change-in-control agreement, and other limited perquisites.
Windstream has also entered into an employment agreement with Mr. Gardner, and certain executive officers are
eligible to participate, on a grandfathered-basis, in the Windstream Pension Plan and the related Windstream
Benefit Restoration Plan.
The Compensation Committee considers the total compensation of each executive officer, including
Mr. Gardner, as well as the allocation of compensation among base salary, short-term incentive compensation,
and equity-based compensation. When it determined compensation levels for 2007, the Compensation
Committee targeted total compensation at the median (or 50th percentile) level of compensation for officers in
similar positions at comparable companies. For determining compensation levels for 2008, the Compensation
Committee targeted base salary between the 50th and 75th percentile, and short and long-term incentives at the
75th percentile of market. The Compensation Committee changed its target levels for compensation in response to
a number of considerations including the desire to have more flexibility in setting compensation levels that
reflect the strong financial and operating performance of the Company during 2007 relative to other rural local
exchange carriers. The Compensation Committee also sought to improve the retention incentives for the
management team in light of the increasing competitive pressures faced by Windstream in its markets. The
Compensation Committee may set compensation above the targeted range for each executive officer based on the
executive’s experience and retention concerns. The Compensation Committee believes that a substantial portion
of executive compensation should be at risk through allocation of compensation to short-term cash incentives and
long-term equity-based incentives. During 2007, approximately 79% and 42%, of total direct compensation to
Mr. Gardner and all other named executive officers as a group, respectively, was comprised of either short-term
incentives or performance-based vesting equity compensation, and approximately 58% and 43% of total direct
compensation to Mr. Gardner and all other named executive officers as a group, respectively, was comprised of
equity-based compensation. Total direct compensation for these purposes equals base salary, short-term cash
incentive payment at target levels and the full up-front fair value of equity-based awards determined in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based
Compensation”.
Base Salary. The Compensation Committee determines base salary primarily based upon individual
performance and benchmark surveys provided by its compensation consultant that compare the base salary of
individual executives to the salary of executives in similar positions at peer companies. During 2007, the base
salary of Windstream executives, including Mr. Gardner, was at approximately the median of base salary level of
officers in similar positions at comparable companies. Base salary is designed primarily to provide competitive
compensation that reflects the contributions and skill levels of each executive.
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
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