UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
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Callon Petroleum Company
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A JOINT LETTER FROM OUR CHAIRMAN AND OUR CHIEF EXECUTIVE OFFICER
 
March 28, 2019
 
DEAR FELLOW SHAREHOLDERS,
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On behalf of the Board of Directors of Callon Petroleum Company, we are pleased to invite you to our 2019 Annual Meeting of Shareholders, which will take place on Thursday, May 9, 2019 at 9:00 a.m. Central Daylight Time (“CDT”), in the Wishmaker Ballroom of the Hotel ZaZa, located at 9787 Katy Freeway in Houston, Texas.
Today we are filing the Notice of Annual Meeting of Shareholders and the Proxy Statement which describe the matters to be acted upon at the meeting. This year we are asking our shareholders to elect directors, ratify the appointment of our auditors, and approve, on a non-binding advisory basis, the compensation of our named executive officers.
Callon had a strong year in 2018 that was reflected in industry-leading operating margins and competitive growth in production and reserves. With a high-quality Permian asset base and declining well obligations, we have now transitioned to a full-field, larger pad development model that has Callon well-positioned to deliver continued improvements capital efficiency and cash flow for our shareholders in 2019 and beyond. We remain steadfast in our long-term value focus, and all of our stakeholders benefit from our early infrastructure investments, a focus on responsible operations and values, and a talented workforce that was named a “Top Workplace” by the Houston Chronicle in 2018.
Your vote is important, and we encourage you to review this proxy statement and to vote promptly so that your shares will be represented at the meeting. On behalf of everyone at Callon, we want to thank you, our valued shareholders, for your continued support of the work we do.

Sincerely,
L. Richard Flury
Chairman of the Board
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Joseph C. Gatto, Jr. 
President, Chief Executive Officer and Director
 
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L. Richard Flury
Chairman of the Board
Joseph C. Gatto, Jr.
President, Chief Executive Officer and Director




We encourage you to read our 2018 Annual Report, which includes our financial statements as of and for the year ended December 31, 2018. Please also refer to the sections captioned “Risk Factors” and “Special Note Regarding Forward-Looking Statements,” for a description of the substantial risks and uncertainties related to the forward-looking statements included herein.


CALLON PETROLEUM      3


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NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
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Dear Shareholders,
You are invited to participate in the 2019 Annual Meeting of Shareholders (the “Annual Meeting”) of Callon Petroleum Company (“Callon,” the “Company,” “us,” “we,” “our” or like terms), a Delaware corporation.
 
Voting matters
Board
Recommendation
 
Proposal 1:
To elect two Class I directors to serve on our Board of Directors (the “Board”), each for three years
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FOR each of the Class I directors
 
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See page 7
 
 
 
Proposal 2: 
To approve, on a non-binding advisory basis, the compensation of our named executive officers (“NEOs”)
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FOR
 
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See page 29
 
 
 
Proposal 3: 
To ratify the appointment of Grant Thornton LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2019
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FOR
 
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See page 53
 
 
 
 
 
 
 
 
We will also transact other business that may properly come before the Annual Meeting.
This Notice of Annual Meeting of Shareholders and the Proxy Statement herein provide further information on the Company’s performance and corporate governance and describe the matters to be presented at the Annual Meeting. The Board set March 15, 2019, as the record date (the “Record Date”) for the Annual Meeting. Holders of record of our common stock at the close of business on the Record Date are entitled to receive this notice of, and vote at, the Annual Meeting.
Beginning on or about March 28, 2019, we mailed an Important Notice Regarding the Availability of Proxy Materials (the “Notice”) to our holders of record. The Notice contained instructions on how to access the Proxy Statement and related materials on the Internet and how to enter your voting instructions. Instructions for requesting a paper copy of the proxy materials are contained in the Notice.
We thank you for your continued support and look forward to seeing you at the Annual Meeting.
By Order of the Board of Directors,
 
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Michol L. Ecklund
Senior Vice President, General Counsel
and Corporate Secretary
Houston, Texas
March 28, 2019
 
 


4      CALLON PETROLEUM


TABLE OF CONTENTS


CALLON PETROLEUM      5


STRATEGY AND PERFORMANCE HIGHLIGHTS
Callon is an independent oil and natural gas company focused on the acquisition and development of unconventional onshore oil and natural gas reserves in the Permian Basin with a strong foundation that spans over 70 years. Callon’s mission is to build trust, create value and drive sustainable growth responsibly for our investors, our employees and the communities in which we operate. We are positioned to deliver value for our shareholders in 2019 and beyond through the following:
PREPARATION
 
PURPOSE
 
PRIORITIES
    Significant scale attained via ~85,000 net acres of best in class Permian footprint with a high degree of operational control
    Robust infrastructure network resulting from thoughtful multi-year planning and investment
    Significant liquidity and healthy capital structure support development plans
    Talented workforce with selective recent additions to our technical, operational and analytical teams
 
    Creating value by delivering sustainable, prudent growth and corporate level returns in a responsible manner
    Harvesting asset value from premier acreage position
    “Life of field” development, balancing capital efficiency and longer term reinvestment
    Thoughtful capital allocation to focus on value maximization
 
    Executing consistently with our core values, including responsibility, integrity and respect
    Sustainable organic growth funded with internally generated cash flow
    Large pad development, benefiting resource optimization and capital efficiency
    Preservation of leading cash margins through cost management and leveraging of existing infrastructure
    Select asset monetization opportunities to enhance returns on capital
2018 was a year of significant progress in the maturity of Callon’s Permian operations as we continued to grow cash margins, production and reserves while transitioning to scaled development of our high quality asset base. The Company also added approximately 35,000 highly complementary net surface acres to our Delaware Basin operating area that promote efficiencies through increased operational scale, longer laterals and integration of infrastructure. Key operational and financial highlights include:
 
 
Increased daily production approximately 44% year-over-year to 32,900 barrels of oil equivalent ("Boe") per day in 2018, with a sustained oil content of 79%.
Completed the acquisition of 34,523 net working interest acres and 1,530 net mineral acres and traded 4,420 net acres to further longer-lateral development.
Increased estimated net proved reserves by nearly 74% year-over-year to 238.5 million barrels of oil equivalent (“MMBoe”), which replaced 690% of 2018 production.
Divested 3,540 net acres as part of ongoing asset rationalization initiatives.
Achieved a “drill bit” finding and development (“F&D”) cost(i) of $7.03 per Boe and provided developed finding and development cost(i) of $13.40 per Boe.
Expanded our dual-basin recycling program that utilized 4.2 million barrels of produced water, significantly reducing freshwater needs and our environmental footprint.
Generated operating margins of $40.16 per Boe, among the highest within the industry.
Improved safety and environmental performance including reductions of over 40% for recordable incident rates and spills to the environment.
Decreased lease operating expense (“LOE”) per Boe by 3% versus 2017, representing the fifth consecutive year of cost reduction.
Increased liquidity by expanding the borrowing base to $1.1 billion with an elected commitment of $850 million.
Realized net income of $300.4 million and generated Adjusted EBITDA(i) of $432.5 million relative to cash drilling and completion capital expenditures of $403.5 million.
Issued $400MM of Senior Notes at an effective yield of 6.4%, contributing to an improved cost of capital.
(i) 
See Appendix A for a reconciliation of Non-GAAP financial measures
Coming off a strong 2018, Callon remains driven by a long-term value focus, and our progress in maturing our operations and production base in recent years now allows us to drive continued improvements in our cash flow profile and corporate-level returns. In 2019 and beyond, the Company is well-positioned to progress efficiencies in our development program through larger pad developments, increased lateral lengths, reduced leasehold obligations and leveraging of established infrastructure for the benefit of our shareholders.


6      CALLON PETROLEUM


 
 
 
Proposal 1
Election of
Class I
Directors
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The Board of Directors Recommends a vote FOR each of the Class I director nominees named in this Proxy Statement
    Our director nominees provide experience and perspectives that enhance the overall strategic and oversight functions of Callon’s Board.
    For more information about the nominees’ experience, skills, and qualifications, please see page 9.
 
 
 
Board of Directors
Process for Selecting Directors
Director Identification and Selection
Criteria. The Nominating and Corporate Governance Committee has established guidelines for considering nominations to our Board. The Committee evaluates potential nominees based on the contribution such nominee’s background and skills could have upon achieving the goal of a well-rounded, diverse Board that functions collegially as a unit. While not an exhaustive list, key criteria include:
Relevant oil and gas exploration and production industry knowledge and experience;
Complimentary mix of backgrounds and experience in areas including business, finance, accounting, technology, and strategy;
Personal qualities of leadership, character, judgment and personal and professional integrity and high ethical standards;
The candidate’s ability to exercise independent and informed business judgment;
Whether the candidate is free of conflicts and has the time required for preparation, participation, and attendance at meetings;
Diversity, including differences in viewpoints, background, education, gender, race or ethnicity, age, and other individual qualifications and attributes;
The ability to work with other members of the Board, the CEO and senior officers of the Company in a constructive and collaborative fashion to achieve the Company’s goals and implement its strategy; and
In the case of an incumbent director, such director’s past performance on the Board.
The Nominating and Corporate Governance Committee and the Board may also consider other qualifications and attributes that they believe are appropriate in evaluating the ability of an individual to serve as a member of the Board. The Nominating and Corporate Governance Committee’s goal is to assemble a Board that brings to us a variety of perspectives and skills derived from high quality business and professional experience to perform its oversight role satisfactorily for our shareholders. In making its determinations, the Committee evaluates each individual in the context of the Board as a whole, with the objective of assembling a group that can best represent shareholder interests through the active, objective, and constructive participation in meetings and the strategic decision-making processes.
Diversity. Our Corporate Governance Guidelines set forth our policy with respect to Board diversity. We are committed to building a diverse Board comprised of individuals from different backgrounds, including differences in viewpoints, education, gender, race or ethnicity, age, and other individual qualifications and attributes. To accomplish this, the Nominating and Corporate Governance Committee will continue to require that search firms engaged by the Company seek to present a robust selection of women and ethnically diverse candidates in all prospective director candidate pools.
Nominating Process. In making its nominations, the Nominating and Corporate Governance Committee identifies nominees by first evaluating the current members of the Board willing to continue their service and any potential need to expand the Board to include additional expertise. Current members with a record of quality contribution to the Board whose experience contributes to a complementary mix of backgrounds that enhance the Board are renominated. When vacancies become available, the Committee may seek input from industry experts or engage third-party search firms to help source particular areas of expertise or backgrounds.


CALLON PETROLEUM      7


PROPOSAL 1

Over time, the Board refreshes its membership through a combination of adding or replacing directors to achieve the appropriate balance between maintaining longer-term directors with deep institutional knowledge of the Company and adding directors who bring a diversity of perspectives and experience. As a reflection of this philosophy, if all of the nominees are elected to the Board, following the Annual Meeting:
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5/8
directors will have tenures of five or fewer years.
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7/8
directors will be independent.
Majority Vote Standard
Our Corporate Governance Guidelines provide for a majority voting policy in uncontested director elections. The Company believes that the majority vote standard ensures accountability and the opportunity for a positive mandate from the Company’s shareholders. At any shareholder meeting for the election of directors at which a quorum is present, any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” such election (“Majority Withheld Vote”) shall tender his or her resignation for consideration by the Nominating and Corporate Governance Committee following certification of the shareholder vote, unless the number of nominees exceeds the number of directors to be elected as of the Record Date for such meeting, in which event the directors shall be elected by a plurality of the votes cast. Such resignation will only be effective upon Board acceptance of such resignation after receiving the recommendation of the Nominating and Corporate Governance Committee.
If a director nominee receives a Majority Withheld Vote, then promptly following the certification of the election results, the Nominating and Corporate Governance Committee will consider any factors it deems relevant to the best interests of the Company and our shareholders in determining whether to accept the director’s resignation and recommend to the Board that action to be taken with respect to the tendered resignation. Within 120 days following certification of the shareholder vote, the Board shall consider the recommendation and make a determination as to whether to accept or reject such director’s resignation and shall notify the director concerned of its decision. We will also promptly publicly disclose the Board’s decision and process in a periodic or current report filed with or furnished to the SEC.
If you hold your shares through a broker and you do not instruct the broker how to vote, your broker will not have the authority to vote your shares. Abstentions and broker non-votes will each be counted as present for purposes of determining the presence of a quorum but will have no effect upon the outcome of the vote. All shares of common stock represented by proxies will be voted “FOR” the election of the director nominees, except where authority to vote in the election of directors has been withheld. Should the nominees become unable or unwilling to serve as a director at the time of the 2019 Annual Meeting, the person or persons exercising the proxies will vote for the election of substitute nominees designated by the Board, or the Board may choose to reduce the number of members of the Board to be elected at the 2019 Annual Meeting in order to eliminate the vacancy. Your proxy cannot be otherwise voted for a person who is not named in this Proxy as a candidate for director or for a greater number of persons than the number of director nominees named. The Board has no reason to believe that the nominees will be unable or unwilling to serve if elected.
 
The Board recommends a vote FOR each of the two Class I director nominees.
 



8      CALLON PETROLEUM


PROPOSAL 1

Directors Nominated For Re-Election
The Board currently consists of eight directors. Consistent with our Certificate of Incorporation, the current Board is divided into three classes designated as Class I, Class II, and Class III, each with staggered, three-year terms. Based on the recommendations from the Nominating and Corporate Governance Committee, our Board has nominated two continuing Class I Directors, Messrs. Michael L. Finch and Larry D. McVay, to stand for re-election or, in each case, until the election and qualification of their respective successors or until their earlier death, retirement, resignation or removal.
The following biographies reflect the particular experience, qualifications, attributes, and skills that led the Board to conclude that each nominee should stand for re-election to serve on the Board:
Class I Directors
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Michael L. Finch
 
Former Chief Financial Officer (Retired) of Stone Energy Corporation
 
Michael Finch has served as a member of the Board since 2015. He spent nearly 20 years affiliated with Stone Energy Corporation, a publicly-traded oil and gas exploration company, from which he retired as Chief Financial Officer and a member of the Board of Directors in 1999. Prior to his service with Stone Energy, he was employed by Arthur Andersen & Co.
Mr. Finch was an independent director of Petroquest Energy, Inc. a publicly-traded oil and gas company, from 2003–2016, where he served as chairman of the Audit Committee and as a member of the Compensation Committee and the Nominating and Corporate Governance Committee. Mr. Finch currently serves on the advisory board of C.H. Fenstermaker & Associates, a multi-disciplinary consulting firm that specializes in surveying and mapping, engineering and environmental consulting.
Mr. Finch holds a B.S. in Accounting from the University of South Alabama and was licensed as a Certified Public Accountant (currently inactive).
SKILLS AND QUALIFICATIONS:
Mr. Finch’s extensive financial, accounting, and operating experience within the oil and gas industry are extremely valuable to the Board and qualify him as a director. In particular, Mr. Finch’s accounting background and status as a “financial expert” provide the Board valuable perspective on issues facing audit committees.
INDEPENDENT
Age 63
Director Since 2015
Callon Committees:
Audit, Compensation, Strategic Planning & Reserves
 
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Larry D. McVay
 
Managing Director of Edgewater Energy, LLC
 
Larry McVay has served as a member of the Board since 2007. Mr. McVay has been a Managing Director of Edgewater Energy, LLC, a privately held oil and gas investment company, since 2007. From 2003–2006, he served as Chief Operating Officer of TNK-BP Holding, one of the largest oil producing companies in Russia. From 2000–2003, he served as Technology Vice President and Vice President of Health, Safety and Environment for BP plc. Prior to joining BP, Mr. McVay held numerous positions at Amoco, including engineering management and senior operating leadership positions.
Mr. McVay is a director of Linde plc, a publicly-traded industrial gas and engineering company. Previously, Mr. McVay was a director of Praxair, Inc., an industrial gases company in North and South America, until Praxair, Inc. and Linde AG combined to create Linde plc in 2018.  Additionally, Mr. McVay was previously a director of Chicago Bridge and Iron Company, N.V., a publicly-traded engineering, procurement and construction company, until it merged into McDermott International in 2018.
Mr. McVay earned a B.S. in Mechanical Engineering from Texas Tech University, where he was recognized as a Distinguished Engineer in 1995.
SKILLS AND QUALIFICATIONS:
Mr. McVay has been directly involved in nearly all aspects of the oil and gas industry, including drilling, production, finance, environmental, risk, and safety. We believe that this experience and his knowledge of the exploration and production industry, particularly in the Permian Basin, as well as his senior executive experience, service on other boards, and independence, provide valuable insight in the development of our long-term strategies and qualify him for service on our Board.
INDEPENDENT
Age 71
Director Since 2007
Callon Committees:
Strategic Planning & Reserves (Chairman), Audit, Nominating & Corporate Governance
Other Current Directorships:
Linde plc
 


CALLON PETROLEUM      9


CORPORATE GOVERNANCE
Directors Continuing in Office
Biographical information for our directors continuing in office is set forth below. These individuals are not standing for re-election at this time:
Class II Directors
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Matthew R. Bob
 
President of Eagle Oil and Gas; Managing Member of MB Exploration
 
Matthew Bob has served as a member of the Board since 2014. Mr. Bob currently serves as President of Eagle Oil and Gas and has been the founder and managing member of MB Exploration and affiliated companies since 1994. Previously, Mr. Bob served as President of Hall Phoenix Energy LLC, a privately held oil and gas exploration company, from 2009–2011. Prior to forming MB Exploration, Mr. Bob was Chief Geophysicist at Pitts Oil Company. He began his career at Union Oil Company of California where he held various geological positions.
Mr. Bob holds a B.A. in Geology from St. Louis University, an M.S. in Geology from Memphis University, and is a graduate of Harvard University’s Executive Management Program. He is a member of the American Association of Petroleum Geologists, the Society of Exploration Geophysicists and the Dallas Petroleum Club, and is a registered Geoscientist in the States of Texas, Mississippi and Louisiana.
SKILLS AND QUALIFICATIONS:
Mr. Bob’s extensive knowledge of the exploration and production industry and technical expertise are assets to the Board and qualify him as a director. His experience as a senior executive further strengthens the strategic and oversight functions of the Board.
INDEPENDENT
Age 62
Director Since 2014
Callon Committees:
Compensation (Chairman), Nominating & Corporate Governance, Strategic Planning & Reserves
 
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Anthony J. Nocchiero
 
Former SVP and Chief Financial Officer (Retired) of CF Industries, Inc.
 
Anthony Nocchiero has served as a member of the Board since 2011. Mr. Nocchiero retired as Senior Vice President and Chief Financial Officer for CF Industries, Inc. in 2010, a position he had held since 2007. From 2005–2007, he was the Vice President and Chief Financial Officer for Merisant Worldwide, Inc. Prior to that, Mr. Nocchiero was self-employed as an advisor and private consultant from 2002–2005. From 1999–2001, Mr. Nocchiero served as Vice President and CFO of BP Chemicals, the global petrochemical business of BP plc. Prior to that, he spent 24 years with Amoco Corporation in various financial and management positions, including service as Amoco’s Vice President and Controller from 1998–1999.
Mr. Nocchiero has previous experience serving as a board member of various public and private companies, including Terra Nitrogen LP, Keytrade AG, Vysis Corporation and the Chicago Chamber of Commerce.
Mr. Nocchiero holds a B.S. degree in Chemical Engineering from Washington University in St. Louis and an M.B.A. degree from the Kellogg Graduate School of Management at Northwestern University.
SKILLS AND QUALIFICATIONS:
Mr. Nocchiero’s broad financial, accounting and operating experience within the energy industry are valuable to the Board and make him a meaningful contributor as a director. Additionally, Mr. Nocchiero’s status as a “financial expert” and knowledge of public company reporting requirements add meaningful insights to our Board and Audit Committee.
INDEPENDENT
Age 68
Director Since 2011
Callon Committees:
Audit (Chairman), Compensation, Nominating & Corporate Governance, Strategic Planning & Reserves
 


10      CALLON PETROLEUM


CORPORATE GOVERNANCE

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James M. Trimble
 
Former Chief Executive Officer and President (Retired) of Stone Energy Corporation
 
James Trimble has served as a member of the Board since 2014. Most recently, Mr. Trimble served as the interim Chief Executive Officer and President of Stone Energy Corporation from 2017–2018. Prior to that, Mr. Trimble served as CEO and President of PDC Energy, Inc. from 2011 until his retirement in 2015. Mr. Trimble was Managing Director of Grand Gulf Energy Limited, a public company traded on the Australian Securities Exchange, and President and CEO of Grand Gulf’s U.S. subsidiary Grand Gulf Energy Company LLC, an exploration and development company focused primarily on drilling in mature basins in Texas, Louisiana and Oklahoma, from 2005–2010. Earlier in his career, Mr. Trimble was CEO of TexCal (formerly Tri-Union Development) and CEO of Elysium Energy, a privately held oil and gas exploration company. Prior to that, he was Senior Vice President of Exploration and Production for Cabot Oil and Gas, a publicly-traded independent energy company.
Mr. Trimble currently serves as a director of Talos Energy, a publicly-traded oil and gas exploration company, and Chairman of the Board of Crestone Peak Resources LLC, a privately held oil and gas exploration company. Previously, Mr. Trimble was a director of Stone Energy Corporation from 2017–2018, PDC Energy from 2009–2016, C&J Energy Services from 2016–2017, Seisgen Exploration from 2008–2015; Grand Gulf Energy from 2009–2012, and Blue Dolphin Energy from 2002–2006.
Mr. Trimble was an officer of PDC Energy in September 2013, when each of the twelve partnerships for which the company was the managing general partner filed for bankruptcy in the federal bankruptcy court, Northern District of Texas, Dallas Division and was on the board of C&J Energy Services when it filed for bankruptcy in the court of the Southern District of Texas, Houston Division in July 2016.
Mr. Trimble graduated from Mississippi State University where he majored in petroleum engineering for undergraduate (Bachelor of Science) and graduate studies. He is a Registered Professional Engineer in the State of Texas.
SKILLS AND QUALIFICATIONS:
Mr. Trimble’s deep knowledge of the exploration and production industry and his leadership experience at previous companies strengthen the strategic and oversight functions of our Board. His experience on the boards of several other public companies provide valuable perspective on best practices relating to corporate governance, management and strategic transactions.
INDEPENDENT
Age 70
Director Since 2014
Callon Committees:
Nominating & Corporate Governance (Chair), Strategic Planning & Reserves, Compensation
Other Current Directorships:
Talos Energy
 


CALLON PETROLEUM      11


CORPORATE GOVERNANCE

Class III Directors
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Major General (Ret.) Barbara J. Faulkenberry
 
Major General (Ret.) of the U.S. Air Force
 
Barbara Faulkenberry has served as a member of the Board since 2018. Ms. Faulkenberry retired from the U.S. Air Force in 2014 as a Major General (2-stars) after a 32-year career, finishing in the top 150 leaders of a 320,000-person global organization. Her last assignment was as Vice Commander (COO) and interim Commander (CEO) of a 37,000-person organization conducting all global Department of Defense air cargo, passenger, and medical patient movements with 1,100 military aircraft plus contracted commercial aircraft.
Ms. Faulkenberry is currently an independent director for USA Truck, a publicly-traded provider of logistics and trucking services across North America, where she serves as chair of the Technology Committee and as a member of the Nominating and Corporate Governance Committee.
Ms. Faulkenberry received a B.S. degree from the Air Force Academy in 1982, an M.B.A. from Georgia College in 1986, and a Master of National Security from the National Defense University in 1999. She has also attended strategic leadership courses at Harvard, Cambridge, and Syracuse Universities.
SKILLS AND QUALIFICATIONS:
Ms. Faulkenberry brings to the Company senior leadership experience in the areas of supply chain management, logistics, strategic planning, risk management, technology, cyber security, and leadership development. Additionally, she is a NACD Board Leadership Fellow and earned the Carnegie Mellon/NACD CERT Certificate in Cybersecurity Oversight, both of which contribute to best practices in corporate governance and cyber security and provide great value to the Board.
INDEPENDENT
Age 59
Director Since 2018
Callon Committees:
Audit, Nominating & Corporate Governance, Strategic Planning & Reserves
Other Current Directorships:
USA Truck, Inc.
 
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L. Richard Flury
 
Chairman of the Board
Former Chief Executive (Retired) for Gas, Power & Renewables of BP plc
 
Richard Flury has served as a member of the Board since 2004 and has served as Chairman since 2017. He spent over 30 years with Amoco Corporation, and later, BP plc, from which he retired as Chief Executive for Gas and Power and Renewables in 2001. Prior to Amoco’s merger with BP in 1998, he served in various executive positions and was Chief Executive for Worldwide Exploration and Production and Executive Vice President of Amoco Corporation at the time of the merger.
Mr. Flury is a director of McDermott International, a publicly-traded engineering, procurement and construction company. Mr. Flury was a director and the non-executive Chairman of Chicago Bridge and Iron Company, N.V., a publicly-traded engineering, procurement and construction company, until it merged into McDermott International in 2018. Previously, Mr. Flury was a member of the Board of QEP Resources, Inc., a publicly-traded oil and gas exploration company, from 2010–2015.
He is a graduate of the University of Victoria (Canada) where he studied geology.
SKILLS AND QUALIFICATIONS:
Mr. Flury’s deep knowledge of the energy industry and years of executive and management experience provide him with a valuable insights into the strategic issues affecting companies in the oil and gas industry that are helpful to our Company and Board. His service on the boards of other publicly traded companies has provided him exposure to different industries and approaches to governance that we believe further enhances our Board.
INDEPENDENT
Age 71
Director Since 2004
Callon Committees:
Audit, Compensation, Strategic Planning & Reserves
Other Current Directorships:
McDermott International
 


12      CALLON PETROLEUM


CORPORATE GOVERNANCE

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Joseph C. Gatto, Jr.
 
President, Chief Executive Officer and Director
 
Joseph C. Gatto, Jr. is President, Chief Executive Officer and Director of Callon. Mr. Gatto was elected to the Board in 2018. He has served as the Company's CEO since 2017 and as President since 2016. Prior to his appointment as CEO, he served as Chief Financial Officer and Treasurer of the Company from 2014–2017, and held various other senior leadership positions within the Company since joining Callon in 2012.
Prior to joining the Company, Mr. Gatto served as Head of Structuring and Execution with Merrill Lynch Commodities from 2010–2011, as the founder of MarchWire Capital, LLC, a financial advisory and strategic consulting firm in 2009, and as a Managing Director in the energy investment banking groups of Merrill Lynch & Co. and Barclays Capital from 1997–2009.
Mr. Gatto graduated from Cornell University with a B.S. degree and The Wharton School of the University of Pennsylvania with an M.B.A.
SKILLS AND QUALIFICATIONS:
Mr. Gatto’s extensive experience in investment banking and the oil and gas industry make him a valuable addition to the Board. Additionally, Mr. Gatto's knowledge of the Company and strong background in capital markets, transactions, strategic planning, and investor relations provide the Board with essential insight and guidance.
Age 48
Director Since 2018
 


CALLON PETROLEUM      13


CORPORATE GOVERNANCE

Current Composition of the Board
The following table provides information with respect to the skills and experience of all current directors and the nominees for Class I terms who have been nominated to stand for election at the 2019 Annual Meeting.
Name
Matthew R. Bob
Barbara J. Faulkenberry
Michael L. Finch
L. Richard Flury
(Chairman)
Joseph C. Gatto, Jr.
Larry D. McVay
Anthony J. Nocchiero
James M. Trimble
Age (May 9, 2019)
62
59
63
71
48
71
68
70
Tenure (as of May 9, 2019)
5
1
4
15
1
12
8
5
Gender Diversity
 
 
 
 
 
 
 
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CEO/President Experience
 
 
 
 
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Senior Executive Leadership
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Outside Public Boards (current)
 
 
 
 
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Outside Public Boards (prior)
 
 
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E&P Industry Experience
 
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Energy (Other than E&P) Industry Experience
 
 
 
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Financial Expert
 
 
 
 
 
 
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Financial Literacy
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Financial Oversight/Accounting
 
 
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Petroleum and Other Engineering
 
 
 
 
 
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Geologist or Geophysicist
 
 
 
 
 
 
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Government/Public Policy/Regulatory
 
 
 
 
 
 
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HES Experience/Environmental
 
 
 
 
 
 
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Strategic Advising
 
 
 
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Investment Banking
 
 
 
 
 
 
 
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Supply Chain
 
 
 
 
 
 
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Technology/IT/Cybersecurity
 
 
 
 


14      CALLON PETROLEUM


CORPORATE GOVERNANCE

Director Compensation
The compensation of our non-employee directors is reviewed by the Compensation Committee and is approved by the Board. We use a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on our Board. In determining director compensation, we consider the responsibilities of our directors, the significant amount of time the directors spend fulfilling their duties, and the competitive market for skilled directors.
Annually the Compensation Committee directly engages Meridian to conduct an analysis of director compensation and recommend any adjustments to the total annual compensation of the non-employee directors. Specifically, Meridian evaluates competitive market data, utilizing the same Peer Group used for executive compensation market data (see page 36). The Compensation Committee generally targets total compensation near the median of this Peer Group. The Company's director compensation program generally consists of cash retainers and an annual grant of Restricted Stock Units ("RSUs") awarded under the Company’s 2018 Omnibus Incentive Plan (the “2018 Plan”). The RSU grants are awarded to match competitive practices and encourage a long-term alignment with shareholders.
In March 2018, with input from compensation advisor Meridian, the Compensation Committee reviewed the competitiveness of the director compensation package. Relative to the Initial 2018 Peer Group (page 36), the director compensation package fell below the 25th percentile. Accordingly, upon recommendation from the Compensation Committee, in May 2018 the Board approved a market-based increase in the annual cash retainer to $80,000 and the annual restricted stock unit grant to $165,000. With these increases, the average total compensation for Callon directors is at approximately the median of the Peer Group.
For 2018, the Company's non-employee director compensation consisted of the following:
Board member cash retainer
$80,000
Restricted Stock Unit (RSU) Grant Value
$165,000
Chairmen Fees
 
Non-Executive Chair
$120,000
Audit Committee Chair
$20,000
Compensation Committee Chair
$15,000
Nominating and Corporative Governance Committee Chair
$10,000
Strategic Planning and Reserves Committee Chair
$10,000
Each non-employee director is reimbursed for reasonable out-of-pocket costs incurred to attend Board and Committee meetings. If a member of our Board is an officer or employee of the Company, they do not receive compensation for their service as a director.
The RSUs granted to directors in 2018 will vest on the first anniversary date following the grant, or on the date of the Company’s 2019 Annual Meeting of Shareholders, whichever occurs first.
Directors have the opportunity to make an annual election to defer some or all of their cash retainer or annual stock award pursuant to the terms of a Deferred Compensation Plan for non-employee directors until separation from service as a director. All deferrals under the plan are credited as phantom stock units of Callon stock. Callon's directors are subject to stock ownership guidelines of five times the annual cash retainer of $80,000. For more information on the stock ownership guidelines see page 42.


CALLON PETROLEUM      15


CORPORATE GOVERNANCE

The table below indicates the total compensation earned during 2018 for each non-employee director:
NON-EMPLOYEE DIRECTOR COMPENSATION FOR 2018
Director
Fees Earned or
Paid in Cash(a)
 
Stock
Awards(b)
 
All Other
Compensation
Total
Matthew R. Bob
$95,000
(c)
$165,000

$0
$260,000
Barbara J. Faulkenberry
$80,000
(d)
$165,000
 
$0
$245,000
Michael L. Finch
$80,000
(d)
$165,000
 
$0
$245,000
L. Richard Flury
$200,000
(e)
$165,000
 
$0
$365,000
Larry D. McVay
$90,000
(f)
$165,000
 
$0
$255,000
Anthony J. Nocchiero
$100,000
(g)
$165,000
 
$0
$265,000
James M. Trimble
$90,000
(h)
$165,000
 
$0
$255,000
(a) 
Does not include reimbursement of expenses associated with attending Board and Committee meetings.
(b) 
Amounts calculated utilizing the provisions of FASB ASC Topic 718. See footnotes 9 and 10 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018 regarding assumptions underlying valuation of equity awards. Represents the amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2018, in accordance with GAAP regarding stock compensation, for the annual restricted stock unit award. These amounts are also equal to the grant date fair value of the awards. The aggregate number of stock unit awards outstanding as of December 31, 2018 for each director is as follows: Messrs. Flury, Bob, Finch, McVay, Nocchiero and Trimble -19,468; and Ms. Faulkenberry - 11,652.
(c) 
Represents annual retainer of $80,000 and an additional $15,000 for acting as Chairman of the Compensation Committee.
(d) 
Represents annual retainer of $80,000.
(e) 
Represents annual retainer of $80,000 and an additional $120,000 for acting as the non-executive Chairman of the Board. Mr. Flury elected to have his annual retainer and his non-executive Chairman of the Board fees deferred pursuant to the terms of a Deferred Compensation Plan for non-employee directors, under which participants may elect to convert cash fees earned to phantom shares and defer the receipt of the proceeds in cash until separation from service as a director.
(f) 
Represents annual retainer of $80,000 and an additional $10,000 for acting as Chairman of the Strategic Planning and Reserves Committee.
(g) 
Represents annual retainer of $80,000 and an additional $20,000 for acting as Chairman of the Audit Committee.
(h) 
Represents annual retainer of $80,000 and an additional $10,000 for acting as Chairman of the Nominating and Corporate Governance Committee.
Director Independence
To minimize potential conflicts, it is a policy of the Board that a majority of the Board be independent. In accordance with the standards for companies listed on the NYSE and the rules and regulations promulgated by the SEC, as well as our Corporate Governance Guidelines, the Board considers a director to be independent if it has affirmatively determined that the director has no material relationship with the Company that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. The Board revisits the independence of each director on an annual basis and makes independence determinations when a newly appointed director joins the Board between annual meetings. The Board reviewed the independence of its directors and nominees in accordance with the standards described above and affirmatively determined that each of the directors (other than Mr. Gatto) and nominees is independent.


16      CALLON PETROLEUM


CORPORATE GOVERNANCE

Board Structure and Responsibilities
Governance Highlights
We are committed to effective and sustainable corporate governance, which we believe strengthens Board and management accountability, promotes the long-term interests of our shareholders, and helps build public trust in our Company. We adhere to our core values and governance principles to ensure that we operate our business responsibly, ethically, and in a manner aligned with the interests of our shareholders. Highlights of our commitment to strong corporate governance include the following:
Seven of our eight directors are independent. Joseph C. Gatto, Jr., our President and CEO, is the only non‑independent member of the Board.
All Board committees are comprised entirely of independent directors.
An independent, non-executive director serves as the Company’s Chairman of the Board.
The Company encourages a paced refreshment of the Board. Five of the eight directors have joined within the last five years.
Our Board includes a balance of experience, tenure, and qualifications in areas important to our business.
Election of directors by majority of votes cast in an uncontested election
We have an overboarding policy in place for directors.
Our Board conducts regular executive sessions with our independent directors.
We regularly refresh our governance documents.
Our Board and its committees conduct annual self-evaluations.
We have adopted stringent insider trading, anti-hedging, and anti-pledging policies.
We engage in active shareholder engagement practices.
Our Board oversees environmental, social and governance practices.
Our Board oversees succession planning for the CEO and executive officer positions.
We engage an independent executive compensation consultant that reports directly to the Compensation Committee.
The Company adopted Annual Say-On-Pay voting.
The Compensation Committee has implemented significant director and executive officer stock ownership guidelines.
We do not have employment agreements with any executive officers.
We have double-trigger change in control provisions in our severance agreements and equity awards.
We do not have a Poison Pill (Shareholder Rights Plan).
General Information
Our Board is responsible for determining the ultimate direction of our business strategy, overseeing our governance policies and culture and promoting the long-term interests of the Company. The Board possesses and exercises oversight authority over our business but, subject to our governing documents and applicable law, delegates day-to-day management of the Company to our CEO and senior management. The Board generally fulfills its responsibilities through regular meetings to review significant developments affecting the Company and to act on matters requiring Board approval. Between regularly scheduled meetings, the Board may also hold special meetings, execute written consents, and participate in telephonic conference calls when an important matter requires Board action. During 2018, our Board met formally six times and transacted business on twelve occasions during the year by unanimous written consent. All of our directors attended at least 75% of Board and committee meetings either in person or by telephone. In addition, to promote open discussion, the non-employee directors meet in executive session without management regularly. L. Richard Flury, the Chairman of the Board, was selected to preside over all executive sessions during 2018. It is the policy of the Board that, to the extent possible, all directors attend the Company’s Annual Meeting of shareholders.
The Board, in consultation with the Nominating and Governance Committee, has determined that a classified board structure continues to be appropriate for us, particularly in an industry where a long-term strategic planning outlook is critical for the successful development of oil and natural gas resources through commodity price cycles. Our future success depends in significant part on the in-depth knowledge of our business and operations by our directors. We believe that a classified board promotes stability, continuity and experience among our directors, which is essential to developing and implementing long-term strategies, while resisting the pressure to focus on short-term results at the expense of enhancing long-term value and success.


CALLON PETROLEUM      17


CORPORATE GOVERNANCE

Board Leadership Structure
One of the Board’s key responsibilities is determining the appropriate leadership structure for the Board, which helps ensure its effective and independent oversight of management on behalf of our shareholders. Our Board believes that there is no one generally accepted approach to providing board leadership and given the dynamic and competitive environment in which we operate, the optimal board leadership structure may vary as circumstances warrant. Accordingly, the Board has no policy mandating the separation or combination of the roles of Chairman of the Board and CEO, but periodically discusses and considers the structure as circumstances change. As such, the Board believes that it is in the best position to evaluate the needs of the Company and to determine how best to organize the Company’s leadership structure to meet those needs.
Currently, the Board has separated the roles of CEO and Chairman and appointed independent director Mr. Flury as Chairman of the Board and Mr. Gatto as CEO.
The Board is currently comprised of eight directors, of whom seven out of eight are independent. Mr. Gatto, the Company’s President and CEO, serves as an executive member of the Board. Independent directors and management generally have different perspectives and roles in strategy development. Our independent directors have backgrounds in the oil and gas industry or other relevant experiences which complement the CEO’s comprehensive, company-specific perspective. As the officer having primary responsibility for managing our daily operations and identifying strategic priorities, the CEO is best positioned to lead the Board through reviews of key business and strategy decisions. This dynamic effectively promotes the opportunity for a successful blend of our independent directors’ perspectives and oversight responsibilities and facilitates information flow and communication between senior management and the Board, which are both essential to effective governance.
The role of our Chairman is to oversee and ensure Board effectiveness. As Chairman, Mr. Flury has the following responsibilities:
Establishes Board meeting agendas and ensures critical issues are included.
Chairs meetings of the Board and the Annual Meeting of Shareholders.
Ensures that the flow of information provided to the Board is timely, complete, and accurate.
Communicates with all directors on key issues and concerns outside of Board meetings.
Assists the Board and executive officers in assuring compliance with and implementation of our governance principles.


18      CALLON PETROLEUM


CORPORATE GOVERNANCE

Areas of Board Oversight
Board Risk Oversight
As an independent oil and gas company, we face a number of risks. Assessing and managing material risk is the responsibility of our management team, while our Board, as a whole and through its committees, generally oversees risk management and our long-term strategic direction, ensuring that risks undertaken by the Company are consistent with the Board’s risk tolerance. Our Board leadership structure and our practice of a high degree of interaction between our directors and members of senior management facilitate this oversight function. Our executive officers regularly attend the Board meetings and are available to address any questions or concerns raised by the Board on risk management-related and any other matters. Other members of our management team periodically attend the Board meetings or are otherwise available to confer with the Board to the extent their expertise is required to address risk management matters. The information flow and communication throughout the year between our Board and senior management regarding long-term strategic planning and short-term operational reporting includes matters of material risk inherent in our business of developing oil and natural gas assets. The Board realizes, however, that it is not possible or prudent to eliminate all risk and that appropriate risk-taking is essential in order to achieve our near and longer-term objectives.
While the Board is ultimately responsible for risk oversight, the Board exercises additional risk oversight responsibilities through its committees, which are comprised solely of independent directors. Each such committee has primary risk oversight responsibility with respect to matters within the scope of its duties as contemplated by its charter and as described below.
Standing Committees of the Board of Directors
The Board has four stading committees, each of which is comprised entirely of independent directors. Each committee, discussed below in greater detail, has a written charter that establishes the responsibilities and scope of the committee and its Chairman. Each committee charter was reviewed in November 2018 and revised as deemed necessary by the Board.
 
BOARD OF DIRECTORS
 
 
 
 
 
The Audit Committee, among other duties, is charged with overseeing material risk exposures in the areas of financial reporting, internal controls, compliance, hedging and cybersecurity. This Committee also oversees responses to any alleged violations of our Code of Business Conduct.
 
 
The Nominating & Corporate Governance Committee focuses on issues relating to corporate governance and Board and Board committee composition. This Committee also assists the Board in fulfilling its oversight responsibilities with respect to succession planning for our directors and executive officers.
 
 
 
 
 
 
The Compensation Committee oversees the Company's compensation programs and the reviews the potential risks that may result from our compensation policies in order that they do not encourage unnecessary or excessive risk taking by management.
 
 
The Strategic Planning & Reserves Committee oversees the development and implementation of our strategic plan and the integrity of our reserve estimation reporting process and related disclosures.
 
 


CALLON PETROLEUM      19


CORPORATE GOVERNANCE

Committees of the Board
 
 
Callon Committees
Name, Age, Independence
Audit
Compensation
Nominating
& Corporate
Governance
Strategic
Planning &
Reserves
Class I Directors (term expires in 2019)
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Michael L. Finch, 63
Independent
 
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Larry D. McVay, 71
Independent
 
Class II Directors (term expires in 2020)
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Matthew R. Bob, 62
Independent
 
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Anthony J. Nocchiero, 68
Independent
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James M. Trimble, 70
Independent
 
Class III Directors (term expires in 2021)
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Barbara J. Faulkenberry, 59
Independent
 
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L. Richard Flury, 71
Independent Chairman of the Board
 
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Joseph C. Gatto, Jr., 48
President and Chief Executive Officer
 
 
 
 
Chairman  Member


20      CALLON PETROLEUM


CORPORATE GOVERNANCE

 
 
Audit Committee
Anthony J. Nocchiero (Chairman and Financial Expert)
Barbara J. Faulkenberry
Michael L. Finch (Financial Expert)
L. Richard Flury
Larry D. McVay
PURPOSE
The principal function of the Audit Committee is to assist the Board in overseeing the areas of financial reporting, accounting integrity, compliance, and risk management.
MEETINGS IN 2018
Five meetings; all members attended at least 75% of Committee meetings.
 
 
RESPONSIBILITIES
Pursuant to its charter, our Audit Committee functions in an oversight role and has the following purposes:
Overseeing the quality, integrity and reliability of the financial statements and other financial information we provide to any governmental body or the public;
Overseeing our compliance with legal and regulatory requirements;
Selecting and hiring (subject to ratification by our shareholders) the independent public accounting firm;
Overseeing the qualifications, independence and performance of the independent auditor;
Overseeing the effectiveness and performance of our internal audit function;
Overseeing our internal controls regarding finance, accounting, legal compliance and ethics;
Establishing and overseeing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or audit matters, including the confidential, anonymous submission of concerns regarding such matters;
Assessing matters related to risk, risk controls and compliance, including the review and approval of hedging practices and policies;
Overseeing matters related to cybersecurity and the security of information technology systems, including management’s plans, programs and policies designed to mitigate cybersecurity risks and third party reports on the information technology control environment;
Producing the Audit Committee Report for inclusion in our annual proxy statement; and
Performing such other functions our Board may assign to the Audit Committee from time to time.
The Audit Committee oversees our accounting and auditing procedures and financial reporting practices, and is responsible for the engagement of and oversight of all audit work conducted by our independent registered public accounting firm. The Audit Committee meets periodically, at least quarterly, with our executive and financial management teams, internal auditor and our independent registered public accounting firm to review our financial information and systems of internal controls. The independent registered public accounting firm reports directly to the Audit Committee and, if requested, meets with the Audit Committee in executive session without management representatives present. The Audit Committee has the authority to investigate any matters brought to its attention and to retain outside legal, accounting or other consultants if deemed necessary.
The Audit Committee is required to pre-approve all audit, audit-related and non-audit services provided by the independent registered public accounting firm exceeding $25,000. The Audit Committee approved all of the fees described in Proposal 3.
Relationship with Independent Registered Public Accounting Firm
Management is responsible for establishing and maintaining internal controls over financial reporting and for assessing the effectiveness of those controls. The independent registered public accounting firm is responsible for performing independent audits of our consolidated financial statements and internal controls over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (“PCAOB”) (United States) and issuing reports thereon. The Audit Committee’s responsibility is to monitor and oversee these processes. Grant Thornton LLP, an independent registered public accounting firm, has served as our independent registered public accounting firm since 2016.
INDEPENDENCE
The Board has determined that all members meet the independence requirements of the SEC and NYSE rules and the financial literacy requirements of the NYSE. Members of the Audit Committee may not simultaneously serve on the audit committee of more than two other public companies.


CALLON PETROLEUM      21


CORPORATE GOVERNANCE

 
 
Compensation Committee
Matthew R. Bob (Chairman)
Michael L. Finch
L. Richard Flury
Anthony J. Nocchiero
James M. Trimble
PURPOSE
The purpose of the Compensation Committee is to establish our compensation programs and oversee the alignment of our compensation with our business strategies.
MEETINGS IN 2018
Four meetings; all members attended at least 75% of Committee meetings.
 
 
RESPONSIBILITIES
Pursuant to its charter, the Compensation Committee’s duties include the responsibility to assist the Board in:
Evaluating the performance of and establishing the compensation of the CEO;
Establishing, with input from the CEO, the compensation for our other executive officers;
Establishing and reviewing our overall executive compensation philosophy and approve changes to our compensation program;
Reviewing incentive compensation arrangements to confirm that executive compensation does not encourage unnecessary risk taking;
Administering our long-term incentive plans;
Reviewing and approving the CD&A for inclusion in the annual proxy statement;
Reviewing and recommending to the Board compensation for non-employee directors;
Retaining and overseeing compensation consultants, including the independence of the consultants;
Reviewing and approving performance criteria and results for bonus and performance-based equity awards for executive officers and approve awards to those officers; and
Performing such other functions as our Board may assign to the Compensation Committee from time to time.
The Committee retained the services of Meridian Compensation Partners LLC, an independent compensation consulting firm, to assist in the annual review of market and industry data to assess our competitive position with respect to each element of total compensation and to assist with the attraction and retention of, and appropriate reward to, our CEO and other executive officers. Pursuant to applicable SEC and NYSE rules, the Committee has determined that no conflicts of interest exist related to Meridian’s engagement by the Committee.
INDEPENDENCE
Consistent with the listing requirements of the NYSE, the Compensation Committee is composed entirely of independent members of our Board, as each member meets the independence requirements set by the NYSE and applicable federal securities laws.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our Compensation Committee is presently or has been an officer or employee of the Company. In addition, during the last fiscal year, none of our executive officers served as a member of the board or the compensation committee (or other board committee performing similar functions or, in the absence of any such committee, the entire board) of any entity in which a Callon Board or Compensation Committee member is an executive officer.


22      CALLON PETROLEUM


CORPORATE GOVERNANCE

 
 
Nominating & Corporate
Governance Committee
James M. Trimble (Chairman)
Matthew R. Bob
Barbara J. Faulkenberry
Larry D. McVay
Anthony J. Nocchiero
PURPOSE
The purpose of the Nominating & Corporate Governance Committee is to identify and recommend qualified candidates to the Board for nomination as members of the Board; assess director, Board and committee effectiveness; develop and implement our Corporate Governance Guidelines; oversee succession planning for executive officers; and otherwise take a leadership role in shaping the corporate governance of our Company.
MEETINGS IN 2018
Five meetings; all members attended at least 75% of Committee meetings.
 
 
RESPONSIBILITIES
Pursuant to its charter, the Nominating & Corporate Governance Committee’s duties include the responsibility to assist the Board in:
Evaluating a set of specific criteria for Board membership and identifying individuals qualified to become Board members, recommending nominees for election at the next annual meeting of shareholders, reviewing the suitability for continued service as a director of each Board member, and filling any vacancies;
Assessing the size and composition of the Board and its committees and recommending to the Board the members and chair for each Board committee;
Advising the Board and making recommendations regarding appropriate corporate governance practices and assisting the Board in implementing those practices, including periodically reviewing the adequacy of our Corporate Governance Guidelines, our Code of Business Conduct and Ethics, and the various Board committee charters, and making recommendations for changes thereto to the Board;
Overseeing the annual self-evaluation of the performance of the Board and its committees;
Overseeing and approving plans for management continuity and succession;
Recommending to the Board a successor to the CEO when a vacancy occurs;
Reviewing directorships in other public companies held by or offered to directors or executive officers of the Company;
Overseeing continuing education for the Board; and
Performing other such functions as the Board may assign to the Nominating and Corporate Governance Committee from time to time.
INDEPENDENCE
Each member of the Committee meets the independence requirements of the NYSE and applicable federal securities laws.


CALLON PETROLEUM      23


CORPORATE GOVERNANCE

 
 
Strategic Planning &
Reserves Committee
Larry D. McVay (Chairman)
Matthew R. Bob
Michael L. Finch
L. Richard Flury
Anthony J. Nocchiero
James M. Trimble
Barbara J. Faulkenberry
PURPOSE
The purpose of the Strategic Planning & Reserves Committee is to manage and oversee the Board’s participation in the development of the Company’s strategic plan, and oversee the integrity of the determination of our oil and natural gas reserve estimates.
MEETINGS IN 2018
Five meetings; all members attended at least 75% of Committee meetings.
 
 
RESPONSIBILITIES
The Strategic Planning & Reserves Committee was created to oversee the responsibilities of the Board relating to strategic planning, including:
Overseeing the Board’s participation in the development of a strategic plan;
Monitoring management's implementation of the strategic plan, and advising the Board if additional Board action appears to be needed;
Assuring that management is addressing the personnel requirements for the successful implementation of the strategic plan;
Overseeing our reserve engineering reports and reserve engineering firm, including: (i) the integrity of our reserve reports, (ii) determinations regarding the qualifications and independence of our independent reserve engineering firm, (iii) the performance of our independent reserve engineering firm, and (iv) our compliance with certain legal and regulatory requirements relating to reserve reporting; and
Performing other such functions as the Board may assign to the Strategic Planning and Reserves Committee from time to time.
INDEPENDENCE
Each member of the Committee meets the independence requirements of the NYSE and applicable federal securities laws.


24      CALLON PETROLEUM


CORPORATE GOVERNANCE

Corporate Governance Matters
Corporate Governance Principles
The Board believes that sound corporate governance practices and policies provide an important framework to assist in fulfilling its duty to shareholders. The framework for our corporate governance can be found in our governance documents, which include:
Corporate Governance Guidelines;
Code of Business Conduct and Ethics; and
Charters for the Audit, Compensation, Nominating & Corporate Governance, and Strategic Planning & Reserves Committees.
In keeping with sound corporate governance practices, each of these documents is reviewed annually and is available on our website www.callon.com under the “About Callon - Governance” menu. Shareholders may obtain a printed copy, free of charge, by sending a written request to our Corporate Secretary at our principal executive office in Houston, Texas. Any amendments to these documents are promptly posted on our website.
Code of Business Conduct and Ethics
Our Code of Business Conduct and Ethics (the “Code”) sets forth the policies and expectations for Callon’s officers, employees and directors as well as consultants, representatives, agents, and contractors while acting on Callon’s behalf. The Code addresses a number of topics including conflicts of interest, compliance with laws, insider trading, prohibitions on discrimination and harassment, workplace safety and protection of the environment, and fair disclosure. In addition, the Code explicitly prohibits directors, officers and employees from engaging in hedging transactions in Callon stock. It also states that no corporate funds may be used for political contributions.
The Code meets the NYSE’s requirements for a code of business conduct and ethics and also includes a code of ethics applicable to our senior financial officers consistent with the requirements of the SEC. We intend to satisfy the disclosure requirements regarding any amendment to, or any waiver of, a provision of the Code by promptly posting such information on our website. Concerns about potential violations of the Code can be anonymously reported to our ethics hotline by calling 1-844-471-7637 or accessing the following website: callon.ethicspoint.com.
Environmental, Social and Governance
Callon’s mission is to build trust, create value and drive sustainable growth responsibly for our investors, our employees and the communities in which we operate. Consistent with this mission, the Board oversees the Company’s environmental, social and governance programs with a focus on a long-term, sustainable investments in our operations, team member development, and protecting the environment in the best interests of all of our stakeholders. The Board regularly addresses the Company’s efforts to continuously improve outcomes regarding workplace safety, environmental impact, team member diversity and workforce development. As described in more detail above beginning on page 17, the Board is also committed to effective and sustainable corporate governance, which we believe strengthens Board and management accountability, promotes the long-term interests of our shareholders, and helps build public trust in our Company.
Communication with Directors
Shareholders or other interested parties who wish to communicate with the full Board, independent directors as a group, or individual directors, may do so by sending a letter in care of the Corporate Secretary to our principal executive office located at 1401 Enclave Parkway, Suite 600, Houston, Texas 77077. Our Corporate Secretary has the authority to discard any solicitations, job inquiries, advertisements, surveys or other inappropriate communications, but will forward any other mail to the named director or group of directors. Our Corporate Secretary will forward approved mail addressed to the full Board to the Chairman of the Board who, if appropriate, will share the item with the full Board.


CALLON PETROLEUM      25


CORPORATE GOVERNANCE


Board Evaluations
The Nominating & Corporate Governance Committee, in consultation with the Chairman of the Board, annually leads the performance review of the Board and its Committees. The self-evaluation process seeks to obtain each director’s assessment of the effectiveness of the Board, the Committees and their leadership, Board and Committee composition and Board and management dynamics. In 2018, the Board self-evaluation process included a survey completed by each director about the Board and the Committees on which the director served. The Board Chairman also conducted interviews with each director for feedback and insights. The results were discussed by the full Board and within each Committee.
Director Education
The Company sponsors an ongoing director education program that assists Board members in fulfilling their responsibilities. Training commences with an orientation program when a new director joins the Board. Ongoing education is provided through written materials, presentations in Board meetings, and training outside the boardroom. All Callon directors are members of the National Association of Corporate Directors and are provided an annual training allowance to pursue relevant director education programs.


26      CALLON PETROLEUM


EXECUTIVE OFFICERS
Executive Officer Biographies
Joseph C. Gatto, Jr.
President, Chief Executive Officer and Director
Joseph C. Gatto, Jr. joined the Company in April 2012 as Senior Vice President, Corporate Finance, with responsibility for our capital markets and strategic planning functions, in addition to investor relations activities. Effective March 31, 2014, Mr. Gatto was appointed Chief Financial Officer and Treasurer of the Company and in August 2016 was promoted to President while retaining the roles of Chief Financial Officer and Treasurer. In May 2017 he was promoted to Chief Executive Officer while retaining the role as President. Mr. Gatto was elected as a member of the Board of Directors in May 2018. Prior to joining Callon, Mr. Gatto was a Managing Director in the energy investment banking groups of Merrill Lynch & Co. and Barclays Capital where he worked from July 1997 until February 2009, with involvement in all phases of M&A and capital raising transactions for his clients. In February 2009, he founded MarchWire Capital, LLC, a financial advisory and strategic consulting firm, and subsequently served as Head of Structuring and Execution with Merrill Lynch Commodities, Inc. from January 2010 until November 2011. Mr. Gatto graduated from Cornell University with a B.S. degree and The Wharton School of the University of Pennsylvania with an M.B.A.
James P. Ulm, II
Senior Vice President and Chief Financial Officer
James P. Ulm, II is the Senior Vice President and Chief Financial Officer for the Company. Prior to joining Callon in December 2017, Mr. Ulm was Founder and Managing Partner of NewVista Energy Partners, a private E&P company focused on emerging resource plays in the Permian and Anadarko Basins, from 2015–2017. Previously, he served as Senior Vice President and Chief Financial Officer for three private companies from 2008–2015 where he was responsible for financial and accounting management, capital formation, and corporate strategy. Prior to these roles, Mr. Ulm served from 1999–2008 as Senior Vice President and Chief Financial Officer for Pogo Producing Company, a publicly-traded oil and gas company which had meaningful operations in the Permian Basin. From 1995–1999, he was the Treasurer for Newfield Exploration Company. Earlier in his career, he held finance and accounting leadership roles with American Exploration Company and Tenneco Oil Company. Mr. Ulm has more than 30 years of experience in the energy industry with responsibilities including finance, accounting, strategic planning, M&A, business development and risk management. Mr. Ulm holds an M.B.A. and an undergraduate degree in Accounting, both from the University of Texas at Austin.
Jeffrey S. Balmer
Senior Vice President and Chief Operating Officer
Jeffrey S. Balmer has over 30 years of operations and subsurface leadership experience in the energy industry. His most recent role was Vice President and General Manager, Southern Operating Area, for Encana Corporation with responsibility for all of Encana’s upstream operations in the Permian Basin. After joining Encana in 2008, he held various leadership roles including Vice President and General Manager, Western Operating Area, managing operations in the Eagle Ford, DJ, San Juan, Piceance and Wind River Basins, and Vice President, Emerging Plays. Prior to joining Encana, Dr. Balmer served in a variety of technical and operations leadership roles, including positions with ConocoPhillips, Burlington Resources and ExxonMobil Corporation. He holds B.S. and Ph.D. degrees in Petroleum Engineering, in addition to an M.S. in Environmental and Planning Engineering, from Missouri University of Science and Technology (formerly University of Missouri – Rolla).


CALLON PETROLEUM      27


EXECUTIVE OFFICERS

Michol L. Ecklund
Senior Vice President, General Counsel and Corporate Secretary
Michol L. Ecklund is the Senior Vice President, General Counsel and Corporate Secretary for the Company. Prior to joining Callon in November 2017, Ms. Ecklund was Deputy General Counsel for Operations & Commercial Law at Marathon Oil Company where she oversaw the legal team for global operations and acquisitions and divestitures as well as corporate communications. During her 15 years at Marathon Oil, Ms. Ecklund served in progressive positions within and outside the Law Organization including compliance, litigation, human resources, investor relations, corporate communications and tax. Prior to Marathon Oil, she practiced law at Baker Botts LLP in Houston. Ms. Ecklund received a B.A. degree from Rice University and J.D. from Harvard Law School.
Correne S. Loeffler
Vice President, Finance and Treasurer
Correne S. Loeffler is the Vice President, Finance and Treasurer for the Company. Prior to joining Callon in April 2017, Ms. Loeffler served as an Executive Director with JPMorgan Securities, LLC where she spent ten years in the Corporate Client Banking Group. During her time at JPMorgan she served as Callon’s Relationship Manager beginning in 2013. Ms. Loeffler graduated with a B.A. degree from Indiana University and received her M.B.A. from the University of Texas at Austin.
Mitzi P. Conn
Vice President and Chief Accounting Officer
Mitzi P. Conn is the Vice President and Chief Accounting Officer for the Company. Prior to being appointed to that position in May 2007, she had served as Assistant Controller. Mrs. Conn has held various other positions in finance and accounting since she joined the Company in June 1993. Prior thereto, she was with Graham Resources, Inc. She received her B.S. degree in Accounting from Southeastern Louisiana University in 1990 and is a member of the American Institute of Certified Public Accountants and the Mississippi Society of Certified Public Accountants.
Jerry A. Weant
Vice President, Land
Jerry A. Weant is the Vice President of Land for the Company. Prior to joining Callon in September 2013, Mr. Weant held the position of Sr. Staff Landman at Pioneer Natural Resources USA, Inc. and served as a Land Liaison in Pioneer's corporate office for special projects involving water flood and horizontal drilling for Pioneer’s Permian operations. Mr. Weant also served as President of Trilogy Operating, Inc. prior to joining Pioneer. Mr. Weant received a BBA/PLM degree from the University of Texas at Austin in 1980 and has participated in the oil and gas business as a Landman since that time. Mr. Weant is an active member of the American Association of Professional Landman and Permian Basin Landman’s Association.
Mr. Weant has announced his intention to retire from the Company effective March 31, 2019.



28      CALLON PETROLEUM


PROPOSAL 2

 
 
 
Proposal 2
Approve, on an Advisory Basis,
the Compensation of the Company’s NEOs
callon2019proxyimage11a.jpg
The Board of Directors Recommends a vote FOR the compensation paid to the Company’s named executive officers, as disclosed in this Proxy Statement.
    Provides performance-based and market-aligned pay opportunities that are intended to foster motivation, engagement, and retention of key talent to drive Company performance and long-term shareholder value.
 
 
 
In accordance with the requirements of Section 14A of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the related rules of the SEC, we are including in this Proxy Statement a separate proposal, which gives our shareholders the opportunity to approve the compensation of our NEOs by voting “FOR” or “AGAINST” the resolution below (commonly referred to as “Say-on-Pay”) on an annual basis. While our Board and Compensation Committee intend to carefully consider the shareholder vote resulting from the proposal, the final vote will not be binding on us and is advisory in nature.
The Board recognizes that executive compensation is an important matter for our shareholders. The Compensation Committee is tasked with the implementation of our executive compensation philosophy and, as described in detail in the CD&A below, the design of our executive compensation programs. Our executive compensation program is designed to attract, motivate and retain a qualified executive management team and to appropriately reward our executive officers for their contributions to the achievement of our short-term and long-term business goals and the creation and enhancement of shareholder value.
As described in the CD&A, we believe our compensation program is effective, appropriate and aligned with the long-term interests of our shareholders and that the total compensation package provided to the NEOs is reasonable and not excessive. As you consider this Proposal 2, we urge you to read the CD&A for additional details on executive compensation. Further, in determining whether to approve this proposal, we believe that shareholders should also consider the following:
Independent Compensation Committee. Executive compensation is reviewed and established by a Compensation Committee of the Board consisting solely of independent directors. The Compensation Committee meets in executive session, without executive officers present, in determining annual compensation. The Compensation Committee receives data, analysis and input from a compensation consultant that is independent of management and free of conflicts of interest with us.
Performance-based incentive compensation. Our executive compensation program seeks to align executive compensation with shareholder value on an annual and long-term basis through a combination of base pay, annual incentives and long-term incentives. Please review the CD&A for more information on how our 2018 compensation was tied to results.
Long-term incentive plans. Our long-term incentive awards generally include three-year minimum vesting periods.
“Double trigger” severance agreements with fixed term. Change in control severance agreements with our executive officers require an actual or constructive termination of employment before benefits are paid following any change in control.
Stock ownership guidelines. Each of the NEOs has been granted equity to provide the officer a stake in our long-term success. The purpose of the ownership requirement is to further our goal of increasing shareholder value by aligning the interests of our NEOs with the interests of our shareholders.
Hedging policy. Our directors and executive officers are prohibited from entering into transactions in puts, calls and other derivative securities with respect to our securities and from engaging in short sales of our securities. We believe these activities are often perceived as involving insider trading and may focus the holder’s attention on our short-term performance rather than our long-term objectives.


CALLON PETROLEUM      29


PROPOSAL 2

In light of the above and as more fully described in the CD&A, we believe that the compensation of our NEOs for 2018 was appropriate and reasonable and that our compensation programs and practices are sound and in the best interests of the Company and our shareholders. We therefore respectfully request that shareholders vote on the following resolution:
“RESOLVED, that the compensation paid to Callon’s NEOs, as disclosed in Callon’s 2019 Proxy Statement (including the Compensation Discussion and Analysis, the compensation tables and related footnotes and narrative disclosures) is hereby approved.”
The vote on this resolution is not intended to address any specific element of compensation, but rather the overall compensation of our NEOs and our compensation-related policies and practices as described in this Proxy Statement. As noted above, the vote solicited by this proposal is advisory in nature and its outcome will not be binding on the Company, the Board or the Compensation Committee, nor will the outcome of the vote require the Board or the Compensation Committee to take any action. The outcome of the vote will not be construed as overruling any decision of the Board or the Compensation Committee or creating or implying any additional fiduciary duty of the Board or the Compensation Committee. However, the Board and the Compensation Committee will carefully consider the outcome of the vote when considering future executive compensation arrangements. For a review of the results of the previous year's vote, which reflects overwhelming validation from our shareholders of our pay philosophy and approach, please see the “Role of Shareholder Say-on-Pay Advisory Vote” on page 35.
Notwithstanding the advisory nature of this vote, the foregoing resolution will be deemed approved with the affirmative vote of the majority of the votes present and entitled to vote on the proposal at the Annual Meeting. If you hold your shares through a broker and you do not instruct the broker how to vote, your broker will not have the authority to vote your shares. Abstentions will have the effect as a vote cast against the proposal. Broker non-votes will not be counted as shares present and entitled to vote, and so will have no effect upon the outcome of the vote.
 
The Board recommends a vote FOR the compensation paid to the Company’s named executives.
 



30      CALLON PETROLEUM


EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Oversight of Executive Compensation Program
The Compensation Committee (referred to in this section as the “Committee”) appointed by our Board, assists the Board in performing its fiduciary responsibilities relating to the compensation of our CEO and other executive officers. The Committee, which is composed entirely of independent directors, is primarily responsible for establishing, implementing and monitoring our executive compensation programs, including those applicable to our named executive officers (“NEOs”). The following compensation discussion and analysis (“CD&A”) describes the actions taken by the Committee in 2018 related to our executive compensation programs.
The Committee meets several times a year to review our executive compensation programs, approve compensation levels, consider performance targets, review management performance and administer our annual and long-term incentive (“LTI”) compensation plans. The Committee operates in accordance with its charter, as revised and approved in November 2018, which sets forth the Committee’s authority and responsibilities.
Our NEOs include the individuals who served as Chief Executive Officer and Chief Financial Officer during 2018 and the three other most highly compensated executive officers for the calendar year. The list also includes our former Senior Vice President and Chief Operating Officer, Gary A. Newberry, who transitioned from the role effective December 10, 2018. Our NEOs for 2018 were:
NEO
Age
Title
Joseph C. Gatto, Jr.
48
President, Chief Executive Officer and Director
James P. Ulm, II
56
Senior Vice President and Chief Financial Officer
Michol L. Ecklund
44
Senior Vice President, General Counsel and Corporate Secretary
Correne S. Loeffler
42
Vice President – Finance and Treasurer
Mitzi P. Conn
50
Vice President and Chief Accounting Officer
Gary A. Newberry
64
Former Senior Vice President and Chief Operating Officer


CALLON PETROLEUM      31


EXECUTIVE COMPENSATION

2018 Performance Highlights
2018 was a year of significant progress in the maturity of Callon’s Permian operations as we continued to grow margins, production and reserves while transitioning to scaled development of our high quality asset base. . The Company also added over 30,000 highly complementary net surface acres to our Delaware Basin operating area that promote efficiencies through increased scale, longer laterals and integration of infrastructure. Key operational and financial highlights include:
 
    Increased daily production approximately 44% year-over-year to 32,900 barrels of oil equivalent ("Boe") per day in 2018, with a sustained oil content of 79%.
    Increased estimated net proved reserves by nearly 74% year-over-year to 238.5 million barrels of oil equivalent (“MMBoe”), which replaced 690% of 2018 production.
    Achieved a “drill bit” finding and development (“F&D”) cost(i) of $7.03 per Boe and provided developed finding and development cost(i) of $13.40 per Boe.
    Generated operating margins of $40.16 per Boe, among the highest within the industry.
    Decreased lease operating expense (“LOE”) per Boe by 3% versus 2017, representing the fifth consecutive year of cost reduction.
    Realized net income of $300.4 million and generated Adjusted EBITDA(i) of $432.5 million relative to cash drilling and completion capital expenditures of $403.5 million.
    Completed the acquisition of 34,523 net working interest acres and 1,530 net mineral acres and traded 4,420 net acres to further longer-lateral development.
    Divested 3,540 net acres as part of ongoing asset rationalization initiatives.
    Expanded our dual-basin recycling program that utilized 4.2 million barrels of produced water, significantly reducing freshwater needs and our environmental footprint.
    Improved safety and environmental performance including reductions of over 40% for recordable incident rates and spills to the environment.
    Increased liquidity by expanding the borrowing base to $1.1 billion with an elected commitment of $850 million.
    Issued $400MM of Senior Notes at an effective yield of 6.4%, contributing to an improved cost of capital.
(i) 
See Appendix A for a reconciliation of Non-GAAP financial measures
Recent Management Changes
Gary A. Newberry transitioned from the role of Senior Vice President and Chief Operating Officer effective December 10, 2018, and retired from the Company effective January 31, 2019. Effective December 10, 2018, Jeffrey S. Balmer became the Company’s Senior Vice President and Chief Operating Officer. To see Dr. Balmer’s biography, please see “Executive Officer Biographies” on page 27.
Jerry A. Weant, Vice President, Land, has announced his intention to retire from the Company effective March 31, 2019.


32      CALLON PETROLEUM


EXECUTIVE COMPENSATION

Key Committee Actions for 2018
The Committee took the following key actions in 2018:
Performance Based
    Established new performance metrics for the annual bonus program to better align with shareholder priorities of cash flow and capital efficiency.
    Granted performance-based and time-based LTI awards to provide retention incentives and to further align management’s interests with shareholder value creation.
Market Based
    Assessed salaries and total compensation relative to competitive data and each officer’s scope of responsibility and performance, and made adjustments where appropriate.
    Re-evaluated our peer group used to measure relative performance for our LTI awards and the competitiveness of executive compensation due to the Company’s growth and changes in the industry.
Additionally the Committee approved certain changes to the Company's change in control severance agreements to align with market practices and increase consistency across the Company’s compensation arrangements.
Compensation Program Governance Highlights
We believe our compensation programs incorporate many sound practices, including the following:
iconcheckmark.jpg
What We Do
 
iconcrossmark.jpg
What We Don’t Do
 
 
 
    Substantial focus on performance-based pay
    Balance of short- and long-term incentives
    Align executive compensation with shareholder returns through substantial weighting on long-term incentives
    Retain an independent external compensation consultant
    Review of peer group benchmarks when establishing compensation
    Substantial stock ownership guidelines for our NEOs and directors
    Double-trigger change in control severance for both cash severance and equity vesting
    Annual assessment of compensation programs intended to ensure avoidance of excessive risk taking
 
    NO hedging or pledging of our stock
    NO employment agreements
    NO excessive benefits or perquisites
    NO single trigger change in control benefits
Executive Compensation Components and Philosophy
Our pay-for-performance philosophy is demonstrated in the mix of compensation that we provide to our NEOs. The Committee designs our compensation program to maintain a balance between rewarding the achievement of annual performance objectives and the long-term objective of aligning the interests of our executives with those of our shareholders. Accordingly, a significant portion of our NEOs’ compensation in 2018 was in the form of annual cash incentives and long-term incentives. Our executive compensation program is designed to do the following:
Reward the management team for delivering results against its strategic objectives, thereby creating value for the shareholders;
Emphasize pay for performance, in which Company and individual performance substantially influence the amount realized by an NEO;
Attract and retain a qualified and motivated management team by offering industry competitive opportunities;
Hold NEOs accountable and appropriately reward them for their contributions to the achievement of our key short-term and long-term strategic objectives through the use of variable compensation; and
Align the compensation of our NEOs with the long-term interests of our shareholders by weighting the programs toward at-risk, performance-based compensation, consisting of an objective-driven annual incentive program, stock grants with three-year vesting, and TSR-contingent incentive awards.


CALLON PETROLEUM      33


EXECUTIVE COMPENSATION

The Committee believes that this approach compensates our NEOs in a manner that fairly and reasonably provides incentives for the enhancement of shareholder value, the successful implementation of our business plan, and continuous improvement in corporate and personal performance. In order to compete in our industry, the Committee believes that our NEOs’ compensation should include the following components:
BASE SALARY
 
Purpose
Philosophy
    Pay for expertise and experience;
    Attract and retain talented executives;
    Provide compensation stability; and
    Compete with comparable companies.
    Fixed component of compensation reflective of individual skills, experience and expertise necessary to execute our business strategy; and
    Competitive with similarly sized peers.
ANNUAL CASH BONUS INCENTIVE
 
Purpose
Philosophy
    Motivate our executive officers to achieve our short-term business objectives that drive long-term performance;
    Reward achievement of financial, operating, and strategic goals for which NEOs are held accountable; and
    Promote and encourage pay-for-performance.
    At-risk component of compensation, with modest or no reward for performance below expectations and potential for increased reward for exceptional performance;
    Goals aligned with our annual business plan and performance targets;
    Provide balance in compensation programs and avoid encouraging undue risk-taking; and
    Competitive with similarly-sized peers.
LONG-TERM INCENTIVE (LTI) AWARDS
Purpose
Philosophy
    Motivate and reward long-term achievement of business objectives, aligning the interests of our NEOs with shareholders;
    Provide competitive pay to attract and retain NEOs; and
    Provide a mix of LTI awards that focuses NEOs on creating long-term value while avoiding undue risk-taking.
    Ensures that realized value to NEOs aligns with value delivered to shareholders;
    Recognizes and rewards share price performance relative to industry peers;
    At-risk component of compensation that aligns with sustained long-term value creation; and
    Allows NEOs to acquire a meaningful and sustained ownership stake in the Company.
OTHER (RETIREMENT; HEALTH BENEFITS; CHANGE IN CONTROL SEVERANCE)
Purpose
Philosophy
    Provide financial security for the NEOs and their families;
    Provide competitive benefits to attract and retain NEOs; and
    Ensure NEOs consider all possible transactions to increase shareholder value related to changes in control of the Company.
    Attracts and retains NEOs with a comprehensive benefits package;
    Provides financial security and maximizes the efficiency of tax-advantaged compensation vehicles; and
    Ensures NEOs act in the best interests of the shareholders in a change in control.


34      CALLON PETROLEUM


EXECUTIVE COMPENSATION

Role of Shareholder Say-on-Pay Advisory Vote
We have historically received strong support from our shareholders for our executive compensation practices. In the advisory vote held at the 2018 Annual Meeting, approximately 96% of the votes cast were in favor of our 2017 executive compensation programs. The Committee acknowledged the support received from our shareholders and viewed the results as an affirmation of our existing executive compensation policies and programs. Accordingly, based on the Committee’s analysis of this support, it generally maintained our executive compensation policies for 2018 and into 2019. However, based on feedback received during shareholder engagement, the Committee modified the 2019 annual bonus to include a performance-based, formulaic assessment component as described below. The Committee will continue to review shareholder votes and conduct shareholder engagement on our executive compensation programs to ensure alignment with shareholder interests.
Role of Independent Compensation Consultant
For 2018, the Committee continued its engagement of Meridian Compensation Partners, LLC (“Meridian” or the “Consultant”) as its independent compensation consultant to provide information and objective advice regarding executive officer and director compensation. The Committee retained Meridian because of its extensive familiarity with executive compensation programs in our industry. Importantly, the Committee makes all of the decisions with respect to our executive compensation, and in setting compensation for our NEOs, considers Meridian's advice as only one factor among many other factors discussed within this CD&A. Other factors include our overall performance; individual NEO performance, experience, skills and tenure with the Company; and industry trends.
Meridian reports solely to the Committee, and the Committee determines the scope of Meridian’s engagement. In an effort to ensure that our NEO compensation programs are competitive and consistent with our compensation philosophy, Meridian assisted the Committee as follows:
Regularly attending meetings of the Compensation Committee and meeting privately in executive session with the Compensation Committee to discuss its recommendations;
Providing recommendations on executive compensation matters to align the Committee’s actions with shareholder interests, our business strategy and pay philosophy, prevailing market practices and relevant legal and regulatory requirements;
Periodically evaluating the peer group and providing peer company data for the Committee to use in its decision-making process, including assessment of pay and performance relative to peers;
Providing competitive market data to consider in evaluating the competitiveness of the executive base salaries and short and long-term incentive plans and awards;
Reviewing data in connection with the Committee’s determination of annual cash incentive performance objectives and performance-based incentive vesting levels for completed performance periods;
Advising on the Company’s compensation arrangements for its non-employee directors, including providing peer group data;
Reviewing and providing feedback on our SEC filings relating to executive compensation disclosures, including our CD&A disclosures; and
Informing the Committee about compensation trends in the industry, best practices and other general trends and developments affecting executive compensation.
The Committee did not direct Meridian to perform its services in any particular manner or under any particular method. The Committee has the final authority to hire and terminate Meridian, and the Committee evaluates Meridian annually. Pursuant to applicable SEC and NYSE rules, the Committee has determined that no conflicts of interest exist related to Meridian’s engagement by the Committee. The Committee has retained Meridian as its consultant on NEO and director compensation for 2019.
From time to time, Meridian contacts our NEOs for information needed to fulfill the objectives established by the Committee. However, the Committee established procedures that it considers adequate to ensure that Meridian’s advice to the Committee remains objective and is not influenced by our NEOs or other management.


CALLON PETROLEUM      35


EXECUTIVE COMPENSATION

Role of Management
The Committee considers input from our CEO in making determinations regarding our executive compensation program and the individual compensation of each of his direct reports and other select officers of Callon. The officer team makes recommendations to the Committee regarding potential objectives for the annual cash bonus incentive program and provides information to the Committee regarding the performance of the Company for the Committee’s determination of annual cash bonuses. The Committee makes the final determination of all elements of NEO compensation. Our CEO makes no recommendations regarding, and does not participate in discussions about, his own compensation.
Role of Market Data
The Compensation Committee of the Board strives to ensure that our executives are compensated in a manner that is fair, equitable, performance-based and guided by the long-term interests of investors. In order to attract, motivate and retain talented executive officers, the Committee must also ensure that our executive compensation program remains competitive with the types and ranges of compensation paid by our peer companies who compete for the same executive talent. On an annual basis, the Committee reviews and discusses compensation data for our CEO and other executive officers as compared with compensation data for similarly situated executive officers at peer companies recommended by Meridian and approved by the Committee.
The Committee engages Meridian to conduct annual assessments of our industry peer group (“Peer Group”) in order to ensure each peer remains appropriate year-over-year. The Peer Group is selected based on multiple factors, such as:
Size, including enterprise value and market capitalization;
Similar geographic footprint and operational focus, particularly in the Permian Basin;
Comparability of asset portfolio; and
Availability of compensation data.
The Committee believes this Peer Group provides a reasonable point of reference for comparing the compensation of our executive officers to others holding similar positions and having similar responsibilities. The Committee considers Peer Group data relevant to, but not determinative of, the Committee’s consideration of overall executive compensation matters.
The Peer Group used by the Committee in evaluating the competitiveness of executive compensation and making 2018 compensation decisions consisted of the companies in the first column of the following table. The Committee also reviewed data from proprietary E&P benchmarking surveys provided by Meridian for additional market perspective and to validate the Peer Group data.
Due to industry volatility and merger activity, the Committee re-evaluated the Peer Group in preparation for making the May 2018 grants of long-term incentives, resulting in the Peer Group in the second column of the following table. The changes reflect recent transactions in the peer group and better align the Peer Group based on size, geography and ownership. The Committee also revisits the Peer Group as needed to reflect business combinations among peer companies. This Peer Group is being used to measure the Company's relative total shareholder return (“TSR”) performance for the May 2018 grant of PSUs and to evaluate the competitiveness of executive compensation beginning in May 2018.
Initial 2018 Peer Group
New 2018 Peer Group
    Carrizo Oil & Gas, Inc.
    EP Energy Corporation
    HighPoint Resources Corporation
    Laredo Petroleum, Inc.
    Matador Resources, Inc.
    Parsley Energy, Inc.
    PDC Energy, Inc.
    QEP Resources, Inc.
    RSP Permian, Inc.
    SM Energy Company
    SRC Energy, Inc.
    Carrizo Oil & Gas, Inc.
    Centennial Resource Development, Inc. (New)
    Jagged Peak Energy, Inc. (New)
    HighPoint Resources Corporation
    Laredo Petroleum, Inc.
    Matador Resources, Inc.
    Oasis Petroleum, Inc. (New)
    Parsley Energy, Inc.
    PDC Energy, Inc.
    QEP Resources, Inc.
    SM Energy Company
    SRC Energy Inc.


36      CALLON PETROLEUM


EXECUTIVE COMPENSATION

The Committee understands the inherent limitations in using any peer group or data set including fluctuations in survey participation and competition for executive talent by companies potentially much larger than Callon. Accordingly, the Committee does not consider data collected from any of these sources to be prescriptive. Rather, the Committee relies upon this and similar data as reference points around which to make informed decisions about the appropriate level and form of compensation for each NEO.
Risk Assessment Related to Our Compensation Structure
The Committee believes our compensation plans and policies are appropriately structured to encourage and reward prudent business judgment and avoid excessive risk-taking. The Committee, with the assistance of Meridian, reviewed the compensation programs maintained by the Company during 2018 to determine whether they encouraged excessive risk taking. Upon evaluation of the assessment, the Committee concluded that our compensation policies and practices for our employees do not present risks that are reasonably likely to have a material adverse effect on the Company. The Committee’s risk review identified the following risk mitigating features of our compensation programs:
A balance of short-term and long-term programs to focus management on both elements of Callon’s performance;
Annual grants of long-term incentives designed to be the largest component of each NEO’s compensation package, with typical vesting periods of three years that are based on the value of our common stock and not on any particular metric that could encourage excessive risk-taking;
Performance criteria and targets for our annual bonus program designed to encourage performance, but not excessive risk taking, and discretion to decrease payouts if it is believed management exercised excessive risk taking;
Performance targets measured at the corporate level, rather than at the individual or business unit level;
Reasonable change in control severance protections; and
Significant executive stock ownership requirements.
Determination of Each Element of Compensation
Base Salaries
We provide all of our employees, including the NEOs, with an annual base salary to compensate them for their services throughout the year. Our Committee recognizes that a substantial amount of competition exists in the oil and gas industry for attracting and retaining qualified management teams, particularly in the Permian Basin. Accordingly, the Committee evaluates our NEOs’ salaries together with other components of their compensation to ensure that the NEOs’ total compensation is competitive relative to market practices in our Peer Group and our industry in general and is consistent with the Committee’s compensation philosophy.
Annually, generally in the first quarter of each year, the Committee reviews the base salaries of our NEOs. Individual salary amounts reflect the Committee’s subjective analysis of a number of factors, including:
Individual officer’s experience, skills, contributions and tenure with Callon;
Changes to the individual’s position within Callon;
Trends in compensation practices within our Peer Group and industry; and
The NEO’s roles, responsibilities and expected future contributions to Callon’s success.
In addition, the Committee also considers the input and recommendations of Meridian regarding base salaries, as well as the input of the CEO, when evaluating base salaries for the other NEOs.
After considering the market analysis and advice of Meridian, at its March 2018 meeting, the Committee increased Mr. Gatto’s salary from $575,000 to $700,000 to reflect the growth and performance of the Company and his continued development in the CEO role. This increase brought Mr. Gatto's salary closer to a competitive level relative to peers.


CALLON PETROLEUM      37


EXECUTIVE COMPENSATION

Performance-Based Annual Cash Bonus Incentive
A core component of our NEO compensation philosophy is to emphasize pay-for-performance by structuring a significant portion of total annual compensation as “at risk.” Each year, the Compensation Committee establishes an annual performance bonus program, which is designed to promote the achievement of annual financial, operating and strategic goals that are aligned with the creation of shareholder value. Performance is judged at the end of the year, or shortly thereafter, based on evaluation of performance against these specified objectives and the Committee's views of corporate and individual performance.
To motivate employees to pursue our annual business goals in a way most beneficial to our shareholders, NEOs, senior management and other non-management technical personnel have the potential to receive a significant portion of their annual cash compensation as a bonus. The Committee set 2018 annual bonus award opportunities for each NEO as a percentage of the NEO’s annual base salary as follows:
NEO
Target Bonus Opportunity
(% of Base Salary)
Joseph C. Gatto, Jr.
100%
Gary A. Newberry
100%
James P. Ulm, II
90%
Other NEOs
60% - 70%
For purposes of evaluating performance, the Committee, in collaboration with management and Meridian, oversees a rigorous process to set performance objectives for the annual bonus program that reflects shareholder and corporate priorities for the upcoming year and provides appropriate incentives for meeting or exceeding our annual corporate plan.
To better align our executive compensation with shareholder priorities including a focus on cash flow and capital efficiency, the Committee modified the performance metrics for the annual bonus program during the first quarter of 2018. The Committee established both quantitative objectives, which measure operational and financial performance, and qualitative objectives, which evaluate progress on safety and environmental performance and key strategic initiatives. The objectives for 2018 and the Committee’s assessment of performance against each are set forth below:
 QUANTITATIVE OBJECTIVES
Objective
Description
Target
Actual
 
Assessment
(LOE + Cash G&A)/BOE
Measure of critical cash margin components influenced by management.
$8.60
$8.29
(i)
Exceeded Target
Production Growth
Key component in our ability to convert assets into shareholder value and deliver returns on capital investment.
31,000 (77% oil)
31,091 (78% oil)
(i)
Exceeded Target
Proved Developed F&D/BOE(ii)
Measure of capital efficiency for annual proved developed reserve additions that captures well costs and well productivity.
$15.50
$13.40
(i)
Exceeded Target
Cash Flow Growth per Debt-Adjusted Share
Measure of quality of growth reflecting cash margins, outstanding debt, and share price
30%
36%
(iii)
Exceeded Target
Net Debt/EBITDA
Measure of our ability to cover our debt which ensures focus on a strong balance sheet.
2.4x
2.4x
(iv)
Met Target
(i) 
Excludes effects of the Delaware Basin Acquisition which closed August 31, 2018.
(ii) 
PD F&D/BOE reflects all operational capital including exploration, development and facilities capital. See Appendix A for a reconciliation of Non-GAAP financial measures.
(iii) 
Pro-forma for Delaware Basin Acquisition and related financings as of September 1, 2018. Calculated using discretionary cash flow (excluding working capital) and CPE average 2018 stock price of $11.23.
(iv) 
Net Debt to LTM Adjusted EBITDA is calculated as the sum of total long-term debt less unrestricted cash and cash equivalents, divided by the Company’s Adjusted EBITDA inclusive of annualized pro-forma results from its acquisitions completed over the last twelve month period. See Appendix A for a reconciliation of Non-GAAP financial measures.


38      CALLON PETROLEUM


EXECUTIVE COMPENSATION

 QUALITATIVE OBJECTIVES
Objective
Assessment and Commentary
Improve Health, Safety & Environmental Performance
Exceeded Target. The Company made meaningful improvements in HES performance in 2018, including improvements of 40% or more in recordable incident rates, proactive safety observations, spill occurrences and spill volumes, while supporting increased production and activity levels.
Enhance Talent and Organizational Developmental Activities
Exceeded Target. The management team added and integrated critical skill sets in subsurface technology, IT, supply chain, risk management and other disciplines. The Company also established an enhanced talent readiness initiative to support employee development.
Strategic Initiatives
Exceeded Target. The Company advanced its longer-term resource capture model through the refinement of larger pad development concepts, completion designs and landing zones.  We also acquired an additional 35,000 net surface acres at competitive prices as strategic “bolt on” assets complementary to our existing footprint.  Management also enhanced financial flexibility through capital markets transactions and an increase in the borrowing base to $1.1B with an elected commitment of $850 million.
The Committee evaluated the NEOs’ performance against the 2018 performance criteria described above and determined that overall the management team exceeded the qualitative and quantitative objectives for the year and did so significantly in several areas. Based on the results set forth above and relevant market survey data, the Committee determined actual bonus amounts paid for 2018 performance at approximately 140% of target, as follows:
NEO
2018 Annual Bonus
Joseph C. Gatto, Jr.
$980,000
James P. Ulm, II
$585,900
Michol L. Ecklund
$343,000
Correne S. Loeffler
$259,700
Mitzi P. Conn
$240,100
Gary A. Newberry
$665,000
2019 Annual Cash Bonus Program
In March 2019, the Committee established the annual bonus program for 2019 to include a performance-based formulaic assessment for 60% of the bonus and a discretionary assessment linked to qualitative strategic objectives for 40% of the bonus. Under the program, each officer’s bonus is capped at 200% of target. The formulaic portion of the bonus is designed to align executive officers’ interests with shareholder priorities of corporate returns on capital and progress towards free cash flow generation and is based on achievement of defined performance levels and weightings related to:
Quantitative Objective
Weighting
Oil Production
10%
(LOE + Cash G&A)/BOE
12.5%
Proved Developed F&D/BOE
10%
Net Debt/EBITDA
15%
Cash Return on Cash Invested
12.5%
The Committee also established strategic qualitative objectives for the 2019 annual cash bonus program related to the following:
Health, safety and environmental performance
Organizational and talent development
Advancement of "life of field" development plans and associated well productivity initiatives
Other strategic initiatives, including selective divestitures of non-core assets to reduce capital intensity.
Collectively, these qualitative factors will carry a weighting of 40% in the bonus calculation for 2019.


CALLON PETROLEUM      39


EXECUTIVE COMPENSATION

Annual Award of Long-Term Incentives
We believe that a long-term incentive program that includes awards of both restricted stock units (“RSUs”) and performance stock units (“PSUs”) provides appropriate retention incentives and effectively aligns our executive officers’ interests with the interests of our shareholders on a long-term basis. Our PSUs have a performance-based component that compares our total shareholder return ("TSR") with that of the Peer Group over a defined performance period. We believe this combination of LTI awards provides appropriate incentives that capture absolute performance of our common stock as well as comparative returns relative to other oil and gas companies. The Committee believes that granting LTI awards is an effective means to provide substantial forward-looking incentives to our executive officers that emphasize:
Long-term value creation by linking compensation with long-term operational success;
Alignment of the long-term interests of our executive officers with those of our shareholders by directly linking rewards to shareholder return;
Retention incentives for our executive officers; and
Meaningful equity participation by our executive officers.
The Committee administers our long-term incentive programs, approves award recipients and amounts, and determines the vesting and performance criteria. For the grant of LTI compensation to executive officers, the Committee will typically consider market information provided by Meridian related to the program design and award amounts. We have no program, plan or obligation that requires us to grant LTI compensation on specified dates.
For the 2018 LTI grants, the Committee approved a 40%/60% mix for our executive officers of time-based RSUs and performance based awards tied to relative TSR, respectively. The performance awards are granted as PSUs that settle 50% in cash and 50% in stock. The following table sets forth the number of RSUs and PSUs awarded to the executive officers at our normal annual grant in May 2018:
NEO
Total Value
$
RSUs Payable in
Common Stock
(a)
PSUs Payable in
50% Stock and 50% cash
(b)
Joseph C. Gatto, Jr.
$3,899,990
110,169
165,254
James P. Ulm, II(c)
$1,062,000
75,000
Michol L. Ecklund
$700,000
19,773
29,662
Correne S. Loeffler
$357,993
10,112
15,170
Mitzi P. Conn
$330,990
9,349
14,026
Gary A. Newberry
$2,099,999
59,321
88,984
(a) 
Amounts represent RSUs that are subject to three-year ratable vesting with one-third vesting each year subsequent to the award year. The first tranche will vest on June 1, 2019; the second on June 1, 2020; and the third on June 1, 2021 and each tranche will settle in Company common stock on the vesting date.
(b) 
Amounts represent PSUs that are scheduled to vest on December 31, 2020 and settled in 50% Company common stock and 50% cash at a variable rate between 0% and 200% based on our TSR when compared to pre-determined peer companies.
(c) 
Mr. Ulm was awarded a hire-on grant of RSUs upon joining the Company in December 2017 in lieu of an annual grant in May 2018.
RSU program
In 2018, the Committee awarded NEOs with time-based RSUs that will vest in one-third increments annually beginning June 1, 2019, provided the executive officer continues to be employed on the vesting dates, and will be paid in shares of the Company’s common stock.


40      CALLON PETROLEUM


EXECUTIVE COMPENSATION

PSU program
In 2018, the Committee awarded PSUs to the NEOs that will vest at the end of the 32-month performance period based on the Company’s TSR ranking relative to the "New 2018 Peer Group" listed on page 36. TSR is the change in the common stock price plus dividends over the defined performance period using a 20-day average at the beginning and end of the performance period. The Committee believes relative TSR is an appropriate long-term performance metric because it provides a strong alignment of the interests of management and the Company’s shareholders. The Committee also believes that the PSU program provides a good balance to the restricted stock unit program. PSUs are eligible for vesting if the employee continues to be employed until the vesting date on December 31, 2020. PSUs will vest at the percentage set forth below based on the Company’s relative TSR ranking for the performance period. Vesting will be interpolated for percentile ranks between the percentiles described:
Callon’s TSR Percentile Rank Among the Peer Companies
PSUs Vesting as a Percentage of Target

>=90th Percentile
200
%
70th Percentile
150
%
50th Percentile
100
%
30th Percentile
50
%
<30th Percentile
0
%
If the Company's TSR is negative during the performance period the payout will be capped at 100% of target. The vested PSUs will pay out 50% in cash and 50% in shares of the Company's common stock.
Vesting of 2016-2018 Performance Awards
In May 2016, our Compensation Committee granted PSUs to the executive officers that vested on December 31, 2018. Under the provisions of these awards, the awards were subject to our relative TSR performance compared with the TSR of the peer companies specified in the award agreement. The Company's TSR during the performance period ranked fifth relative to the 13 peer companies, resulting in vesting of 142% of the target PSUs awarded. Vested units were paid 50% in cash and 50% in Company common stock.
The table below summarizes the PSUs earned by the executive officers for the 2016-2018 performance period:
NEO
Target Number
of PSUs
Percent of Target
PSUs Earned
Actual Vested PSUs
(Settled 50% Cash and 50% Shares)
Joseph C. Gatto, Jr.
65,100
142%
92,442
James P. Ulm, II(a)
Michol L. Ecklund(a)
Correne S. Loeffler(a)
Mitzi P. Conn
17,902
142%
25,420
Gary A. Newberry
65,100
142%
92,442
(a) 
Executive was not employed by the Company in May 2016 when award was granted.
Other Compensation
Perquisites and Other Benefits
Benefits represent a relatively small part of our overall compensation package; however, these benefits help attract and retain senior level executives. We review these benefits annually to ensure that they are competitive with industry norms. We provide benefits commonly offered in the oil and gas E&P industry to all of our employees. These benefits consist of:
Group medical and dental insurance program for employees and their qualified dependents;
Group life insurance for employees and their spouses;
Accidental death and dismemberment coverage for employees;
Long-term disability coverage;
Callon's sponsored cafeteria plan; and
401(k) employee savings and protection plan.


CALLON PETROLEUM      41


EXECUTIVE COMPENSATION

We pay the full costs of these benefits, including the 401(k) plan administration, for all employees. Employee life insurance amounts that surpass the Internal Revenue Service maximum are treated as additional compensation to all employees.
Under our 401(k) plan, employees may elect to defer a portion of their compensation up to the statutorily prescribed limit. The Company provides contributions for qualified employees, including NEOs, of 5% of the employee’s IRS eligible salary. We also match employee deferral amounts, including amounts deferred by NEOs, up to a maximum of 5% of IRS eligible salary.
Our NEOs are entitled to certain benefits, or perquisites, that are not otherwise available to all of our employees. We provide our executive officers with use of a Company automobile. We purchase the automobile and pay for all maintenance, repairs, insurance and fuel. The employee is required to recognize taxable income using the Internal Revenue Service’s annual lease value method for personal use of the vehicle. The costs associated with these benefits for the NEOs are reported as “Other Compensation” in the Summary Compensation Table. The Committee believes these perquisites are modest, yet competitive with the perquisites provided to similarly situated oil and gas industry executives.
Change in Control Severance Protection
We have no employment agreements with our executive officers, but we do provide change in control severance compensation agreements (“SCAs”) with each of our executive officers that provide certain protections upon a change in control. The Committee believes that SCAs serve shareholders’ best interests by diminishing potential distractions for our executive officers in the event of a potential corporate restructuring or change in control transaction. These protections also help ensure continuity of management in the event of certain corporate transactions. However, the Committee believes that executives should not be unduly enriched, and all benefits under the SCAs require a "double trigger." For a more detailed explanation of the SCAs, including amendments adopted as of January 1, 2019, please see “Employment Agreements, Termination of Employment and Change in Control (“CIC”) Arrangements” on page 50.
Stock Ownership Guidelines
Consistent with its goal of driving long-term value creation for our shareholders, the Committee’s stock ownership guidelines require significant stock ownership by the executive officers and directors. The Committee believes that requiring meaningful stock ownership by our executive officers and directors is an important way to further align their interests with the interests of our shareholders and discourage undue risk taking. Accordingly, the Committee has adopted a stock ownership policy which applies to the CEO, the other executive officers and outside directors as described below. The guidelines require the executive officers and directors to hold the following amounts of our stock:
Executive Officers/Directors
Required Common Stock Ownership as a Multiple of Annual Base Salary / Annual Retainer
CEO
6x
Directors
5x
Other Executive Officers
2x
The Committee evaluates compliance with these guidelines on an annual basis. For purposes of the guidelines, shares owned indirectly, shares in the executive officer's 401(k) plan and any unvested time-based RSUs are included. The value of unvested PSUs is excluded.
Each executive officer has a transition period of five years from the date the individual becomes subject to the guidelines to attain the required investment position. If an executive officer becomes subject to a greater ownership requirement due to a promotion or an increase in salary, the executive officer will be expected to attain the higher level within three years of the change.
Each outside director is required to achieve the ownership requirement within five years following their election as a director.
All participants are currently in compliance with the stock ownership policy, either through meeting the ownership requirement or by being within the transition period.


42      CALLON PETROLEUM


EXECUTIVE COMPENSATION

Internal Revenue Service Limitations
Section 162(m) of the Internal Revenue Code places a limit of $1.0 million on the amount of compensation that we may deduct in any one year with respect to compensation paid to each covered employee. For years prior to 2018, an exception to the deduction limit for compensation qualified as “performance-based.” The enactment of the Tax Cuts and Jobs Act on December 22, 2017 repealed the "performance-based" exemption from Section 162(m)‘s deduction limit. In addition, the limitation on deductibility was expanded to include any individual who is an NEO in 2017 or any later calendar year. As a result, compensation paid to our NEOs in excess of $1 million will not be deductible for years subsequent to 2017, subject to limited transition relief for arrangements in place as of November 2, 2017. Despite the change in law, the Committee intends to continue to consider the deductibility of compensation and to implement compensation programs that it believes are competitive and in the best interests of the Company and its shareholders.
Insider Trading Policy
The Company’s Board has adopted a comprehensive Insider Trading Policy for employees and directors to promote compliance with federal and state securities laws. The policy prohibits certain persons who are aware of material non-public information about a company from: (i) trading in securities of that company; or (ii) providing material non-public information to other persons who may trade on the basis of that information. When material non-public information about us may exist and may have an influence on the marketplace, a trading blackout period is placed in effect by management. In addition, this Insider Trading Policy also applies to family members, other members of a person’s household, and entities controlled by a person covered by this Insider Trading Policy. Officers, directors, and designated employees, as well as the family members and controlled entities of such persons, may not engage in any transaction in Company securities without first obtaining pre-clearance of the transaction from our General Counsel.
Under the Insider Trading Policy, directors, executive officers and other employees are prohibited from entering into any hedging or monetization transactions relating to Callon's securities or otherwise trading in any instrument relating to the future securities' price. This Insider Trading Policy also prevents directors and executive officers from pledging Callon common stock as collateral for loans or holding Callon securities in a margin account.
Recoupment Policy
We have no recoupment policy applicable to annual incentive bonuses or LTI awards other than those required under Sarbanes-Oxley legislation, though the Committee regularly evaluates the need to adopt such a policy.
Compensation Committee Report
The Compensation Committee has reviewed and discussed with management the CD&A required by Item 402(b) of Regulation S-K promulgated under the Exchange Act, and based on such review and discussions, the Committee has recommended to the Board that the CD&A be included in this Proxy Statement relating to the 2019 Annual Meeting of Shareholders.
Respectfully submitted by the Compensation Committee of the Board of Directors,
Matthew R. Bob, Chairman
Michael L. Finch
L. Richard Flury
Anthony J. Nocchiero
James M. Trimble


CALLON PETROLEUM      43


EXECUTIVE COMPENSATION

Executive Compensation Tables
Summary Compensation Table
The compensation paid to the Company’s executive officers generally consists of base salaries, annual cash incentive payments, awards under the 2011 Omnibus Incentive Plan and the 2018 Omnibus Incentive Plan (approved by shareholders in 2018), contributions to the Company’s defined contribution 401(k) retirement plan and miscellaneous perquisites. The table below sets forth information regarding fiscal years 2018, 2017 and 2016 compensation awarded to, earned by or paid to the Company’s NEOs, in each case for the years in which these individuals constituted "named executive officers" under SEC rules. This includes all individuals who served as the Company's CEO or CFO during 2018, the three other most highly compensated executive officers serving at the end of the fiscal year, and our former Chief Operating Officer who would have been in the top three but stepped down from the role prior to year-end:
Name and Principal Position
Year
Salary
 
Bonus(a)
Stock
Awards
 
All Other Compensation(b)
Total
Joseph C. Gatto, Jr.(c)
President & CEO
2018
$666,346
(d)
$980,000
$3,899,990
(e)
$31,430
$5,577,766
2017
$494,568
 
$690,000
$2,599,998
 
$41,816
$3,826,382
2016
$367,308
 
$630,000
$1,907,000
 
$35,948
$2,940,256
James P. Ulm, II(f)
Senior Vice President & CFO
2018
$465,000
 
$585,900
$1,062,000
(e)
$39,245
$2,152,145
2017
$17,885
 
$52,000
$989,100
 
$0
$1,058,985
Michol L. Ecklund(g)
Senior Vice President, General Counsel & Corporate Secretary
2018
$340,577
(h)
$343,000
$700,000
(e)
$38,131
$1,421,708
Correne S. Loeffler(i)
Vice President - Finance 
& Treasurer
2018
$259,615
(j)
$259,700
$357,993
(e)
$31,167
$908,475
2017
$164,904
 
$176,400
$537,239
 
$3,710
$882,253
Mitzi P. Conn(k)
Vice President &
Chief Accounting Officer
2018
$239,615
(l)
$240,100
$330,990
(e)
$30,987
$841,692
2017
$225,000
 
$189,000
$329,997
 
$30,118
$774,115
2016
$198,370
 
$250,000
$471,400
 
$28,811
$948,581
Gary A. Newberry(m)
Former SVP &
Chief Operating Officer
2018
$475,000
 
$665,000
$2,099,999
(e)
$45,361
$3,285,360
2017
$440,529
 
$570,000
$2,799,995
 
$41,171
$3,851,695
2016
$367,308
 
$630,000
$1,907,000
 
$40,613
$2,944,921
(a) 
Cash bonus awarded in first quarter of following year in recognition of previous year's performance. See "Performance-Based Annual Cash Incentive" in the CD&A above for further information.
(b) 
See the "Table of All Other Compensation” below and related footnotes for reconciliation.
(c) 
Mr. Gatto was promoted to Chief Executive Officer in May 2017.
(d) 
Mr. Gatto's salary was increased from $575,000 to $700,000 in March 2018. See page 37 for more information.
(e) 
Represents the grant date fair value of the RSUs and PSUs granted to the NEOs on May 10, 2018, computed in accordance with FASB ASC Topic 718. The assumptions utilized in the calculation of these amounts are set forth in footnotes 9 and 10 to our consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 27, 2019.
(f) 
Mr. Ulm began serving as our Chief Financial Officer in December 2017.
(g) 
Ms. Ecklund was not an NEO prior to 2018.
(h) 
Effective April 2, 2018, Ms. Ecklund's salary was increased from $315,000 to $350,000.
(i) 
Ms. Loeffler began serving as our Treasurer in April 2017.
(j) 
During April 2018, Ms. Loeffler's salary was increased from $245,000 to $265,000.
(k) 
Ms. Conn was promoted to Vice President and Chief Accounting Officer in August 2016.
(l) 
During April 2018, Ms. Conn's salary was increased from $225,000 to $245,000.
(m) 
Mr. Newberry was promoted to Chief Operating Officer in August 2016.


44      CALLON PETROLEUM


EXECUTIVE COMPENSATION

Table of All Other Compensation
NEO
Year
Company
Contributions to 401(k)
(a)
Company
Provided
Auto
(b)
Total
Joseph C. Gatto, Jr.
2018
$25,000
$6,430
$31,430
 
2017
$31,500
$10,316
$41,816
 
2016
$26,500
$9,448
$35,948
James P. Ulm, II
2018
$26,493
$12,752
$39,245
 
2017
$0
$0
$0
Michol L. Ecklund
2018
$25,312
$12,819
$38,131
Correne S. Loeffler
2018
$25,902
$5,265
$31,167
 
2017
$3,710
$0
$3,710
Mitzi P. Conn
2018
$23,961
$7,026
$30,987
 
2017
$22,500
$7,618
$30,118
 
2016
$20,212
$8,599
$28,811
Gary A. Newberry
2018
$27,500
$17,861
$45,361
 
2017
$27,000
$14,171
$41,171
 
2016
$26,500
$14,113
$40,613
(a) 
Subject to IRS limits, Company contributions to each employee's 401(k) account consist of a 5% non-matching contribution plus a matching contribution at the rate of 0.625% in cash for every 1% that the participant deferred up to 5%.
(b) 
Represents annual depreciation based on a three-year life, plus insurance, fuel, maintenance and repairs, pursuant to IRS rules.


CALLON PETROLEUM      45


EXECUTIVE COMPENSATION

Grants of Plan-Based Awards During 2018
The following table presents grants of equity awards during the fiscal year ending December 31, 2018:
 
 
Estimated Future Payouts Under
Equity Incentive Plan Awards
(a)
 
 
NEO
Grant
Date
Threshold
Target
Maximum
Other Awards
(Shares or Units)
(b)
Grant Date
Fair Value
(c)
Joseph C. Gatto, Jr.
5/10/2018
110,169
$1,559,993
 
5/10/2018
165,254
330,508
$2,339,997
 
 
 
 
 
 
 
James P. Ulm, II(d)
5/10/2018
75,000
150,000
$1,062,000
 
 
 
 
 
 
 
Michol L. Ecklund
5/10/2018
19,773
$279,986
 
5/10/2018
29,662
59,324
$420,014
 
 
 
 
 
 
 
Correne S. Loeffler
5/10/2018
10,112
$143,186
 
5/10/2018
15,170
30,340
$214,807
 
 
 
 
 
 
 
Mitzi P. Conn
5/10/2018
9,349
$132,382
 
5/10/2018
14,026
28,052
$198,608
 
 
 
 
 
 
 
Gary A. Newberry
5/10/2018
59,321
$839,986
 
5/10/2018
88,984
177,968
$1,260,013
(a) 
Amounts represent PSUs payable 50% in cash and 50% in stock on the vesting date, currently scheduled for December 31, 2020. See "PSU Program" in the CD&A above for further details.
(b) 
Amounts represent RSUs granted to our NEOs on May 10, 2018. These awards are scheduled to vest in equal installments on June 1, 2019, 2020, and 2021, subject to the NEO's continued service.
(c) 
This column shows the grant date fair value of the awards granted to the NEOs on the date indicated computed in accordance with FASB ASC Topic 718. The assumptions utilized in the calculation of these amounts are set forth in footnotes 9 and 10 to our consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 27, 2019. The value ultimately realized by the executive upon the actual vesting of the awards may be more or less than the grant date fair value.
(d) 
Mr. Ulm received an award of 90,000 RSUs when he joined the Company in December 2017. He did not receive an RSU award in 2018.
Stock-Based Incentive Compensation Plans
The 2011 Omnibus Incentive Plan (the "2011 Plan") was approved by shareholders on May 12, 2011 and amended on May 14, 2015. The 2018 Omnibus Incentive Plan (the "2018 Plan") was approved by shareholders on May 10, 2018. Awards available under each of the 2011 Plan and the 2018 Plan include grants of stock options, stock appreciation rights or units, restricted stock, RSUs, and performance shares or units. As of May 10, 2018, no more shares will be issued from the 2011 Plan and the remaining 1,322,742 shares authorized and available for issuance under the 2011 Plan will be transferred into the 2018 Plan. Shares, which would otherwise become available for issuance under the 2011 Plan as a result of vesting and/or forfeiture of any equity awards existing prior to the effective date of the 2018 Plan, will increase the authorized shares available to the 2018 Plan. As of March 15, 2019, 7,811,037 shares remain unissued in the 2018 Plan.


46      CALLON PETROLEUM


EXECUTIVE COMPENSATION

Outstanding Equity Awards at Fiscal Year-End
The following table contains information concerning all outstanding equity awards that were held as of December 31, 2018 for the NEOs:
 
Stock Awards
NEO
Number of Shares or Units of Stock That Have Not Vested (#)
 
Market Value of Shares or Units of Stock That Have Not Vested(a)
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
 
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested(a)
Joseph C. Gatto, Jr.
36,890

(b)
$239,416

 
$0
 

 
$0
6,510

(c)
$42,250
 
50,000

(d)
$324,500

 
$0
 
42,868

(e)
$278,213

 
$0
 
80,098

(f)
$519,836

 
$0
 
110,169

(g)
$714,997

 
$0
 

 
$0
32,152

(h)
$208,666
 

 
$0
32,152

(i)
$208,666
 

 
$0
82,627

(j)
$536,249
 

 
$0
82,627

(k)
$536,249
James P. Ulm, II
90,000

(l)
$584,100

 
$0
 

 
$0
37,500

(j)
$243,375
 

 
$0
37,500

(k)
$243,375
Michol L. Ecklund
37,500

(m)
$243,375

 
$0
 
19,773

(g)
$128,327

 
$0
 

 
$0
14,831

(j)
$96,253
 

 
$0
14,831

(k)
$96,253
Correne S. Loeffler
23,333

(n)
$151,431

 
$0
 
7,068

(e)
$45,871

 
$0
 
10,112

(g)
$65,627

 
$0
 

 
$0
3,030

(h)
$19,655
 

 
$0
7,585

(j)
$49,227
 

 
$0
7,585

(k)
$49,227
Mitzi P. Conn
10,145

(b)
$65,841

 
$0
 

 
$0
1,790

(c)
$11,617
 
10,000

(d)
$64,900

 
$0
 
10,881

(e)
$70,618

 
$0
 
9,349

(g)
$60,675

 
$0
 

 
$0
8,162

(h)
$52,971
 

 
$0
8,162

(i)
$52,971
 

 
$0
7,013

(j)
$45,514
 

 
$0
7,013

(k)
$45,514
Gary A. Newberry
36,890

(b)
$239,416

 
$0
 

 
$0
6,510

(c)
$42,250
 
50,000

(d)
$324,500

 
$0
 
42,868

(e)
$278,213

 
$0
 
59,321

(g)
$384,993

 
$0
 

 
$0
32,152

(h)
$208,666
 

 
$0
32,152

(i)
$208,666
 

 
$0
44,492

(j)
$288,753
 

 
$0
44,492

(k)
$288,753
 
138,632

(o)
$899,722

 
$0
(a) 
Amounts calculated using the closing price of $6.49 per share of our common stock on the last trading day of 2018.
(b) 
Stock settleable RSUs awarded on May 13, 2016 subject to cliff vesting on May 13, 2019.
(c) 
Cash settleable RSUs awarded on May 13, 2016 subject to cliff vesting on May 13, 2019.
(d) 
Stock settleable RSUs awarded August 24, 2016 subject to cliff vesting on August 24, 2019.


CALLON PETROLEUM      47


EXECUTIVE COMPENSATION

(e) 
Stock settleable RSUs awarded on May 11, 2017 subject to cliff vesting on May 11, 2020.
(f) 
Stock settleable RSUs awarded to Mr. Gatto upon his promotion to CEO on July 11, 2017 subject to three-year ratable vesting with one-third vesting each year subsequent to the award year. The first tranche vested on July 1, 2018. The second tranche will vest on July 1, 2019. The third and final tranche will vest on July 1, 2020.
(g) 
Stock settleable RSUs awarded on May 10, 2018 subject to three-year ratable vesting with one-third vesting each year subsequent to the award year. The first tranche will vest on June 1, 2019. The second tranche will vest on June 1, 2020. The third and final tranche will vest on June 1, 2021.
(h) 
Stock settleable PSUs awarded on May 11, 2017 with vesting terms subject to performance criteria related to the TSR of the Company compared to a group of peer companies from May 2017 through December 31, 2019. The number of units subject to vest under this award can range from 0% to 200%.
(i) 
Cash settleable PSUs awarded on May 11, 2017 with vesting terms subject to performance criteria related to the TSR of the Company compared to a group of peer companies from May 2017 through December 31, 2019. The number of units subject to vest under this award can range from 0% to 200%.
(j) 
Stock settleable PSUs awarded on May 10, 2018 with vesting terms subject to performance criteria related to the TSR of the Company compared to a group of peer companies from May 2018 through December 31, 2020. The number of units subject to vest under this award can range from 0% to 200%.
(k) 
Cash settleable RSUs awarded on May 10, 2018 with vesting terms subject to performance criteria related to the TSR of the Company compared to a group of peer companies from May 2018 through December 31, 2020. The number of units subject to vest under this award can range from 0% to 200%.
(l) Stock settleable RSUs awarded to Mr. Ulm upon his hiring on December 11, 2017 subject to three-year ratable vesting with one-third vesting each year subsequent to the award year. The first tranche vested on January 1, 2019. The second tranche will vest on January 1, 2020. The third and final tranche will vest on January 1, 2021.
(m) Stock settleable RSUs awarded to Ms. Ecklund upon her hiring on November 6, 2018 subject to three-year ratable vesting with one-third vesting each year subsequent to the award year. The first tranche vested on January 1, 2019. The second tranche will vest on January 1, 2020. The third and final tranche will vest on January 1, 2021.
(n) 
Stock settleable RSUs awarded to Ms. Loeffler upon her hiring on April 24, 2017 subject to three-year ratable vesting with one-third vesting each year subsequent to the award year. The first tranche vested on March 1, 2018. The second tranche vested on March 1, 2019. The third and final tranche will vest on March 1, 2020.
(o) 
Stock settleable RSUs awarded to Mr. Newberry on July 11, 2017 subject to three-year ratable vesting with one-half vesting on the second year subsequent to the award year. The first tranche will vest on July 1, 2019; and the second and final tranche will vest on July 1, 2020.


48      CALLON PETROLEUM


EXECUTIVE COMPENSATION

Stock Vested
The following table provides information about the value realized by the NEOs on vesting of RSUs and PSUs during 2018:
 
Stock Awards(a)
NEO
Number of Shares
Acquired on Vesting (#)
 
Value Realized on Vesting $(b)
 
Joseph C. Gatto, Jr.
46,221

(c) 
$299,974
 
 

 
$299,974
(d) 
 
24,848

(e) 
$344,145
 
 

 
$61,127
(f) 
 
40,050

(g) 
$430,137
 
James P. Ulm, II(h)

 
$0
 
Michol L. Ecklund(h)

 
$0
 
Correne S. Loeffler
11,667

(i) 
$125,304
 
Mitzi P. Conn
12,710

(c) 
$82,488
 
 

 
$82,488
(d) 
 
12,424

(e) 
$172,072
 
 

 
$30,557
(f) 
Gary A. Newberry
46,221

(c) 
$299,974
 
 

 
$299,974
(d) 
 
24,848

(e) 
$344,145
 
 

 
$61,127
(f) 
(a) 
No options were awarded, outstanding, expired, or exercised by any NEO in 2018.
(b) 
Except as otherwise indicated, represents the aggregate dollar amount realized on the date of vesting, based on the closing market price per share of Company common stock on the vesting date or last business day prior to the vesting date if such date fell on a weekend or holiday.
(c) 
Represents PSUs awarded on May 13, 2016 that settled in stock on December 31, 2018.
(d) 
Represents PSUs awarded on May 13, 2016 that settled in cash on December 31, 2018, which include amounts as follows: Mr. Gatto - 46,221, Ms. Conn - 12,710, and Mr. Newberry - 46,221.
(e) 
Represents RSUs awarded on May 14, 2015 that settled in stock on the May 14, 2018 vesting date.
(f) 
Represents RSUs awarded on May 14, 2015 that settled in cash on the May 14, 2018 vesting date, which include amounts as follows: Mr. Gatto - 4,385, Ms. Conn - 2,192, and Mr. Newberry - 4,385.
(g) 
Represents RSUs awarded on July 11, 2017; the first tranche of which vested on July 11, 2018.
(h) 
NEO had no stock vest during 2018.
(i) 
Represents RSUs awarded on April 24, 2017; the first tranche of which vested on March 1, 2018.


CALLON PETROLEUM      49


EXECUTIVE COMPENSATION

Employment Agreements, Termination of Employment and Change in Control Arrangements
Employment Agreements
We do not have employment agreements with any of our executive officers.
Severance Compensation Agreements
We entered into amended Change in Control Severance Compensation Agreements (“SCA”) with each of our NEOs effective as of January 1, 2019. The SCA will terminate, except to the extent that any obligation of Callon thereunder remains unpaid as of such time, upon the earliest of (i) December 31, 2019, except that, on each anniversary date thereafter, the expiration date will automatically be extended for one additional year unless, as of such date and prior to such anniversary date, either party has given proper written notice that it does not wish to extend the SCA, but in no event will the expiration date be earlier than the second anniversary of the effective date of a change in control; (ii) the termination of the NEOs employment with Callon based on death, disability (as defined in the SCA), or cause (as defined in the SCA); (iii) the voluntary resignation of the NEOs for any reason other than a post-change in control resignation for good reason (as defined in the SCA); and (iv) any resignation of the NEO prior to a change in control.
Pursuant to the SCA, if the executive is terminated without cause by Callon or for good reason by him within two years following a change in control of Callon (or in certain cases, prior to a change in control), then the executive is entitled to a single lump-sum cash payment equal to an SCA multiple times the sum of (i) the annual base salary in effect immediately prior to the change in control or, if higher, in effect immediately prior to the separation from service, and (ii) the greater of the average bonus earned with respect to the three most recently completed full fiscal years or the target bonus for the fiscal year in which the change in control or termination occurs. For Mr. Gatto, the SCA multiple is three times. For the other NEOs, the SCA multiple is two times. The SCAs also provide that in the event an NEO is eligible for benefits due to a “double trigger” termination, any outstanding equity awards then held by the NEO shall vest in full with any performance-based awards earned at the level specified in the applicable award agreement or, if not specified, at the target level. In addition, we must maintain at our expense until twenty-four months after a separation from service all medical, dental, and health insurance coverage. A change in control as generally defined in the SCA occurs when (i) any person or group of persons acting in concert becomes the beneficial owner of more than 50% of our outstanding common stock; (ii) our shareholders cause a change in the majority of the members of the Board within a thirty-six month period; (iii) there is a change in control in ownership of at least 40% of Company assets; or (iv) a third party acquires more than 30% of the voting power of our common stock in a twelve month period.
The SCAs incorporate a provision to provide for the possible impact of the federal excise tax on excess parachute payments. If any SCA payment is subject to any excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended, the payment will be reduced so that no portion of the payment is subject to such excise tax if the net benefit payable would be at least as much as it would have been if no reduction was made. The so-called “golden parachute” tax rules subject “excess parachute payments” to a dual penalty: the imposition of a 20 percent excise tax upon the recipient and non-deductibility of such payments by the paying corporation. While the excise tax is seemingly evenhanded, the excise tax can discriminate against long-serving employees in favor of new hires, against individuals who do not exercise stock options in favor of those who do and against those who elect to defer compensation in favor of those who do not. For these reasons, we believe that the “net-best” provision included in the SCA is appropriate.


50      CALLON PETROLEUM


EXECUTIVE COMPENSATION

Potential Payments upon Termination or Change in Control
The following table shows the estimated gross taxable compensation payable upon termination following a change in control or upon death, disability or retirement. No amounts would be payable upon termination for other causes. The information assumes, in each case, that the officer’s termination was effective as of December 31, 2018. In presenting this disclosure, we describe amounts earned through December 31, 2018 and, in those cases where the actual amounts to be paid out can only be determined at the time of such executive’s separation from us, the estimates are of the amounts which would be paid out to the executives upon their termination.
NEO / Reason for Termination
Base
Salary
(a)
Cash
Bonus
(a)
Accelerated
Stock Award
Vesting
(b)
Continued
Employee
Benefits
(c)
Total
Joseph C. Gatto, Jr. - CIC(d)
$2,100,000
$2,100,000
$4,031,547
$46,763
$8,278,310
Death, Disability or Retirement(e)
$0
$0
$4,031,547
$0
$4,031,547
James P. Ulm, II - CIC(d)
$930,000
$837,000
$1,070,850
$46,763
$2,884,613
Death, Disability or Retirement(e)
$0
$0
$1,070,850
$0
$1,070,850
Michol L. Ecklund - CIC(d)
$700,000
$490,000
$564,208
$46,763
$1,800,971
Death, Disability or Retirement(e)
$0
$0
$564,208
$0
$564,208
Correne S. Loeffler - CIC(d)
$530,000
$371,000
$381,050
$46,414
$1,328,464
Death, Disability or Retirement(e)
$0
$0
$381,050
$0
$381,050
Mitzi P. Conn - CIC(d)
$490,000
$439,000
$586,806
$46,214
$1,562,020
Death, Disability or Retirement(e)
$0
$0
$586,806
$0
$586,806
Gary A. Newberry(f) - CIC(d)
$950,000
$1,200,000
$3,586,432
$33,429
$5,769,861
Death, Disability or Retirement(e)
$0
$0
$3,586,432
$0
$3,586,432
(a) 
In accordance with Mr. Gatto’s SCA, the computation uses a three-year multiple with respect to the severance amount relating to salary and target bonus, while a two-year multiple is used for the other NEOs. See “Employment Agreements, Termination of Employment and Change in Control Arrangements.”
(b) 
The amounts are calculated based on unvested stock awards at December 31, 2018 using the closing price of $6.49 per share of our common stock on the last trading day of 2018.
(c) 
Benefits consist of twenty-four months of employer provided family medical and dental insurance and disability and life insurance for the NEOs in the table.
(d) 
We entered into a Severance Compensation Agreement with each of the NEOs listed in the table above. See “Employment Agreements, Termination of Employment and Change in Control Arrangements.”
(e) 
“Disability” is generally defined as the employee’s inability to carry out the normal and usual duties of his employment on a full-time basis for an entire period of six continuous months together with the reasonable likelihood, as determined by the Board after consultation of a qualified physician, he will be unable to carry out his normal and usual duties of employment. “Retirement” is generally defined as the employee’s attainment of age 55 with at least 10 years of service.
(f) 
Gary A. Newberry retired from the Company effective January 31, 2019 and is no longer eligible to receive any payment upon termination following a change in control or upon death, disability or retirement.
Pension and Non-Qualified Deferred Compensation Plans.
We sponsor a 401(k) plan for all eligible employees, including the NEOs as described on page 42. We do not sponsor any qualified or non-qualified defined benefit plans, or any non-qualified defined contribution plan. The Board or Compensation Committee may elect to adopt qualified or non-qualified defined benefit plans or non-qualified defined contribution plans in the future if it determines that doing so is in the Company’s best interest.



CALLON PETROLEUM      51


EXECUTIVE COMPENSATION

CEO Pay Ratio
Pursuant to a mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are disclosing here that the ratio of our median employee’s compensation to the compensation of our Chief Executive Officer (CEO) is 40:1.
In order to find the median employee, we used the sum of the base salary and bonus, including any overtime or commission that was paid to the employee. Furthermore, we annualized the bonus, base salary, and any overtime for employees that were not employed the entire 2018 year, other than for temporary and seasonal employees. We identified the median employee from the employee population as of December 31, 2018.
In accordance with SEC rules, we then determined the annual total compensation of our median employee for 2018, which was $137,712. This amount represents the total compensation that would have been reported in the Summary Compensation Table in accordance with the requirements of Item 402(c)(x) of Regulation S-K for the median employee if the employee had been a Named Executive Officer for fiscal year 2018. For purposes of calculating the ratio, an additional value of $2,789 was included in the annual compensation for non-discriminatory benefits bringing the annual total compensation to $140,501.
We determined the amount of the CEO’s annual total compensation was $5,577,766 which represents the amount reported for the CEO in the “Total” column of our 2018 Summary Compensation Table. For purposes of the ratio, an additional value of $23,882 was included in the annual total compensation for non-discriminatory benefits to bring the value to $5,601,148.
Based on the foregoing, for 2018 the ratio of the median of the annual total compensation of all employees to the annual total compensation of our CEO is 40:1.
Callon’s CEO Pay Ratio increased from 2017 to 2018 due to several contributing factors. The 2018 Pay Ratio reflects increases in the salary and target long-term incentive value for the CEO that were approved by the Compensation Committee in 2018 in order to better align his compensation with the competitive market, reflect his tenure in the role, and reward performance. In addition, the employee selected as our median employee for the ratio comparison did not receive a long-term incentive award from the Company in 2018 because she commenced employment in the middle of the 2018 calendar year. For this reason, we have calculated an additional pay ratio that includes an estimated amount of long-term incentive value that the median employee would have been awarded for calendar year 2018 had she been employed on the long-term incentive award grant date. If the estimated long-term incentive amount had been included in the median employee’s total compensation, then the pay ratio would have been 32:1.
The pay ratio is a reasonable estimate calculated in a manner consistent with SEC rules based on our payroll and employment records.



52      CALLON PETROLEUM


 
 
 
Proposal 3
Ratification of the Appointment of the Independent Registered Public Accounting Firm, Grant Thornton LLP, for 2019
callon2019proxyimage11a.jpg
The Board recommends that you vote “FOR” the ratification of the appointment of Grant Thornton LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2019.
    The Board and the Audit Committee believe the retention of Grant Thornton LLP is in the best interests of Callon and its shareholders based on the information presented below.
 
 
 
The Audit Committee has appointed Grant Thornton LLP, as the independent registered public accounting firm to audit our consolidated financial statements for the year ending December 31, 2019. We are asking shareholders to ratify this appointment. Grant Thornton LLP has served as the Company’s independent registered public accounting firm since being appointed effective March 3, 2016. A representative of Grant Thornton LLP will be present at the 2019 Annual Meeting and will have the opportunity to make a statement, if they desire, and to respond to appropriate questions from shareholders.
Fees
The following table sets forth the fees incurred by us for services performed by Grant Thornton LLP in the fiscal years 2017 and 2018:
Fee Category
2017
2018
Audit fees(a)
$817,789
$959,652
Audit-related fees(b)
$0
$0
Tax fees(c)
$15,900
$21,647
All other fees(d)
$0
$0
Total
$833,689
$993,499
(a) 
Audit fees consist of the aggregate fees billed for professional services related to the audit and quarterly reviews of our financial statements and for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
(b) 
Audit-related fees consist of the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements that are not reported above under “Audit” fees.
(c) 
Tax fees consist of the aggregate fees billed for professional services rendered for tax compliance (including filing state and federal tax returns), tax advice and tax planning. Tax fees do not include fees for services rendered in connection with the audit.
(d) 
Other fees consist of the aggregate fees billed for professional services other than the services reported above.
Pre-approval policy
The Audit Committee pre-approves all audit and permissible non-audit services (including the fees and terms thereof) exceeding $25,000 to be performed on behalf of the Company by our independent registered public accounting firm, as required by applicable law or listing standards and subject to the terms of the audit and non-audit services pre-approval policy in accordance with the Audit Committee charter. The Committee may delegate authority to one or more of its members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services, provided that any decisions to grant pre-approvals are consistent with the terms of the delegation and the Audit Committee Charter and are presented to the full Committee at its next scheduled meeting.


CALLON PETROLEUM      53


PROPOSAL 3

Voting Standard
The submission of this matter for approval by shareholders is not legally required. However, the Board and Audit Committee believe that this submission is consistent with best practices in corporate governance and is an opportunity for shareholders to provide direct feedback to the Board and Audit Committee on an important issue of corporate governance. Although the results of the vote are not binding on the Audit Committee, if the appointment is not ratified the Audit Committee will consider whether it should select another independent registered public accounting firm.
This proposal will be approved if it receives the affirmative vote of a majority of shares of our common stock present and entitled to vote at the Annual Meeting. If you hold your shares through a broker and you do not instruct the broker how to vote, your broker will have the authority to vote your shares in its discretion on this proposal. Abstentions will have the effect as a vote cast against this proposal.
 
The Board recommends a vote FOR the ratification of the appointment of Grant Thornton LLP as the Company’s independent registered public accounting firm.
 



54      CALLON PETROLEUM


PROPOSAL 3

Audit Committee Report
Acting pursuant to its Charter, the Audit Committee reviewed and discussed the Company's audited financial statements for the year ended December 31, 2018, with management and Grant Thornton LLP, and recommended to the Board that the audited consolidated financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, for filing with the SEC. This recommendation was based on:
The Audit Committee’s review of the audited financial statements;
Discussion of the financial statements with management;
Discussion with our independent registered public accounting firm, Grant Thornton LLP, of the matters required to be discussed by auditing standards generally accepted in the United States of America, including the communication matters required to be discussed by Auditing Standard No. 1301, Communications with Audit Committees, issued by the Public Company Accounting Oversight Board;
Receipt from Grant Thornton LLP of the written disclosures and letter required by Public Company Accounting Standards Board Rule 3526 (Communications with Audit Committees Concerning Independence);
Discussions with Grant Thornton LLP regarding its independence from Callon, our Board and our management;
Grant Thornton LLP’s confirmation that it would issue its opinion that the consolidated financial statements present fairly, in all material respects, our financial position and the results of our operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America; and
Other matters the Audit Committee deemed relevant and appropriate.
Management is responsible for the preparation, presentation and integrity of our consolidated financial statements in accordance with Generally Accepted Accounting Principles ("GAAP"), the establishment and maintenance of our disclosure controls and procedures, and the establishment, maintenance and evaluation of the effectiveness of our internal controls over financial reporting. The independent registered public accounting firm is responsible for performing an independent audit of our consolidated financial statements and internal control over financial reporting in accordance with the standards of the PCAOB and issuing reports thereon. The Audit Committee’s responsibilities include monitoring and overseeing these processes.
Members of the Audit Committee rely, without independent verification, on the information provided to them and on the representations made by management and our independent registered public accounting firm. The Audit Committee’s considerations and discussions referred to above do not assure that the audit of our financial statements and internal control over financial reporting have been carried out according to the standards of the PCAOB, that the financial statements are presented according to GAAP, or that Grant Thornton LLP is in fact independent.
Respectfully submitted by the Audit Committee of the Board of Directors,
Anthony J. Nocchiero, Chairman
Barbara J. Faulkenberry
Michael L. Finch
L. Richard Flury
Larry D. McVay



CALLON PETROLEUM      55


OTHER MATTERS
Beneficial Ownership of Securities
Principal Shareholders and Management
The following table sets forth beneficial ownership information with respect to our common stock as of March 15, 2019, for (i) each person known by us to own beneficially 5% or more of our outstanding common stock; (ii) each of our named executive officers referenced in the Summary Compensation Table, (iii) each of our directors and nominees for director, and (iv) all of our directors and executive officers as of March 15, 2019, as a group. Unless otherwise noted, each person listed below has sole voting and investment power with respect to the shares of our common stock listed below as beneficially owned by the person. Information set forth in the table with respect to beneficial ownership of common stock has been obtained from filings made by the named beneficial owners with the SEC as of the Record Date or, in the case of our executive officers and directors, has been provided to us by such individuals. As of March 15, 2019, the Company had 227,884,091 shares outstanding.
None of the shares beneficially owned by our executive officers or directors has been pledged as security for an obligation. Our Insider Trading Policy prohibits our executive officers and directors from holding Callon securities in a margin account or pledging Callon securities as collateral for a loan.
 
Beneficial Ownership(1)
Name of Beneficial Owner
Shares (#)
Percent of Class
Holders of More Than 5%:
 
 
BlackRock, Inc.(2)
26,888,623

11.8%
The Vanguard Group, Inc.(3)
20,839,300

9.2%
State Street Corporation(4)
13,961,168

6.1%
Wellington Management Group, LLP(5)
13,450,287

5.9%
Named Executive Officers:
 
 
Joseph C. Gatto, Jr.(6)
282,968

*
James P. Ulm, II(7)
22,269

*
Michol L. Ecklund(8)
9,396

*
Correne S. Loeffler(9)
17,444

*
Mitzi P. Conn(10)
85,215

*
Gary A. Newberry(11)
547,080

*
Directors:
 
 
Matthew R. Bob(12)
77,915

*
Barbara J. Faulkenberry(13)
12,277

*
Michael L. Finch(14)
46,365

*
L. Richard Flury(15)
225,620

*
Larry D. McVay(16)
166,900

*
Anthony J. Nocchiero(17)
135,771

*
James M. Trimble(18)
58,915

*
All Executive Officers and Directors as a Group (consisting of 14 persons)(19)
1,294,271

*
*
Less than 1%
(1) 
The amounts shown for our Directors and Named Executive Officers include, as of March 15, 2019: (a) shares of common stock held under Callon’s 401(k) Plan for the accounts of participants; (b) shares of common stock owned outright by the individual; and (c) shares of common stock that may be acquired within 60 days through the vesting or settlement of certain restricted stock units, if any. Until restricted stock units vest, these individuals have neither voting nor investment power over the underlying shares of common stock. As of March 15, 2019, none of the directors or executive officers held any stock options to purchase shares of Company stock.