Lincoln Proxy
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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PHILADELPHIA, PENNSYLVANIA


April 5, 2007


Dear Fellow Shareholder:

You are cordially invited to attend our Annual Meeting of Shareholders scheduled for Thursday, May 10, 2007, at 10:00 a.m., local time, at Delaware Investments, Inc., Second Floor Auditorium, Two Commerce Square, 2001 Market Street, Philadelphia, Pennsylvania 19102. Our Board of Directors and management look forward to greeting you.

The enclosed notice of meeting and proxy statement describe the matters to be acted upon at the Annual Meeting of Shareholders. Please review these documents carefully.

It is important that you vote your shares of our stock, either in person or by proxy. To assist you in voting your shares, we offer, in addition to voting through the use of a proxy card, voting via telephone and over the Internet. If you are unable to attend, please sign, date and mail the enclosed proxy card in the postage-paid envelope provided, or vote your shares in any other manner described in the enclosed proxy statement.

On behalf of the Board of Directors, thank you for your continued support.

Sincerely,
 
                                 Jon A. Boscia
Chairman and Chief Executive Officer





LINCOLN NATIONAL CORPORATION
PHILADELPHIA, PENNSYLVANIA



NOTICE OF
ANNUAL MEETING OF SHAREHOLDERS

April 5, 2007

The Annual Meeting of Shareholders of Lincoln National Corporation will be held on Thursday, May 10, 2007, at 10:00 a.m., local time, at Delaware Investments, Inc., Second Floor Auditorium, Two Commerce Square, 2001 Market Street, Philadelphia, Pennsylvania 19102.

The items of business are:

1.  
to elect five directors for three-year terms expiring at the 2010 Annual Meeting;
2.  
to ratify the appointment of Ernst & Young LLP, as independent registered public accounting firm for 2007;
3.  
to approve an amendment and restatement of the Lincoln National Corporation Amended and Restated Incentive Compensation Plan;
4.  
to approve the Lincoln National Corporation Stock Option Plan for Non-Employee Directors; and
5.  
to consider and act upon such other matters as may properly come before the meeting.

You have the right to receive this notice and vote at the Annual Meeting of Shareholders if you were a shareholder of record at the close of business on March 5, 2007. Please remember that your shares cannot be voted unless you cast your votes by one of the following methods: (1) sign and return a proxy card; (2) call the 800 toll-free number listed on the proxy card; (3) vote via the Internet as indicated on the proxy card; (4) vote in person at the Annual Meeting; or (5) make other arrangements to vote your shares.

For the Board of Directors,
 
                                
C. Suzanne Womack
Secretary




 
TABLE OF CONTENTS

    
56
 
 
 
 
 
   
   






LINCOLN NATIONAL CORPORATION
1500 MARKET STREET, SUITE 3900
CENTRE SQUARE WEST
PHILADELPHIA, PENNSYLVANIA 19102

PROXY STATEMENT
Annual Meeting of Shareholders
May 10, 2007


Our Board of Directors is soliciting proxies in connection with the proposals to be voted on at the Annual Meeting of Shareholders scheduled for May 10, 2007 (the “Annual Meeting”). The Annual Meeting will be held at Delaware Investments, Inc., Second Floor Auditorium, Two Commerce Square, 2001 Market Street, Philadelphia, Pennsylvania 19102, beginning at 10 a.m. local time. We are first mailing this Proxy Statement and enclosed proxy to our shareholders on or about April 5, 2007. Whenever we refer in this Proxy Statement to the “Annual Meeting,” we are also referring to any meeting that results from an adjournment of the Annual Meeting.

What proposals are being voted on at the Annual Meeting?

At the Annual Meeting, shareholders are being asked to vote upon the following items of business:

1.  
to elect five directors for three-year terms expiring in 2010;
2.  
to ratify the appointment of Ernst & Young LLP, as independent registered public accounting firm for 2007;
3.  
to approve an amendment and restatement of the Lincoln National Corporation Amended and Restated Incentive Compensation Plan;
4.  
to approve the Lincoln National Corporation Stock Option Plan for Non-Employee Directors; and
5.  
to consider and act upon such other matters as may properly come before the meeting.

Who is entitled to vote at the Annual Meeting?

Only shareholders of record at the close of business on March 5, 2007, the record date for the meeting, are entitled to vote at the Annual Meeting. As of the record date, we had 277,216,958 shares of common stock and 12,526 shares of $3.00 cumulative convertible preferred stock, series A issued, outstanding, and entitled to vote at the Annual Meeting. You are entitled to one vote for each share of common stock and each share of preferred stock you own. The number of shares you own (and may vote) is listed on the proxy card.

What constitutes a quorum?

A majority of all outstanding shares entitled to vote at the Annual Meeting constitutes a quorum, which is the minimum number of shares that must be present or represented by proxy at the Annual Meeting in order to transact business. Subject to the rules regarding the votes necessary to adopt the proposals discussed below, abstentions and broker non-votes will be counted for purposes of determining whether a quorum is present. Generally, “broker non-votes” occur when brokerage firms return proxies for which no voting instructions have been received from beneficial owners and the broker does not have discretionary authority to vote on the proposal. Once a share is represented for any purpose at the Annual Meeting, it will be deemed present for quorum purposes for the remainder of the meeting (including any meeting resulting from an adjournment of the Annual Meeting, unless a new record date is set).

How do I vote?

1. In person. Attend the Annual Meeting and vote your shares, or send a personal representative with an appropriate proxy.

If you own your shares in “street name” (i.e., through a broker-dealer or other financial institution) and you want to vote at the Annual Meeting, you will need to obtain a proxy card from the institution that holds your shares.

- 1 -


If you own share equivalents through the Lincoln National Corporation Common Stock fund of the Lincoln National Corporation Employees’ Savings and Profit-Sharing Plan or The Lincoln National Life Insurance Company Agents’ Savings and Profit-Sharing Plan, all of which are 401(k) plans, you cannot vote at the Annual Meeting. Instructions on voting these share equivalents are described in more detail below.

2. By Mail. Mark, date, sign and mail the proxy card in the prepaid envelope. If you return the proxy card but do not mark your voting preference, the individuals named as proxies will, to the extent permissible, vote your shares in accordance with the description of each item in this proxy statement. With respect to any other matter that properly comes before the Annual Meeting, the individuals named as proxies will, to the extent permissible, vote all proxies in the manner they perceive to be in our best interests.

3. By Telephone or Internet. You may submit your proxy with voting instructions by telephone if you are calling within the United States, Canada or Puerto Rico. You may submit your proxy through the Internet by visiting the website listed on the enclosed proxy card.

If you hold your shares in “street name,” please check your proxy card or contact your broker, nominee, fiduciary or other custodian to determine if you will be able to vote by telephone or Internet.

If you choose to submit your proxy with voting instructions by telephone or through the Internet, you will be required to provide your assigned control number noted on the enclosed proxy card before your proxy will be accepted. In addition to the instructions that appear on the enclosed proxy card and information sheet, step-by-step instructions will be provided by recorded telephone message or at the designated website on the Internet.

Can I revoke my proxy and change my vote after I return my proxy card?

Yes. You may revoke your proxy at any time prior to the Annual Meeting by (i) sending our Corporate Secretary a written revocation, (ii) submitting a new proxy by mail, telephone or Internet, or (iii) attending the Annual Meeting and voting your shares in person.

How do I vote my 401(k) and/or dividend reinvestment plan shares?

If you have invested in the Lincoln National Corporation Common Stock fund of the Lincoln National Corporation Employees’ Savings and Profit-Sharing Plan or The Lincoln National Life Insurance Company Agents’ Savings and Profit-Sharing Plan, the enclosed proxy/voting instruction card, when executed and returned by you, will instruct the trustees of your plan how to vote the shares of common stock allocated to your account. If our stock books contain identical account information regarding common stock that you own directly and common stock that you own through one or more of those plans, you will receive a single proxy/voting instruction card representing all shares owned by you. If you participate in one of these plans and do not return a proxy/voting instruction card by 11:59 p.m. (E.D.T.) on May 7, 2007, the trustees of your plan will vote the shares in your account in proportion to shares held by your plan for which voting instructions have been received.

If you participate in our dividend reinvestment plan, your proxy/voting instruction card(s) will also include your shares of common stock allocated to your accounts in that plan. To vote your shares in those plans, you must return your proxy/voting instruction card(s) or submit your voting instructions by telephone or over the Internet as instructed on your proxy/voting instruction card(s).

If you own our shares through an employee benefit plan other than those plans mentioned above, you should contact the administrator of your plan if you have questions regarding how to vote your shares.

What vote is required to approve each item?

A plurality of the votes cast is required for the election of directors (Item 1), which means that the director nominees receiving the highest number of votes will fill the open director seats. We do not have cumulative voting for directors. With respect to the ratification of the independent registered public accounting firm (Item 2), the proposal will be approved if more shares are cast in favor of the proposal than against it. For this purpose, abstentions and, if applicable, broker non-votes, are not counted as votes cast.

Under Indiana law, approval of the amendment and restatement of the Lincoln National Corporation Amended and Restated Incentive Compensation Plan (Item 3) and the Lincoln National Corporation Stock Option Plan
 
 
- 2 -

 
for Non-Employee Directors (Item 4) will be approved if more shares are cast in favor of the proposal than against it, and abstentions and broker non-votes are not counted as votes cast on the proposals. However, under New York Stock Exchange (“NYSE”) listing standards, for the shares under the Plans to be approved for listing, at least a majority of the votes cast on each proposal must be voted in favor of the proposal, and the total votes cast on each proposal must represent a majority of all shares entitled to vote on the proposal at the Annual Meeting. Under the NYSE rules, abstentions are counted as votes cast against the proposal, but broker non-votes are not counted as votes cast on the proposal.

If any other matters are properly presented at the meeting, a particular proposal will be approved if the number of votes cast in favor of the proposal exceeds the number of votes cast against the proposal.

Who may solicit proxies?

Our directors, officers and employees as well as Georgeson Shareholder may solicit proxies on behalf of the Board via mail, telephone, fax, and personal contact.

Who pays for the costs of soliciting proxies?

We will pay the cost of soliciting proxies. Our directors, officers and employees will receive no additional compensation for soliciting proxies. We will reimburse certain brokerage firms, banks, custodians and other fiduciaries for the reasonable mailing and other expenses they incur in forwarding proxy materials to the beneficial owners of stock that those brokerage firms, banks, custodians and fiduciaries hold of record. As noted above, we have retained Georgeson Shareholder to solicit proxies. We will pay Georgeson Inc. a fee of $8,500, plus reasonable expenses, for these services.

SECURITY OWNERSHIP

Security Ownership Of More Than 5% Beneficial Owners

We have two classes of equity securities: common stock and preferred stock. The following table shows the names of persons known by us to beneficially own more than 5% of our common stock at December 31, 2006. We know of no one who beneficially owns more than 5% of our preferred stock.
 
 
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS
AS OF DECEMBER 31, 2006
 
TITLE OF CLASS
 
NAME AND ADDRESS OF BENEFICIAL OWNER
 
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
 
PERCENT OF CLASS
Common Stock
 
Neuberger Berman Inc.
605 Third Avenue
New York, NY 10158
14,214,869 shares
5.125%

The information set forth in this table is based solely on our review of Schedules 13G filed with the SEC and as of the date set forth above. We do not have information regarding the foregoing share position after December 31, 2006. Information regarding the amount and nature of beneficial ownership is to the best of our knowledge.

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Security Ownership of Directors, Nominees and Executive Officers

The following table shows the number of shares of common stock and stock units (i.e., non-transferable, non-voting “phantom” units, the value of which is the same as the value of the corresponding number of shares of common stock) beneficially owned on March 5, 2007 by each director, nominee for director, and “Named Executive Officer,” individually, and by all directors and executive officers as a group. As of March 5, 2007, none of the persons listed in the table owned any shares of our preferred stock.

Whenever we refer in this Proxy Statement to the “Named Executive Officers,” or NEOs, we are referring to those executive officers that we are required to identify in the Summary Compensation Table on page 45.

SECURITY OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
AS OF MARCH 5, 2007
NAME
AMOUNT OF LNC COMMON STOCK AND NATURE OF BENEFICIAL OWNERSHIP1
PERCENT
OF
CLASS
LNC
STOCK UNITS2
TOTAL OF LNC COMMON STOCK AND STOCK UNITS
TOTAL PERCENT OF CLASS
William J. Avery
9,640
*
11,334
20,974
*
J. Patrick Barrett
32,574
*
37,553
70,127
*
Jon A. Boscia
1,639,647
*
53,473
1,693,120
*
Patrick P. Coyne
1,011
*
4,857
5,868
*
Frederick J. Crawford
50,648
*
3,531
54,179
*
William H. Cunningham
74,950
*
12,037
86,987
*
Dennis R. Glass
1,321,925
*
--
1,321,925
*
John H. Gotta
--
*
8,676
8,676
*
George W. Henderson, III
74,318
*
18,891
93,209
*
Eric G. Johnson
17,796
*
18,672
36,468
*
M. Leanne Lachman
21,508
*
29,644
51,152
*
Warren A. May
61,025
*
--
61,025
*
Michael F. Mee
8,508
*
13,054
21,562
*
William P. Payne
84,761
*
10,252
95,013
*
Patrick S. Pittard
86,790
*
12,030
98,820
*
Jill S. Ruckelshaus
25,908
*
10,642
36,550
*
David A. Stonecipher
2,424,178
*
--
2,424,178
*
Westley V. Thompson
181,870
*
29,802
211,672
*
Isaiah Tidwell
10,030
*
2,299
12,328
*
All Directors and Executive Officers as a group -28 persons
6,893,920
2.44%
331,016
7,224,936
2.55%
_________________________________
* Each of these amounts represents less than 1% of the outstanding shares of our common stock as of March 5, 2007.

1 The number of shares that each person named in this table has a right to acquire within 60 days of March 5, 2007 is as follows: Mr. Avery, 5,250 shares; Mr. Barrett, 11,250 shares; Mr. Boscia, 1,293,140 shares; Mr. Crawford, 22,350 shares; Mr. Cunningham, 73,712 shares; Mr. Glass, 1,191,480 shares; Mr. Henderson, 73,712 shares; Mr. Johnson, 11,250 shares; Ms. Lachman, 11,250 shares; Mr. May, 54,530 shares; Mr. Mee, 8,250 shares; Mr. Payne, 73,712 shares; Mr. Pittard, 83,835 shares; Ms. Ruckelshaus, 11,250 shares; Mr. Stonecipher, 2,166,396 shares; Mr.
 
 
 
- 4 -

 
 
    Thompson, 107,618 shares; and Mr. Tidwell, 9,940 shares. In addition, the shares listed above include restricted stock of which the following persons have sole voting power (and no investment power): Mr. Avery, 258 shares; Mr. Barrett, 258 shares; Mr. Crawford, 6,153; Mr. Glass, 39,749; Mr. Johnson, 258 shares; Ms. Lachman, 328 shares; Mr. Mee, 258 shares; Ms. Ruckelshaus, 328 shares; and Mr. Thompson, 6,211 shares. The following individual shares voting and investment power with his spouse to the specified number of shares: Mr. Boscia, 53,579. In addition, the shares listed above include certain shares owned by the individual’s spouse: Mr. Boscia, 66,513 shares and Mr. Stonecipher, 8,247 shares. Mr. Stonecipher’s shares include 181,399 shares held in a trust. Finally, the shares listed above include shares that are held in charitable foundations: Mr. Boscia, 70,696 shares are held by the Boscia Family Foundation of which Mr. Boscia is a trustee, and with respect to which, he does not have a pecuniary interest and Mr. Stonecipher, 24,974 shares are held by the Stoneypeak Foundation of which Mr. Stonecipher is a trustee, and respect to which, he does not have a pecuniary interest.

2 LNC Stock Units are non-voting, non-transferable phantom stock units that track the economic performance of our common stock.


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GOVERNANCE OF THE COMPANY

As a result of the completion of our merger on April 3, 2006 with the Jefferson-Pilot Corporation, or Jefferson- Pilot, we amended our bylaws to effectuate various corporate governance changes as required by the agreement and plan of merger. The amended bylaws expanded our Board of Directors from 12 to 15 members and set forth the following additional provisions relating to the composition of our Board of Directors immediately following the merger:

·  
the initial Board of Directors was required to consist of eight directors who were members of our Board of Directors prior to the effective time of the merger (referred to as “former LNC directors”), and seven directors who were members of Jefferson-Pilot’s Board of Directors prior to the effective time of the merger (referred to as “former Jefferson-Pilot directors”);

·  
the initial Board of Directors was required to have two former Jefferson-Pilot directors and three former LNC directors as members of the class having terms expiring at the 2006 Annual Meeting; three former Jefferson-Pilot directors and two former LNC directors as members of the class having terms expiring at the 2007 Annual Meeting; and two former Jefferson-Pilot directors and three former LNC directors as members of the class having terms expiring at the 2008 Annual Meeting;

·  
the lead director of the initial Board of Directors was chosen by the former Jefferson-Pilot directors;

·  
our bylaws require each of our initial Board Committees to consist of an equal number of former LNC and former Jefferson-Pilot directors, with former LNC directors having the exclusive authority to recommend replacements of former LNC directors and former Jefferson-Pilot directors having the exclusive authority to recommend replacements of former Jefferson-Pilot directors;

·  
with respect to any election of directors occurring prior to the 2007 annual shareholders’ meeting, our bylaws require that former LNC directors on our Corporate Governance Committee have the authority to recommend individuals to our Board of Directors to fill vacant former LNC directorships and to recommend nominees to shareholders at an annual meeting to fill former LNC directorships;

·  
with respect to any election of directors occurring prior to the 2007 annual shareholders’ meeting, our bylaws require that former Jefferson-Pilot directors on our Corporate Governance Committee have the authority to recommend individuals to our Board of Directors to fill vacant former Jefferson-Pilot directorships and to recommend nominees to shareholders at an annual meeting to fill former Jefferson-Pilot directorships;

·  
for a period of 30 months from completion of the merger, our bylaws require the approval of 70% of the directors to:

1.  
remove Jon A. Boscia as our Chairman and CEO or modify his duties and responsibilities;

2.  
remove any director;

3.  
with respect to any election of directors occurring at or after the 2007 annual shareholders’ meeting (a) elect any director to fill a vacancy or newly created directorship or the nomination of any individual for election as a director by shareholders, unless such person has been recommended to the Board of Directors by the affirmative vote of a majority of the entire membership of the Corporate Governance Committee, or (b) change the composition or chairmanship of any committee of the Board of Directors, unless such change has been recommended by a majority of the entire membership of the Corporate Governance Committee;

4.  
remove the lead director or appoint any person as lead director who is not a former Jefferson-Pilot Director;
 
 
 
- 6 -


 
5.  
change the size of the Board of Directors or any committee, or the responsibilities of, or the authority delegated to, any committee of the Board of Directors;

6.  
engage in any extraordinary business transactions involving LNC or any of its “significant subsidiaries” (as defined in the Bylaws);

7.  
alter, amend or repeal LNC’s Corporate Governance Guidelines, except to the extent necessary to make such guidelines consistent with the bylaws; and

8.  
alter, amend or repeal the foregoing bylaw provisions.
 
Our Corporate Governance Guidelines

Subject to the bylaw amendment discussed above, listed below are what we believe are some, but not all, of the more significant aspects of our Corporate Governance Guidelines. A full text of our Corporate Governance Guidelines is available on our website (www.lfg.com) and in print to any shareholder who requests them by contacting our Corporate Secretary.

·  
A majority of our Board, including the nominees for director, must at all times be independent under the applicable NYSE listing standards as determined under the guidelines for determining the independence of directors. Director independence is discussed further below.
 
·  
The independent directors must meet in executive session at least once a year and at such other times as they may desire. Director J. Patrick Barrett will preside over the meeting(s) of independent directors. The outside directors, including any who are not “independent,” meet (presided over by the lead director) in connection with each regularly scheduled Board meeting and at such other times as they may desire.
 
·  
The Board has, among other Committees, an Audit Committee, Compensation Committee and Corporate Governance Committee and only independent directors may serve on each of these committees, and all of the directors serving on those Committees are independent under applicable NYSE listing standards and our Corporate Governance Guidelines.
 
·  
The current lead director is David A. Stonecipher. Mr. Stonecipher was the former chairman and chief executive officer of Jefferson-Pilot Corporation.
 
·  
Outside directors are not permitted to serve on more than five boards of public companies in addition to our Board and independent directors who are chief executive officers of publicly held companies may not serve on more than two boards of public companies in addition to our Board. Inside directors are not permitted to serve on more than two boards of public companies in addition to our Board.
 
·  
The written charters of the standing Committees of the Board are reviewed not less than annually. The charters of the Audit, Compensation and Corporate Governance Committees comply with the NYSE’s listing standards. The charters are available on our website (www.lfg.com) and in print to any shareholder who requests them by contacting our Corporate Secretary.
 
·  
We have Corporate Governance Guidelines that likewise comply with the NYSE’s listing standards. The Corporate Governance Guidelines are available on our website (www.lfg.com) and are also available in print to any shareholder who requests them by contacting our Corporate Secretary.
 
·  
We have a Code of Conduct that is available on our website () and is also available in print to any shareholder who requests it by contacting our Corporate Secretary. The Code of Conduct comprises our “code of ethics” for purposes of Item 406 of Regulation S-K under the Securities Exchange Act of 1934, as amended, and our “code of business conduct and ethics” for purposes of the NYSE listing standards. We intend to disclose amendments to or waivers from a required provision of the code by including such information on our website ().
 
·  
Committee chairs serve a minimum of three years and a maximum of six years, unless those limitations are shortened or extended by the Board.
 
·  
We have a mandatory retirement age of 72 for outside directors.
 
·  
The Board conducts a review of the performance of the Board and its Committees each year.
 
 
- 7 -

 
 
·  
The Corporate Governance Committee is responsible for individual director assessments and obtains input for such assessments from all Board members other than the director being assessed. These assessments, including confidential feedback to the director, will be completed at least one year prior to a director’s anticipated nomination for a new term.
 
·  
The Board conducts an annual CEO performance evaluation. The lead director chairs a meeting of the outside directors to discuss the evaluation and communicates the results to the CEO.
 
·  
The Board reviews the annual succession planning report from the CEO, including the position of CEO as well as other executive officers.
 
·  
The Board, Audit Committee, Compensation Committee, Corporate Governance Committee and Finance Committee each have authority to retain legal counsel or any other consultant or expert without notification to, or prior approval of, management.
 
·  
Directors are required to submit their resignation from the Board upon changing their occupational status, and the Corporate Governance Committee with input from the CEO makes a recommendation to the Board regarding acceptance of such resignation.
 
·  
Directors are required to achieve share ownership of three times their annual cash portion of the retainer within five years of election to the Board, and based on the March 5, 2007 closing price of our common stock, all directors are in compliance with such requirements.
 
·  
We will pay the reasonable expenses for each director to attend at least one continuing education program per year.
 
·  
We have a director orientation program for new directors, and all directors are invited to attend orientation programs when they are offered.
 
·  
We will not make any personal loans or extensions of credit to directors or executive officers.
 
·  
The Corporate Governance Committee must re-evaluate the Corporate Governance Guidelines each year.
 

Director Independence

Our common stock is traded on the NYSE. NYSE listing standards and our Corporate Governance Guidelines require that a majority of our directors meet the criteria for independence as set forth in the NYSE listing standards. The NYSE listing standards provide that in order to be considered independent, the Board must determine that a director has no material relationship with us other than as a director. As permitted by the NYSE listing standards, the Board has adopted categorical standards to assist it in determining whether its members have such a material relationship with us. These standards, which are part of our Corporate Governance Guidelines, are discussed below and can be found on our website (www.lfg.com).

The Corporate Governance Committee and the Board have reviewed the independence of each Board member, including the nominees for director at the Annual Meeting, considering the standards set forth in our Corporate Governance Guidelines (which include the NYSE standards for independence). As a result of this review, the Board affirmatively determined that directors Avery, Barrett, Cunningham, Henderson, Johnson, Lachman, Mee, Payne, Pittard, Ruckelshaus and Tidwell are, and former director Tilton was, independent because they have none of the following material relationships with us (either directly or as a partner, shareholder or officer of an organization that has a material relationship with us):

·  
is or was an employee, or whose immediate family member is or was an executive officer, of us or our subsidiaries during the three years prior to the independence determination;

·  
has received, or whose immediate family member received, from us, during any 12-month period within the three years prior to the independence determination, more than $100,000 in direct compensation, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service);

·  
(i) is or an immediate family member is a current partner of our external or internal auditor (to the extent the internal auditor is a third-party); (ii) is a current employee of such a firm; (iii) has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit,
 
 
 
- 8 -

 
 
assurance or tax compliance (but not tax planning) practice; or (iv) was, or who has an immediate family member that was, within the three years prior to the independence determination (but is no longer) a partner or employee of such a firm and personally worked on our audit within that time;
·  
is or was employed, or whose immediate family member is or was employed, as an executive officer of another company where any of our present executives served at the same time on that company’s compensation committee within the three years prior to the independence determination;
 
·  
is or was an executive officer or an employee, or whose immediate family member is or was an executive officer, of a company that makes payments to, or receives payments from, us for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million or 2% of such other company’s consolidated gross revenues within the three years prior to the independence determination;

·  
is an executive officer of a not-for-profit organization to which we or the Lincoln Financial Foundation, Inc.’s annual discretionary contributions exceed the greater of $1 million or 2% of the organization’s latest publicly available total annual revenues; and

·  
has any other material relationship with us (either directly or as a partner, shareholder, or officer of an organization that has a relationship with us, including any contributions we made to a charitable organization of which the director serves as an executive officer).

The Board of Directors also has determined that the following relationships are not material and do not impair a director’s independence:

·  
A director or a director’s immediate family member’s purchase or ownership of an insurance, annuity, mutual fund or other product from us, or use of our financial services, all on terms and conditions substantially similar to those generally available to other similarly situated third parties in arm’s-length transactions and does not otherwise violate the criteria listed above.

·  
A director’s membership in the same professional association, or the same social, fraternal or religious organization or club, as one of our executive officers or other directors.

·  
A director’s current or prior attendance at the same educational institution as one of our executive officers or other directors.

·  
A director’s service on the board of directors of another public company on which one of our executive officers or directors also serves, except for prohibited compensation committee interlocks.

·  
A director’s employment by another public company whose independent registered public accounting firm is the same as ours.

In addition, a director who is also a member of our Audit Committee must meet the following additional requirements regarding independence as required by Rule 10A-3(b)(1)(ii) under the Securities Exchange Act of 1934:

 
1.
A director is not independent if he or she accepts, directly or indirectly, any consulting, advisory, or other compensatory fee from us or any of our subsidiaries, other than the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with us or any of our subsidiaries (provided that such compensation is not contingent in any way on continued service).

2.     
A director is not independent if he or she is an “affiliated person” (as defined in Section 10A-3 of the Exchange Act) of us or any of our subsidiaries.

Finally, the Board determined that those directors who are members of the Audit, Corporate Governance, Compensation and Finance Committees are likewise independent of our management and us under our Corporate Governance Guidelines and SEC and NYSE rules, as applicable.


- 9 -


In conducting its independence review discussed above, the Board considered, among other things, transactions and relationships between each outside director or any member of his or her immediate family and us or our subsidiaries and affiliates. In making these determinations, the Board considered that in the ordinary course of business, transactions occur between us and companies at which some of our directors are or have been employees or officers. In each case, the amount of transactions with these companies in each of the last three years did not reach the thresholds set forth in the categorical standards. Mr. Cunningham is a professor at and employee of The University of Texas with which we engage in ordinary course of business transactions. Mr. Barrett is president of a company with which we engage in ordinary course of business transactions. The transactions were on terms that are substantially equivalent to those prevailing at the time for comparable transactions, and none approached the threshold levels set forth in our categorical standards.

Under our categorical standards, discretionary contributions to not-for-profit organizations to which a director serves as an executive officer of the lesser of $1 million or 2% of the organization’s latest publicly available total annual revenues, will not impair the director’s independence. None of the directors are executive officers of the not-for-profit organizations to which we or the Lincoln Financial Foundation, Inc. made contributions, and none of the reported transactions approach the levels set forth on our categorical standards.

Qualifications and Director Nomination Process

The Corporate Governance Committee of the Board, which is composed solely of “independent directors,” is responsible for (1) assisting the Board by identifying individuals qualified to become Board members, (2) recommending to the Board the director nominees for the next annual meeting of shareholders and (3) evaluating the competencies appropriate for the Board and identifying missing or under-represented competencies. Our Corporate Governance Guidelines provide that the Board itself should be responsible, in fact as well as procedure, for selecting its own members.

The Corporate Governance Committee does not have any specific minimum qualifications that must be met by a nominee. However, its charter provides that “[I]n nominating candidates, the Committee shall take into consideration such factors as it deems appropriate. These factors may include judgment, skill, diversity, experience, the extent to which the candidate’s experience complements the experience of other Board members, and the extent to which the candidate would be a desirable addition to the Board and any Committees of the Board. The Committee may consider candidates proposed by management, but is not required to do so.”

The Corporate Governance Committee identifies nominees by first evaluating the current members of the Board willing to continue in service. The Corporate Governance Committee begins by reviewing the individual director assessments of existing directors who are being considered for re-nomination. Current members of the Board who have skills and experience that are relevant to our business, who are willing to continue to serve and whose director assessment indicates the director has performed well during the most recent term are considered for re-nomination. If any member of the Board being considered for re-nomination does not wish to serve or if the Corporate Governance Committee decides not to re-nominate a given member, the Corporate Governance Committee identifies the desired skills and experience that a potential new nominee should possess. The Corporate Governance Committee also considers whether it is necessary or desirable that the nominee be considered independent under the NYSE listing standards, and, if so, whether the individual meets the standards for independence. The Corporate Governance Committee may, but is not required to, retain an outside firm to assist in the identification and evaluation of potential nominees.

The Corporate Governance Committee is responsible for reviewing with the Board the appropriate skills and characteristics required of Board members in the context of the current make-up of the Board. This assessment includes integrity, issues of diversity, age, professional accomplishments, skills such as understanding of marketing, finance, accounting, regulation and public policy, international background, commitment to our shared values, etc. - all in the context of an assessment of the perceived needs of the Board at a given point in time.

The Board has delegated the process of screening potential nominees who are not current directors to the Corporate Governance Committee with input from the CEO. In connection with the evaluation of a new nominee, the Corporate Governance Committee determines whether it should interview the nominee, and if warranted, one or more members of the Corporate Governance Committee interview the nominee. Upon completing the evaluation and the interview, the Corporate Governance Committee makes a recommendation to the Board as to whether to nominate the director nominee.
 
 
 
- 10 -


Although the Corporate Governance Committee does not solicit shareholder recommendations regarding director nominees to be proposed by the Board, it will consider such recommendations if they are made in accordance with the procedures set forth in Article I, Section 11 of our Bylaws, which is set forth in Exhibit 2 to this proxy statement and discussed beginning on page 69 of this proxy statement under the heading “Shareholder Proposals.” If the Corporate Governance Committee determines that such a nominee should be considered as a director, it will recommend the nominee to the Board. The Board may accept or reject the proposed nominee. There are no differences in the manner in which the Corporate Governance Committee evaluates nominees for director based on whether the nominee is recommended by a shareholder.

Communications with Directors

The Board provides a process for interested persons to send communications to the Board or to the outside directors of the Board. Interested persons with information pertaining to any possible violation of our Code of Conduct, or concerns or complaints pertaining to our accounting, internal accounting controls or audit, or other concerns are invited to communicate this information to the outside members of the Board of Directors at:

The Outside Directors
Lincoln National Corporation
Centre Square, West Tower
1500 Market St, Suite 3900
Philadelphia, PA 19102-2112
Facsimile: 215-977-2881
Attention: Office of the Corporate Secretary

All complaints and concerns will be received and processed by the Corporate Secretary. Relevant and appropriate complaints and concerns will be referred to our Board’s lead director. You may report your concerns anonymously and/or confidentially. If you choose to report your concerns anonymously, we will be unable to contact you in the event we require further information in the course of our investigation. If you choose to report your concerns confidentially, we cannot guarantee absolute confidentiality. In certain circumstances, it would be impossible to conduct a thorough investigation without revealing your identity. No retaliatory action will be taken against employees who raise any concern in good faith.

Director Attendance at 2006 Annual Meeting

The Board does not have a formal policy regarding attendance by Board members at our annual meeting of shareholders, but directors are encouraged to attend the annual meeting of shareholders. All of our directors attended the 2006 annual meeting of shareholders, except Jill S. Ruckelshaus.



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THE BOARD OF DIRECTORS AND COMMITTEES

Our Board is currently composed of 14 members. The members of the Board, including Board nominees, their relevant term of office, and certain biographical information are set forth below under “Item 1 - Election of Directors.” Compensation of our directors is discussed below under “Compensation of Directors.”

During 2006, the Board met 6 times. All directors attended 75% or more of the aggregate meetings of the Board and Board Committees held during the period that he or she served as a director and which he or she was eligible to attend.

The Board currently has five standing committees: the Audit Committee, the Compensation Committee, the Corporate Governance Committee, the Finance Committee and the Committee on Corporate Action. In 2006, the former Development Committee changed its name to the Finance Committee, and the Finance Committee assumed the duties of the Development Committee and former Securities Committee. The following table lists the Directors who currently serve on the Committees and the number of meetings held for each Committee during 2006. The Audit, Compensation, Corporate Governance and Finance Committees each conduct a self-evaluation of their respective committee’s performance each year.

Current Committee Membership and Meetings Held During 2006
(C=Chair M=Member)
 
Name
Audit
Compensation
Corporate Governance
Finance
Corporate Action1
William J. Avery
M
       
J. Patrick Barrett
   
M
   
Jon A. Boscia
       
C
William H. Cunningham
 
C
 
M
 
Dennis R. Glass
       
M
George W. Henderson, III
M
   
M
 
Eric G. Johnson
     
C
 
M. Leanne Lachman
C
       
Michael F. Mee
 
M
 
M
 
William P. Payne
   
C
   
Patrick S. Pittard
 
M
     
Jill S. Ruckelshaus
   
M
   
David A. Stonecipher
         
Isaiah Tidwell
M
 
M
   
Number of Meetings in 2006:
10
9
6
4
--
1 The Committee on Corporate Action normally takes action by the unanimous written consent of the members of that Committee, and eight such actions were taken in 2006.

The functions and responsibilities of the key standing committees of our Board are described below.

Audit Committee

The primary function of the Audit Committee is oversight. The principal functions of the Audit Committee include:

·  
assist the Board of Directors in its oversight of (a) the integrity of our financial statements, (b) our compliance with legal and regulatory requirements, (c) the independent auditor’s qualifications and independence, and (d) the performance of our general auditor and independent auditor;
·  
select, evaluate and replace the independent auditors, and approve all engagements of the independent auditors;
·  
review significant financial reporting issues and practices;
·  
discuss our annual consolidated financial statements and quarterly “management discussion and analysis of financial condition and results of operations” included in our SEC filings and annual report to shareholders, if applicable;
·  
inquire about significant risks and exposures, if any, and review and assess the steps taken to monitor and manage such risks;
·  
establish procedures for the receipt, retention, and treatment of complaints regarding accounting, internal
 
 

 
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auditing controls, or auditing matters, and for the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;
·  
consult with management before the appointment or replacement of the internal auditor; and
·  
prepare the report required to be prepared by the Audit Committee pursuant to the rules of the SEC for inclusion in our annual proxy statement.
 
The Board has determined that William J. Avery is an “audit committee financial expert” as defined under Item 401 of Regulation S-K under the Securities Exchange Act of 1934, as amended. Mr. Avery is an independent director under applicable SEC rules, NYSE listing standards and our Corporate Governance Guidelines. The Audit Committee has authority to obtain advice and assistance from internal or external legal, accounting or other advisors. The Board has adopted a written charter for the Audit Committee, a copy of which is available on our website (www.lfg.com).

More information concerning the Audit Committee, including the Audit Committee Report, is set forth below under “Ratification of the Appointment of the Independent Registered Public Accounting Firm” beginning on page 18.

Compensation Committee  

The principal functions of the Compensation Committee include:

·  
establish, in consultation with senior management, our general compensation philosophy;
·  
review and confer on the selection and development of executive officers and key personnel;
·  
review and approve corporate goals and objectives relevant to the compensation of the chief executive officer, evaluate the chief executive officer’s performance in light of these goals and set the chief executive officer’s compensation level based on this evaluation;
·  
review and recommend to the Board for approval candidates for chairman of the Board and chief executive officer;
·  
review and approve all compensation strategies, policies and programs that encompass total remuneration of our executive officers and key personnel;
·  
make recommendations to the Board regarding incentive compensation and equity-based plans and approve all grants and awards under such plans to executive officers;
·  
approve employment contracts and agreements for executive officers; and
·  
approve employee benefit and executive compensation plans and programs and changes to such plans and programs, if the present value cost of each plan or change to a plan will not exceed $20 million for the next five calendar years after their effectiveness.

The Compensation Committee has the authority to retain and terminate compensation consultants and to approve any compensation consultant’s fees and terms of retention and to obtain advice and assistance from internal or external legal, accounting or other advisors. A copy of the Compensation Committee Charter is available on our website (www.lfg.com). More information concerning the Compensation Committee is set forth below “Compensation Committee Processes and Procedures.”

Corporate Governance Committee 

The principal functions of the Corporate Governance Committee include:

·  
identify individuals qualified to become Board members;
·  
subject to our bylaws, recommend to the Board nominees for director (including those recommended by shareholders in accordance with our Bylaws) and for Board Committees;
·  
take a leadership position regarding corporate governance and to develop and recommend to the Board a set of corporate governance principles;
·  
develop and recommend to the Board standards for determining the independence of directors;
·  
recommend to the Board an overall compensation program for directors;
·  
make recommendations to the Board regarding the size of the Board and the size, structure and function of Board Committees;
·  
assist in the evaluation of the Board and be responsible for the evaluation of individual directors; and
·  
recommend to the Board such additional actions related to corporate governance as the Committee deems advisable.

- 13 -


The Corporate Governance Committee has the authority to retain and terminate search firms and to approve any search firm’s fees and terms of retention and to obtain advice and assistance from internal or external legal, accounting or other advisors. A copy of the Corporate Governance Committee Charter is available on our website (www.lfg.com).

Finance Committee  

The Finance Committee replaced our prior Development and Securities Committees. The principal functions of the Finance Committee include:

·  
review our financial performance standards and our performance against such standards;
·  
review and provide guidance to senior management with respect to our capital structure, including reviewing and approving (within guidelines established by the Board) issuance of securities by us or any of our affiliates and reviewing and recommending changes, if necessary, to our dividend and share repurchase strategies;
·  
review our overall credit quality and credit ratings strategy;
·  
review and provide recommendations regarding our strategic initiatives;
·  
within guidelines established by the Board, review and approve proposed mergers, acquisitions, divestitures, joint ventures, other strategic investments and significant proposed “off balance sheet” transactions;
·  
review and approve our investment policies, strategies and guidelines;
·  
review our hedging program and the policies and procedures governing the use of financial instruments including derivative instruments; and
·  
review the adequacy of the funding of our qualified pension plans, including significant actuarial assumptions.

The Finance Committee has authority to obtain advice and assistance from internal or external legal, accounting or other advisors. A copy of the Finance Committee Charter is available on our website at www.lfg.com.

Committee on Corporate Action

Within limits now or hereafter specified by the Board and, in some cases, the Finance Committee, the principal functions of the Committee on Corporate Action include:

·  
determine the pricing of the securities offered from the shelf registration statement (including the interest rate, dividend rate, distribution rate or contract adjustment payments, as applicable, the conversion ratio or settlement rate, as applicable, the price at which such securities will be sold to the underwriters, the underwriting discounts, commissions and reallowances relating thereto and the price at which such securities will be sold to the public);
·  
approve the final form of underwriting agreement, security and other transaction documents relating to the offering and sale of the securities under the shelf registration statement; and
·  
elect certain classes of our officers as the Board may determine by resolution.


ITEM 1 - ELECTION OF DIRECTORS

Our Board is currently composed of 14 members and is divided into three classes. Each director is elected for a three-year term. We have a vacancy in the class with a term expiring at the 2008 Annual Meeting of Shareholders as a result of Glenn F. Tilton’s resignation from the Board on March 20, 2007. The Board of Directors is authorized under our Bylaws to fill the vacancy in the class of directors or reduce the size of the Board without seeking shareholder approval.

Nominees For Director

If you sign the enclosed proxy card and return it to us, your proxy will be voted for the Board’s nominees for terms expiring at the 2010 Annual Meeting or until their successors are duly elected and qualified, unless you specifically indicate on the proxy card that you are withholding authority to vote for one or more of those nominees. All of the nominees are current directors of LNC. All nominees have agreed to serve on the Board if they are elected. If any nominee is unable (or for whatever reason declines) to serve as a director at the time of the Annual Meeting, proxies may be voted for the election of a qualified substitute nominee selected by the Board.
 
 
- 14 -


Nominees for a Term Expiring at the 2010 Annual Meeting

William J. Avery
Director since 2002
Age 66
 
 
Principal Occupation, Business Experience and public and investment Company Directorships:
Retired Executive. Chairman of the Board and Chief Executive Officer of Crown Cork & Seal Company, Inc., a manufacturer of packaging products for consumer goods (1995 - 2001). Director of Rohm & Haas.

William H. Cunningham
Director since 2006
Age 63
 
Principal Occupation, Business Experience and public and investment Company Directorships:
Professor at The University of Texas at Austin (2000 - Present). Director of Hayes Lemmerz International, Inc., Introgen Therapeutics, Inc., John Hancock Mutual Funds, LIN Television, and Southwest Airlines Co.

William Porter Payne
Director since 2006
Age 59
 
Principal Occupation, Business Experience and public and investment Company Directorships:
Partner, Gleacher Partners LLC, an investment banking and asset management firm (2000 - Present). Director of Anheuser Busch, Inc. and Cousins Properties, Inc.

 
Patrick S. Pittard
Director since 2006
Age 61
 
Principal Occupation, Business Experience and public and investment Company Directorships:
Distinguished Executive in Residence at the Terry Business School, University of Georgia (2002 - Present). Chairman, President and Chief Executive Officer of Heidrick & Struggles International, Inc., a global provider of senior level executive search and leadership development services (1983 - 2002). Director of Artisan Funds.

Jill S. Ruckelshaus
Director since 1975
Age 70
 
Principal Occupation, Business Experience and Public and Investment Company Directorships:
Retired Executive. Prior to her retirement in 1997, Ms. Ruckelshaus was a consultant for William D. Ruckelshaus Associates, environmental consultants (1989 - 1997). Director of Costco, Inc.

The Board of Directors recommends a vote FOR each of the nominees.

- 15 -


Directors Continuing In Office

The identity of, and certain biographical information relating to, the directors who will continue in office after the Annual Meeting are set forth below.

Continuing in Office for a Term Expiring at the 2008 Annual Meeting

J. Patrick Barrett
Director since 1990
Age 70
 
Principal Occupation, Business Experience and Public and Investment Company Directorships:
Chairman and Chief Executive Officer of CARPAT Investments, a private investment company (1987 - Present).

 
Dennis R. Glass
Director since 2006
Age 57
 
Principal Occupation, Business Experience and Public and Investment Company Directorships:
President and Chief Operating Officer of Lincoln National Corporation (April 2006 - Present). President and Chief Executive Officer of Jefferson-Pilot Corporation (2004- April 2006). President and Chief Operating Officer of Jefferson-Pilot Corporation (2001 -2004).

 
Michael F. Mee
Director since 2001
Age 64
 
Principal Occupation, Business Experience and Public and Investment Company Directorships:
Retired Executive. Executive Vice President and Chief Financial Officer of Bristol-Myers Squibb Company, a pharmaceutical and related health care products company (1994 - 2001). Director of Ferro Corporation.
 

 
    David A. Stonecipher
    Director since 2006
    Age 66
 
     Principal Occupation, Business Experience and Public and Investment Company Directorships:
     Retired Executive. Director, Chairman of the Board of Jefferson-Pilot Corporation (2004 - 2006). Director, Chairman of the Board, Chief Executive Officer of Jefferson-Pilot  
     Corporation    (2001 - 2004).


- 16 -



Continuing in Office for a Term Expiring at the 2009 Annual Meeting

Jon A. Boscia
Director since 1998
Age 55
 
Principal Occupation, Business Experience and Public and Investment company Directorships:
Chairman of Lincoln National Corporation (2001 - Present). Chief Executive Officer of Lincoln National Corporation (1998 - Present) President of Lincoln National Corporation (1998 - 2001). President, The Lincoln National Life Insurance Company (1999 - 2004). Director of The Hershey Company.

George W. Henderson, III
Director since 2006
Age 58
 
Principal Occupation, Business Experience and Public and Investment Company Directorships:
Retired Executive. Chairman and Chief Executive Officer of Burlington Industries, Inc., a manufacturer of textile products (1995 - 2003) (Burlington filed for bankruptcy protection under Chapter 11 in late 2001 to transition and modify its business model in the highly competitive textile business). Director of Bassett Furniture Industries, Inc. and Propex, Inc.

Eric G. Johnson
Director since 1998
Age 56
 
Principal Occupation, Business Experience and Public and Investment Company Directorships:
President and Chief Executive Officer of Baldwin Richardson Foods Company, a manufacturer of dessert products and liquid condiments for retail and the food service industry (December 1997 - present).

M. Leanne Lachman
Director since 1985
Age 64
 
Principal Occupation, Business Experience and Public and Investment Company Directorships:
President of Lachman Associates LLC, an independent real estate consultant and investment advisor (2003 - Present). Principal and Managing Director of Lend Lease Real Estate Investments, a global investment manager (1999 - 2003). Secretary of G.L. Realty Investors, Inc (2004 - Present). Director of Liberty Property Trust.

 
Isaiah Tidwell
Director since 2006
Age 62
 
Principal Occupation, Business Experience and Public and Investment Company Directorships:
Retired Executive. Executive Vice President and Georgia Wealth Management Director, Wachovia Bank, N.A., a diversified commercial banking organization (2001 - 2005). Director of Lance, Inc. and Ruddick Corporation.
 
 
- 17 -

 
 
ITEM 2 - RATIFICATION OF THE APPOINTMENT OF
THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

On February 22, 2007, our Audit Committee appointed Ernst & Young LLP, as our independent registered public accounting firm, for the year ending December 31, 2007. We have engaged this firm and its predecessors in this capacity continuously since 1968. Although not required, we request that you ratify this appointment. If you do not ratify this appointment, the Audit Committee may reconsider its appointment. Even if you do ratify this appointment, the Audit Committee is empowered to terminate Ernst & Young LLP and select and retain another independent registered public accounting firm at any time during the year.
 
Representatives of Ernst & Young LLP will be present at the Annual Meeting. They will be given the opportunity to make a statement, if they so desire, and will be available to respond to appropriate questions relating to the audit of our audited consolidated financial statements for the year ended December 31, 2006.

The Board of Directors recommends a vote FOR the ratification of Ernst & Young LLP, as our independent registered public accounting firm for 2007.

Independent Registered Public Accounting Firm
Fees and Services

Below are fees that were incurred by Ernst & Young LLP, our independent registered public accounting firm, for fiscal years 2006 and 2005 for professional services rendered as well as the related percentage of total fees that each category comprises.

   
Fiscal Year Ended -December 31, 2006
 
 
% of Total Fees
 
Fiscal Year Ended -December 31, 2005
 
 
% of Total Fees
 
Audit Fees
   
10,017,627
   
83.3
 
$
7,830,649
   
82.9
 
Audit-Related Fees
   
2,006,249
   
16.7
 
$
1,553,626
   
16.5
 
Tax Fees
   
--
   
--
 
$
57,093
   
0.6
 
All Other Fees
   
13,500
   
*
   
--
   
--
 
TOTAL FEES:
   
12,037,376
   
100.0
 
$
9,441,368
   
100.0
 
 
*less than 1%

Audit Fees

Fees for audit services include fees associated with the annual audit, the reviews of our interim financial statements included in quarterly reports on Form 10-Q, accounting consultations directly associated with the audit, and services normally provided in connection with statutory and regulatory filings.

Audit-Related Fees

Audit-related services principally include employee benefit plan audits, service auditor reports on internal controls, due diligence procedures in connection with acquisitions and dispositions, reviews of registration statements and prospectuses and accounting consultations not directly associated with the audit or quarterly reviews.

Tax Fees

Fees for tax services include tax compliance and advisory services.

All Other Fees

Represents fees for two software products used for technical research.


- 18 -


Audit Committee Pre-Approval Policy

In accordance with its charter, the Audit Committee’s policy is to pre-approve services provided by Ernst & Young LLP. These pre-approval procedures are set forth in Exhibit 3 hereto. During the year ended December 31, 2006, we relied upon the de minimis exception to pre-approval pursuant to SEC rules for approximately 1% of all services provided by Ernst & Young LLP.
 
Audit Committee Report(1)

Management has primary responsibility for preparing Lincoln National Corporation’s financial statements and establishing financial reporting systems and internal controls. Management also is responsible for reporting on the effectiveness of the Corporation’s internal control over financial reporting. The independent registered public accounting firm is responsible for performing an independent audit of the Corporation’s consolidated financial statements and issuing a report on these financial statements. The independent registered public accounting firm is also responsible for issuing an attestation report on management’s assessment of the effectiveness of the Corporation’s internal control over financial reporting.

In this context, the Audit Committee has reviewed and discussed with management the audited financial statements for the fiscal year ended December 31, 2006. The Audit Committee has also discussed with the Corporation’s independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, Communications with Audit Committees. Additionally, the Audit Committee has received the written disclosures and representations from the independent registered public accounting firm required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, and has discussed with the independent registered public accounting firm the independent registered public accounting firm’s independence.

Based upon the review and discussions referred to in this report, the Audit Committee recommended to the Board that the audited financial statements for the fiscal year ended December 31, 2006 be included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 for filing with the SEC.

William J. Avery
George W. Henderson, III
M. Leanne Lachman, Chair
Isaiah Tidwell

(1)
This Audit Committee Report, will not be deemed to be “soliciting material” or to be “filed” with the SEC, except to the extent that we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed with the SEC under the Exchange Act or under the Securities Act of 1933, as amended.

- 19 -


ITEM 3
APPROVAL OF THE
LINCOLN NATIONAL CORPORATION
AMENDED AND RESTATED INCENTIVE COMPENSATION PLAN

On February 23, 2007, our Board of Directors approved an amendment and restatement of the Amended and Restated Lincoln National Corporation Incentive Compensation Plan, which, as amended and restated, is referred to below as the ICP, or the Plan. The Plan as last amended and restated in 2005 is referred to below as the Amended and Restated ICP.

The purpose of the amendment and restatement was to increase the total number of shares of common stock available for issuance under the Plan by 5,500,000 and to expand the business criteria that we use to set performance targets, subject to shareholder approval at this Annual Meeting. We are asking shareholders to approve the amendment and restatement so that we may continue to grant equity awards to attract and retain key employees and to tie our key employees’ interests with those of shareholders. Also, by approving the amendment and restatement, shareholders will be deemed to have re-approved the expanded business criteria that we use to set performance targets for awards granted to satisfy the provision of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code.

Purpose

Our Board of Directors believes that attracting and retaining key employees is essential to our growth and success. In addition, our Board believes that our long-term success is enhanced by a competitive and comprehensive compensation program, which may include tailored incentives designed to motivate and reward such persons for outstanding service, including awards that link compensation to applicable measures of our performance and the creation of shareholder value. Under the Plan, we are able to grant awards that enable us to attract and retain key employees and enable such persons to acquire and/or increase their proprietary interest in us and thereby align their interests with the interests of our shareholders. Accordingly, the Plan is designed to accomplish these objectives.

The changes to the Amended and Restated ICP are to increase the total number of shares of common stock available for issuance under the Plan by 5,500,000 shares and to expand the business criteria that we use to set performance targets. Under the Plan, the total number of shares of our common stock initially reserved and available for delivery to participants in connection with Awards (as defined below), including shares relating to awards previously granted, was 32,226,512. As of December 31, 2006 and March 5, 2007, 5,057,411 and 3,490,150, respectively, of these shares remained available for issuance. Note, in general, that the shares remaining under the Plan at December 31, 2006 will fluctuate as new Awards are granted and as outstanding Awards expire or are cancelled or forfeited without delivery of the shares underlying an award to a recipient. For a further discussion of share counting under the Plan, see “Shares Subject to the ICP; Annual Per-Person Limitations” below. If the amendment and restatement is not approved, the Plan will continue with the remaining shares available for issuance, but we believe this amount will be insufficient to allow us to attract and retain key talent.

Our incentive compensation programs are paid out upon the Compensation Committee’s certification of the achievement of pre-established performance goals that meet the requirements of Section 162(m) of the Code for “performance-based” compensation. For further information regarding 2006 incentive compensation, see the “Compensation Discussion & Analysis” beginning on page 31 of this proxy statement. We believe that, as a result of our merger with Jefferson-Pilot Corporation and the growth of our businesses, the current list of business criteria used to establish the pre-established performance goals is not broad enough to allow us to develop appropriate performance goals for all of our businesses.

We commit to shareholders that we will maintain a prospective three-year average burn rate (commencing on January 1, 2008) with respect to our equity awards under all plans that will not exceed the greater of two percent of our shares outstanding or the mean of its Global Industry Classification Standards Peer Group (Insurance). The “burn rate” is calculated by dividing the number of Awards granted each fiscal year by the basic shares of common stock outstanding at the end of each of the three fiscal years. For purposes of calculating the number of shares granted in a year, Awards, other than options and SARs with an exercise price that is at least equal to the fair market value on the date of grant, will count as equivalent to (i) 1.5 option shares if our annual stock price volatility is 53% or higher, (ii) two option shares if our annual stock price volatility is between 25% and 52%, and (iii) four option shares if our annual stock price volatility is less than 25%.
 
 
- 20 -


The following is a brief description of the material features of the Plan. This description is qualified in its entirety by reference to the full text of the Plan, which is attached hereto as Exhibit 4.

Types of Awards. The terms of the Plan provide for grants of stock options, stock appreciation rights (“SARs”), restricted stock, deferred stock units, other stock-related awards, and performance or annual incentive awards that may be settled in cash, stock, or other property (“Awards”).

Shares Subject to the ICP; Annual Per-Person Limitations. As stated above, under the Plan, the total number of shares of our common stock reserved and available for delivery to participants in connection with Awards is 32,226,512. However, 5,057,411 shares and 3,490,150 were available under the ICP as of December 31, 2006 and March 5, 2007, respectively. We are seeking to increase the number of shares available for issuance under the Plan by 5,500,000. Shares that may be issued in payment of Awards, other than Options and SARs, are counted against the remaining shares at a ratio of 3.25-to-1. The total number of shares of common stock with respect to which incentive stock options (“ISOs”), none of which are currently outstanding, may be granted shall not exceed 2,000,000. As stated above, the remaining shares will vary at any point in time due to new Award grants and expirations, forfeitures and cancellations of outstanding Awards as discussed in the following paragraph. Any shares of common stock delivered under the Plan shall consist of authorized and unissued shares.

 The Plan contains rules to permit all awards to be properly counted and not counted twice. These rules will apply to shares previously authorized under any other plan at the time they become subject to the Plan. Forfeited, terminated or expired awards of shares, as well as awards settled in cash without issuing any shares, will become available for future awards. With respect to stock settled SARS, the full issuance of shares to settle such Awards will count against shares available under the Plan.

In addition, the Plan imposes individual limitations on the amount of certain Awards in order to comply with Section 162(m) of the Code. Under these limitations, during any fiscal year the number of options, SARs, shares of restricted stock, units of deferred stock, shares of common stock issued as a bonus or in lieu of other obligations, and other stock-based Awards granted to any one participant shall not exceed 2,000,000 shares for each type of such Award, subject to adjustment in certain circumstances. The maximum amount that may be earned as an annual incentive award or other cash Award (payable currently or on a deferred basis) in any fiscal year by any one participant is $8,000,000, and the maximum amount that may be earned as a performance award or other cash Award (payable currently or on a deferred basis) in respect of a performance period by any one participant is $8,000,000.

The Committee is authorized to adjust the number and kind of shares subject to the aggregate share limitations and annual limitations under the Plan and subject to outstanding Awards (including adjustments to exercise prices and number of shares of options and other affected terms of Awards) in the event that a dividend or other distribution (whether in cash, shares, or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event affects the common stock so that an adjustment is appropriate. The Committee is also authorized to adjust performance conditions and other terms of Awards in response to these kinds of events or in response to changes in applicable laws, regulations, or accounting principles.

Eligibility. Our or our subsidiaries’ executive officers and other officers and employees, agents and brokers, including any such person who may also be one of our directors, are eligible to be granted Awards under the Plan. It is anticipated that approximately 1,500 persons are eligible to receive Awards under the Plan.

Administration. The Plan will be administered by the Committee. Subject to the terms and conditions of the Plan, the Committee is authorized to interpret the provisions of the plan, select participants, determine the type and number of Awards to be granted and the number of shares of common stock to which Awards will relate, specify times at which Awards will be exercisable or settleable (including performance conditions that may be required as a condition thereof), set other terms and conditions of such Awards, prescribe forms of Award agreements, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations that may be necessary or advisable for the administration of the Plan. The Committee may, in its discretion, convert any Award or the value of any Award under the Plan, subject to applicable laws and regulations, into Deferred Stock Units which will be administered under the Deferred Compensation Plan. The Plan provides that Committee members shall not be personally liable, and shall be fully indemnified, in connection with any action, determination, or interpretation taken or made in good faith under the Plan.


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Stock Options and SARs. The Committee is authorized to grant stock options, including both ISOs that can result in potentially favorable tax treatment to the participant and non-qualified stock options (i.e., options not qualifying as ISOs), and SARs entitling the participant to receive the excess of the fair market value of a share of common stock on the date of exercise over the grant price of the SAR. The exercise price per share subject to an option and the grant price of a SAR is determined by the Committee, but must not be less than the fair market value of a share of common stock on the date of grant. Under the Plan, unless otherwise determined by the Committee, the fair market value of common stock is the average of the highest and lowest prices of a share of common stock, as quoted on the composite transactions tape on the NYSE, on the last trading day prior to the date on which the determination of fair market value is being made. However, as is discussed further below on page 39, the Compensation Committee has adopted a policy providing that options granted after November 2006 will use the closing price of our common stock on the date of grant as the exercise price. On March 22, 2007, the closing price of our common stock was $68.23 per share.
 
The maximum term of each option or SAR, the times at which each option or SAR will be exercisable, and provisions requiring forfeiture of unexercised options or SARs at or following termination of employment generally are fixed by the Committee, except no option or SAR may have a term exceeding ten years. Options may be exercised by payment of the exercise price in cash, common stock or outstanding Awards having a fair market value equal to the exercise price, as the Committee may determine from time to time. Methods of exercise and settlement and other terms of the SARs are determined by the Committee. To date, we have only granted SARs settleable exclusively in cash. The Committee may include a provision in an option permitting the grant of a new option when payment of the exercise price of an option is made in shares of common stock. However, as discussed below, the exercise price of an option may not be reduced (except as a result of a change in our capitalization) without shareholder approval. See “Other Terms of Awards; No Repricing,” below.

Restricted Stock and Deferred Stock Units. The Committee is authorized to grant restricted stock and deferred stock units. Restricted stock is a grant of common stock which may not be sold or disposed of, and which may be forfeited in the event of certain terminations of employment and/or failure to meet certain performance requirements, prior to the end of a restricted period specified by the Committee. A participant granted restricted stock generally has all of the rights of a shareholder, including the right to vote the shares and to receive dividends thereon, unless otherwise determined by the Committee. An Award of deferred stock units is credited to a bookkeeping reserve account under the Deferred Compensation Plan. Such an Award confers upon a participant the right to receive shares at the end of a specified deferral period, subject to possible forfeiture of the Award in the event of certain terminations of employment and/or failure to meet certain performance requirements prior to the end of a specified restricted period (which restricted period need not extend for the entire duration of the deferral period). Prior to settlement, an Award of deferred stock units carries no voting or dividend rights or other rights associated with share ownership, although dividend equivalents may be granted, as discussed below.

Bonus Stock and Awards in Lieu of Cash Obligations. The Committee is authorized to grant shares as a bonus free of restrictions, or to grant shares or other Awards in lieu of obligations to pay cash under other plans or compensatory arrangements, subject to such terms as the Committee may specify.

Other Stock-Based Awards. The Plan authorizes the Committee to grant Awards that are denominated or payable in, valued by reference to, or otherwise based on or related to shares. Such Awards might include convertible or exchangeable debt securities, other rights convertible or exchangeable into shares, purchase rights for shares, Awards with value and payment contingent upon our performance or any other factors designated by the Committee, and Awards valued by reference to the book value of shares or the value of securities of or the performance of specified subsidiaries. The Committee determines the terms and conditions of such Awards, including consideration to be paid to exercise Awards in the nature of purchase rights, the period during which Awards will be outstanding, and forfeiture conditions and restrictions on Awards.

Performance Awards, Including Annual Incentive Awards. The right of a participant to exercise or receive a grant or settlement of an Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Committee. In addition, the Plan authorizes specific annual incentive Awards, which represent a conditional right to receive cash, shares or other Awards upon achievement of pre-established performance goals during a specified one-year period. Performance Awards and annual incentive Awards granted to persons the Committee expects will, for the year in which a deduction arises, be among the Named Executive Officers, will, if so intended by the Committee, be subject to provisions that should qualify such Awards as “performance-based compensation” not subject to the limitation on tax deductibility by us under Code Section 162(m).
 
 
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The performance goals to be achieved as a condition of payment or settlement of a performance Award or annual incentive Award will consist of (i) one or more business criteria and (ii) a targeted level or levels of performance with respect to each such business criterion. In the case of performance awards intended to meet the requirements of Code Section 162(m), the business criteria used must be one of those specified in the Plan, although for other participants the Committee may specify any other criteria. The business criteria specified in the Plan that may be used are, as defined by the Committee: (1) earnings (total or per share); (2) revenues or growth in revenues; (3) cash flow or cash flow return on investment; (4) assets, return on assets, growth in assets, return on investment, capital or return on capital, return on equity, or shareholder equity (total or per share); (5) economic value added or insurance-imbedded value added; (6) operating margin; (7) net income or growth in net income (total or per share), pretax earnings or growth in pretax earnings (total or per share), pretax earnings before interest, depreciation and amortization, pretax operating earnings after interest expense and before incentives, and extraordinary or special items; (8) operating earnings or income from operations; (9) total shareholder return; (10) profit margins; (11) sales, deposits, net flows, premiums and fees, or growth in premiums and fees, including service fees; (12) book value; (13) customer and producer growth or retention; (14) market share or change in market share; (15) stock price or change in stock price; (16) market capitalization, change in market capitalization, or return on market value; (17) fund, account or investment performance; (18) cash flow or change in cash flow; (19) expense ratios, product cost reduction through advanced technology, or other expense management measures; (20) productivity ratios or other measures of operating efficiency or effectiveness; (21) ratio of claims or loss costs to revenues; (22) satisfaction measures: customer, provider, or employee; (23) implementation or completion of critical projects or processes; (24) product development, product release schedules, new product innovation, brand recognition/acceptance; (25) any of the above goals as compared to the performance of a published or special index deemed applicable by the Committee including, but not limited to, the Standard & Poor’s 500 Stock Index or a group of comparator companies; and (26) any criteria comparable to those listed above, including metrics designed to measure progress toward achieving the company’s strategic intent of becoming the retirement income security company of choice for its clients, that shall be approved by the Committee.

In granting annual incentive or performance Awards, the Committee may establish unfunded award “pools,” the amounts of which will be based upon the achievement of a performance goal or goals using one or more of the business criteria described in the preceding paragraph. During the first 90 days of a fiscal year or performance period, the Committee will determine who will potentially receive annual incentive or performance Awards for that fiscal year or performance period, either out of the pool or otherwise. After the end of each fiscal year or performance period, the Committee will determine the amount, if any, of the pool, the maximum amount of potential annual incentive or performance Awards payable to each participant in the pool, and the amount of any potential annual incentive or performance Award otherwise payable to a participant. The Committee may, in its discretion, determine that the amount payable as an annual incentive or performance Award will be increased or reduced from the amount of any potential Award, but may not exercise discretion to increase any such amount intended to qualify as performance-based compensation under Code Section 162(m).

Subject to the requirements of the Plan, the Committee will determine other performance Award and annual incentive Award terms, including the required levels of performance with respect to the business criteria, the corresponding amounts payable upon achievement of such levels of performance, termination and forfeiture provisions, and the form of settlement. Because of the discretionary nature of the Awards that may be made under the Plan, the benefits available under the Plan are not readily determinable. However, the Awards that may be made under the Plan are subject to the limitations discussed above under “Shares Subject to the ICP; Annual Per Person Limitations.”
 
Other Terms of Awards; No Repricing. In general, Awards may be settled in the form of cash, common stock, other Awards, or other property, in the discretion of the Committee. The Committee may require or permit participants to defer the settlement of all or part of an Award in accordance with such terms and conditions as the Committee may establish, including payment or crediting of interest or dividend equivalents on deferred amounts, and the crediting of earnings, gains, and losses based on deemed investment of deferred amounts in specified investment vehicles. The Committee is authorized to place cash, shares, or other property in trusts or make other arrangements to provide for payment of our obligations under the Plan. The Committee may condition any payment relating to an Award on the withholding of taxes and may provide that a portion of any shares or other property to be distributed will be withheld (or previously acquired shares or other property surrendered by the participant) to satisfy withholding and other tax obligations. Awards granted under the Plan generally may not be pledged or otherwise encumbered and are not transferable except by will or by the laws of descent and distribution, or to a designated beneficiary upon the participant’s death, except that the Committee may, in its discretion, permit transfers for estate planning or other purposes.

Awards under the Plan are generally granted without a requirement that the participant pay consideration in the form of cash or property for the grant (as distinguished from the exercise), except to the extent required by law.
 
 
 
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The Committee may, however, grant Awards in exchange for other Awards under the Plan, awards under our other plans, or other rights to payment from us, and may grant Awards in addition to and in tandem with such other award, or rights as well.

Unless the Award agreement specifies otherwise, the Committee may cancel or rescind Awards if the participant fails to comply with certain noncompetition, confidentiality or intellectual property covenants. For instance, Awards may be canceled or rescinded if the participant engages in competitive activity while employed by us or within a specified period following termination of employment. We may, in our discretion, in any individual case provide for waiver in whole or in part of compliance with the noncompetition, confidentiality or intellectual property covenants.

Notwithstanding any other provision of the Plan, no option that has been granted under the Plan may be repriced, replaced or regranted through cancellation, or otherwise modified without shareholder approval (except in connection with adjustments permitted under the Plan), if the effect would be to reduce the exercise price for the shares underlying the option.

Acceleration of Vesting. The Committee may, in its discretion, accelerate the exercisability, the lapsing of restrictions, or the expiration of deferral or vesting periods of any Award, and such accelerated exercisability, lapse, expiration and vesting will occur automatically in the case of a “change of control” of us, except to the extent otherwise determined by the Committee at the date of grant. In addition, the Committee may provide that the performance goals relating to any performance-based award will be deemed to have been met upon the occurrence of any change of control. Upon the occurrence of a change of control, except to the extent otherwise determined by the Committee at the date of grant, options will become fully vested and exercisable and restrictions on restricted stock and deferred stock units will lapse. “Change of Control” is defined to include a variety of events, including the acquisition by certain individuals or entities of twenty percent or more of our outstanding common stock, significant changes in our board of directors, certain reorganizations, mergers and consolidations involving us, and the sale or disposition of all or substantially all of our consolidated assets.

Amendment and Termination of the Plan. The Board of Directors, or the Committee acting pursuant to authority delegated to it by the Board, may amend, alter, suspend, discontinue, or terminate the Plan or the Committee’s authority to grant Awards without further shareholder approval, except shareholder approval must be obtained for any amendment or alteration if required by law or regulation or under the rules of any stock exchange or automated quotation system on which the shares are then listed or quoted. Shareholder approval will not be deemed to be required under laws or regulations, such as those relating to ISOs, that condition favorable treatment of participants on such approval, although the Board may, in its discretion, seek shareholder approval in any circumstance in which it deems such approval advisable. Thus, shareholder approval will not necessarily be required for amendments that might increase the cost of the Plan or broaden eligibility. Unless earlier terminated by the Board, the Plan will terminate at such time as no shares remain available for issuance under the Plan, and we have no further rights or obligations with respect to outstanding Awards under the Plan.

Because the Compensation Committee has discretion to determine the amount and types of awards to be granted under the Plan, all of the benefits that will be received in the future by participants are not readily determinable.
 
The table below shows the number of shares underlying grants of all awards under the Amended and Restated ICP at March 5, 2007 to the NEOs set forth in the Summary Compensation Table, our executive officers, as a group and the group of current employees who are not executive officers.

Name & Title
Total Number of Plan Awards Outstanding1
Jon A. Boscia
Chairman and CEO of LNC
2,334,870
Frederick J. Crawford
Senior Vice President & CFO of LNC
192,726
Dennis R. Glass
President and COO of LNC
282,421
Patrick P. Coyne
President of Lincoln National Investment Company, Inc.
and Delaware Management Holdings, Inc.
37,041
Westley V. Thompson
President of Employer Markets
413,039
 
 
 
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John H. Gotta
Former President and CEO of The Lincoln National Insurance Company
8,676
Warren H. May
Former President of
Lincoln Financial Distributors, Inc.
--
All Executive Officers (including those above), as a Group
4,424,909
Non-Executive Officers Employee Group
6,085,894

1 Includes non-qualified stock options, performance shares (at maximum), restricted stock and deferred units.

The table below provides information as of December 31, 2006 regarding securities authorized for issuance under all of our equity compensation plans. Approximately 10.9 million shares underlying options in the table below represent Jefferson-Pilot options converted into our options as part of the merger.

Securities Authorized for Issuance Under Equity Compensation Plans

 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
 
Weighted- average exercise price of outstanding options, warrants and rights
(b)
 
Number of securities remaining available for future issuance under equity compensation (excluding securities reflected in column (a))
(c)
Equity compensation plans approved by shareholders
17,995,312(1)
 
$45.13
 
5,936,049 (2)
Equity compensation plans not approved by shareholders
None
 
-
 
-

 
1
This amount includes the following:

 
12,852,368 outstanding options.
 
1,322,168 and 2,172,783 represent outstanding long-term incentive awards, based on the maximum amounts potentially payable under the awards in stock options and shares (including potential dividend equivalents). The long-term incentive awards have not been earned as of December 31, 2006. The number of options and shares, if any, to be issued pursuant to such awards will be determined based upon our, and in some cases, our subsidiaries performance, over the applicable three-year performance period. Since the shares that may be received in payment of the awards have no exercise price, they are not included in weighted-average exercise price calculation in column (b). The long-term incentive awards are all issued under our Amended and Restated Incentive Compensation Plan (“ICP”).
 
13,870 outstanding restricted stock units.
 
1,634,123 outstanding deferred stock units.

If we included the units above in our weighted-average exercise price in Column (b), such price would have been $35.86.

 
2
Includes up to 5,057,411 securities available for issuance in connection with restricted stock, restricted stock units, performance stock units, deferred stock and deferred stock unit awards under the ICP. Shares that may be issued in payment of awards, other than options and stock appreciation rights, reduce the number of securities remaining available for future issuance under equity compensation plans at a ratio of 3.25-to-1.

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Federal Income Tax Implications of the Plan. The following is a brief description of the federal income tax consequences generally arising with respect to Awards under the Plan.

The grant of an option or SAR will create no tax consequences for the participant or us. A participant will not recognize taxable income upon exercising an ISO (except that the alternative minimum tax may apply). Upon exercising an option other than an ISO, the participant must generally recognize ordinary income equal to the difference between the exercise price and fair market value of the freely transferable and nonforfeitable shares acquired on the date of exercise. Upon exercising a SAR, the participant must generally recognize ordinary income equal to the cash or the fair market value of the freely transferable and nonforfeitable shares received.

Upon a disposition of shares acquired upon exercise of an ISO before the end of the applicable ISO holding periods, the participant must generally recognize ordinary income equal to the lesser of (i) the fair market value of the shares at the date of exercise of the ISO minus the exercise price, or (ii) the amount realized upon the disposition of the ISO shares minus the exercise price. Otherwise, a participant’s disposition of shares acquired upon the exercise of an option (including an ISO for which the ISO holding periods are met) or SAR generally will result in short-term or long-term capital gain or loss measured by the difference between the sale price and the participant’s tax basis in such shares (the tax basis generally being the exercise price plus any amount previously recognized as ordinary income in connection with the exercise of the option or SAR).

We will generally be entitled to a tax deduction equal to the amount recognized as ordinary income by the participant in connection with an option or SAR. We are generally not entitled to a tax deduction relating to amounts that represent a capital gain to a participant. Accordingly, we will not be entitled to any tax deduction with respect to an ISO if the participant holds the shares for the ISO holding periods prior to disposition of the shares.

With respect to Awards granted under the Plan that result in the payment or issuance of cash or shares or other property that is either not restricted as to transferability or not subject to a substantial risk of forfeiture, the participant must generally recognize ordinary income equal to the cash or the fair market value of shares or other property received. Thus, deferral of the time of payment or issuance will generally result in the deferral of the time the participant will be liable for income taxes with respect to such payment or issuance. We will generally be entitled to a deduction in an amount equal to the ordinary income recognized by the participant.

With respect to Awards involving the issuance of shares or other property that is restricted as to transferability and subject to a substantial risk of forfeiture, the participant must generally recognize ordinary income equal to the fair market value of the shares or other property received at the first time the shares or other property becomes transferable or is not subject to a substantial risk of forfeiture, whichever occurs earlier. A participant may elect to be taxed at the time of receipt of shares or other property rather than upon lapse of restrictions on transferability or substantial risk of forfeiture, but if the participant subsequently forfeits such shares or property, the participant would not be entitled to any tax deduction, including as a capital loss, for the value of the shares or property on which he previously paid tax. The participant must file such election with the Internal Revenue Service within 30 days of the receipt of the shares or other property. We will generally be entitled to a deduction in an amount equal to the ordinary income recognized by the participant.

Awards that are granted, accelerated or enhanced upon the occurrence of a change of control may give rise, in whole or in part, to “excess parachute payments” within the meaning of Code Section 280G and, to such extent, will be non-deductible by us and subject to a 20% excise tax payable by the participant.

The foregoing summary of the federal income tax consequences in respect of the Plan is for general information only. Interested parties should consult their own advisors as to specific tax consequences, including the application and effect of foreign, state and local tax laws.

The Board of Directors recommends a vote FOR the amendment to the Amended and Restated Amended Compensation Plan


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ITEM 4
APPROVAL OF THE
LINCOLN NATIONAL CORPORATION
STOCK OPTION PLAN FOR
NON-EMPLOYEE DIRECTORS

On February 23, 2007, our Board of Directors approved the Lincoln National Corporation Stock Option Plan for Non-Employee Directors, which is referred to below as the Plan. We are asking shareholders to approve the Plan so that we will be able to grant stock options to our non-employee directors in order to tie those directors' interests with those of shareholders.

The following is a brief description of the material features of the Plan. This description is qualified in its entirety by reference to the full text of the Plan, which is attached hereto as Exhibit 5.

Purpose. The purpose of the Plan is to promote our long-term success by attracting, retaining, and rewarding the services of experienced and knowledgeable non-employee directors, and to encourage those directors to acquire or increase their equity ownership of us in order to strengthen their focus on the creation of long-term shareholder value. The Plan is designed to accomplish these objectives.

Types of Awards. The terms of the Plan provide only for grants of stock options. The exercise price per share subject to an option is determined by the Board's Corporate Governance Committee, or Committee, but must not be less than the fair market value of a share of common stock on the date of grant. Under the Plan, unless otherwise determined by the Committee, the fair market value of common stock is the closing price of a share of common stock, as quoted on the composite transactions tape on the NYSE, on the date of grant.

The maximum term of each option, the times at which each option will be exercisable, and the provisions requiring forfeiture of unexercised options at or following termination of service are generally fixed by the Committee at the time of the award. However, no option may have a term exceeding ten years. The Committee may include a provision in an option agreement permitting the grant of a new option when payment of the exercise price of an option is made in shares of common stock. Options may be exercised by payment of the exercise price in cash, common stock or other property (including notes or other contractual obligations of participants to make payment to us on a deferred basis), as the Corporate Governance Committee may determine from time to time. As discussed below, the exercise price of an option may not be reduced (except to prevent dilution resulting from certain corporate events) without shareholder approval. See “Other Terms of options; No Repricing,” below.

Unless otherwise provided for in the Plan or an option agreement, all exercised options will be settled in shares of our common stock. The settlement of an option may be accelerated, and cash paid in lieu of stock, in the Corporate Governance Committee’s discretion or in certain circumstances that are described in the option agreements.

Shares Subject to the Plan. Under the Plan, the total number of shares of our common stock reserved and available for delivery to participants in connection with options will be 500,000. The shares or stock underlying options that are canceled, expired, forfeited, settled in cash or otherwise terminated without shares being issued, will become available for future options. Any shares of common stock delivered under the Plan shall consist of authorized and unissued shares. On March 22, 2007, the closing price of our common stock was $68.23 per share.

In the event that a dividend or other distribution (whether in cash, shares, or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event affects the common stock, the Corporate Governance Committee shall adjust the number and kind of shares that may be delivered in connection with the options under the Plan, the number and kind of shares subject to or deliverable in respect of outstanding options and the exercise price relating to any option and/or make provisions to allow payment of the exercise price to be made in cash or other property.

Eligibility. Options may be granted under the Plan only to directors who are not our employees. It is anticipated that 12 persons are currently eligible to receive options under the Plan.

Administration. The Plan will be administered by the Corporate Governance Committee. Subject to the terms and conditions of the Plan, the Committee is authorized to interpret the provisions of the Plan, determine questions of eligibility, grant options, determine the number and other terms and conditions of options, set other terms and 
 
 
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conditions of options, prescribe forms of option agreements, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations that may be necessary or advisable for the administration of the Plan. The Plan provides that Committee members shall not be personally liable, and shall be fully indemnified, in connection with any action, determination, or interpretation taken or made in good faith under the Plan.

Other Terms of Options; No Repricing. If required by law, the Corporate Governance Committee may condition any payment relating to an option on the withholding of taxes and may provide that a portion of any shares or other property to be distributed will be withheld (or previously acquired shares or other property surrendered by the participant) to satisfy withholding and other tax obligations. Options granted under the Plan generally may not be pledged or otherwise encumbered and are not transferable except by will or by the laws of descent and distribution, or to a designated beneficiary upon the participant’s death, except that the Committee may, in its discretion, permit transfers for estate planning or other purposes. In addition, the Committee may provide in an option agreement that the stock received upon exercise may not be transferred, assigned, pledged or otherwise encumbered while the director continues to serve on our Board.

Options under the Plan are generally granted without a requirement that the participant pay consideration in the form of cash or property for the grant (as distinguished from the exercise), except to the extent required by law.

Notwithstanding any other provision of the Plan, no option that has been granted under the Plan may be repriced, replaced or regranted through cancellation, or otherwise modified without shareholder approval (except in connection with adjustments permitted under the Plan), if the effect would be to reduce the exercise price for the shares underlying the option.

Except as otherwise provided in the Plan or an option agreement, if a non-employee director terminates his service on our board of directors for a reason other than for cause, an option may only be exercised if it is vested and exercisable on the date of termination, and any option that is not vested and exercisable on the date of termination will be terminated and forfeited on that date. If a non-employee director is terminated for cause, any options (even if vested) will be terminated and forfeited on the date of termination.

If a non-employee director fails to comply with certain confidentiality and non-disclosure covenants, his option exercises may be rescinded. We may, in our discretion, in any individual case, provide for a waiver in whole or in part of compliance with these provisions.

The Plan is not funded and nothing contained in the Plan is intended to provide non-employee directors with rights that are greater than those of an unsecured creditor with respect to payments not yet made or an obligation to deliver shares subject to an option.

Acceleration of Vesting. The Committee may, in its discretion, accelerate the exercisability or the expiration of vesting periods of any option, and such accelerated exercisability, expiration and vesting will occur automatically in the case of a “change of control” of us, except to the extent otherwise determined by the Corporate Governance Committee at the date of grant. “Change of Control” is defined by reference to the Executives’ Severance Benefit Plan and includes a variety of events, including the acquisition by certain individuals or entities of twenty percent or more of our outstanding common stock, significant changes in our board of directors, certain reorganizations, mergers and consolidations involving us, and the sale or disposition of all or substantially all of our consolidated assets.

Amendment and Termination of the Plan. The Board of Directors, or the Corporate Governance Committee acting pursuant to authority delegated to it by the Board, may amend, alter, suspend, discontinue, or terminate the Plan or the Committee’s authority to grant options without further shareholder approval, except shareholder approval must be obtained for any amendment or alteration if required by law or regulation or under the rules of any stock exchange or automated quotation system on which the shares are then listed or quoted. The Board may, in its discretion, seek shareholder approval in any other circumstance in which it deems such approval advisable. Thus, shareholder approval will not necessarily be required for amendments that might increase the cost of the Plan or broaden eligibility. Unless earlier terminated by the Board, the Plan will terminate as of the close of business on the tenth anniversary of the effective date.

Plan Benefits. Because the Committee has discretion to determine the amount of options to be granted under the Plan, all of the benefits that will be received in the future by participants are not readily determinable.
 
 
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We intended to pay the value of one-quarter of the outside directors’ current annual retainer of $186,000 in options, if the Plan is approved by shareholders. For information regarding securities authorized for issuance under our existing equity compensation plans, see page 25 above.

Federal Income Tax Implications of the Plan. The following is a brief description of the federal income tax consequences generally arising with respect to options under the Plan.

The grant of an option will create no tax consequences for the participant or us. Upon exercising an option, the participant must generally recognize ordinary income equal to the difference between the exercise price and fair market value of shares acquired that are transferable or are not subject to a substantial risk of forfeiture on the date of exercise.

A participant’s disposition of shares acquired upon the exercise of an option generally will result in short-term or long-term capital gain or loss measured by the difference between the sale price and the participant’s tax basis in such shares (the tax basis generally being the exercise price plus any amount previously recognized as ordinary income in connection with the exercise of the option).

We will generally be entitled to a tax deduction equal to the amount recognized as ordinary income by the participant in connection with an option. We are generally not entitled to a tax deduction relating to amounts that represent a capital gain to a participant.

The foregoing summary of the federal income tax consequences in respect of the Plan is for general information only. Interested parties should consult their own advisors as to specific tax consequences, including the application and effect of foreign, state and local tax laws.

The Board of Directors recommends a vote FOR the Stock Option Plan for Non-Employee Directors.

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SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, certain officers and beneficial owners of greater than 10% of our equity securities to file reports of holdings and transactions with the SEC and the NYSE. Based on written representations that we have received from our officers subject to Section 16 and directors, and a review of the reports filed with respect to transactions that occurred during 2006, we believe that each of our directors and officers subject to Section 16 met all applicable filing requirements, except for Mr. Stonecipher, one late filing disclosing two transactions and Douglas N. Miller, Chief Accounting Officer, one late filing disclosing one transaction.

COMPENSATION PROCESSES AND PROCEDURES

The Compensation Committee of the Board of Directors has primary authority for considering and determining executive compensation, while the Corporate Governance Committee reviews and recommends to the Board of Directors the overall compensation program for directors. With respect to executive compensation, the scope of the Compensation Committee’s authority includes:

·  
establishing, in consultation with senior management, our general compensation philosophy;
·  
reviewing and approving corporate goals and objectives relevant to the compensation of the chief executive officer, evaluating the chief executive officer’s performance in light of these goals and setting the chief executive officer’s compensation level based on this evaluation;
·  
reviewing and approving all compensation strategies, policies and programs that encompass total remuneration of our executive officers and key personnel;
·  
making recommendations to the Board regarding incentive compensation and equity-based plans and approving all grants and awards under such plans to executive officers;
·  
approving employment contracts and agreements for executive officers;
·  
approving employee benefit and executive compensation plans and programs and changes to such plans and programs, if the present value cost of each plan or change to a plan will not exceed $20 million for the next five calendar years after their effectiveness; and
·  
retaining and terminating compensation consultants and approving any compensation consultant’s fees and terms of retention.

Although there is nothing in its charter specifically preventing the Compensation Committee from delegating its authority on executive compensation matters to members of management, the Committee has not delegated its authority. In addition, under the Amended and Restated ICP, as described above,” under “Item 3—Approval of the Lincoln National Corporation Amended and Restated Incentive Compensation Plan, the Committee may not delegate its authority if such delegation would lead to a loss of an exemption under Section 16 of the Securities Exchange Act of 1934, as amended.

The Compensation Committee has engaged Towers Perrin as its independent compensation consultant. At the Committee’s request, Towers Perrin provides the Compensation Committee with market data and information on trends in executive compensation, such as the use of various forms of equity, the prevalence of performance-based awards and the appropriate allocation of compensation among base salary and annual and long-term incentive awards. Jon A. Boscia, our Chairman and CEO, and our senior vice president of Human Resources make recommendations to the Compensation Committee with respect to the base salary, target annual incentive awards and target long-term incentive awards for each of the executive officers, except for Mr. Boscia. The Compensation Committee’s and management’s role in the compensation process is discussed further in the Compensation Discussion and Analysis beginning on page 31 below.

The Compensation Committee normally approves the vesting of incentive awards at its first regularly scheduled meeting of the calendar year (usually in late February or early March). During this meeting, the Committee reviews financial data provided by management reporting the results for the various performance measures previously established for the just-completed annual and long-term performance cycles. The Committee certifies the achievement—or not—of the performance measures and approves the vesting of awards, as appropriate.

The Compensation Committee generally grants equity awards to our executive officers once a year at a regularly scheduled meeting, usually in late February or March. However, the Board may also grant equity awards at

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regularly scheduled meetings, or if circumstances require, the Compensation Committee or Board may grant equity awards at special meetings or by taking action through unanimous written consent. Generally, this occurs only upon the hiring or promotion of a new executive officer. For more information on the equity grant procedures of the Board and Committee, see the “Compensation Discussion & Analysis—Equity Grant Procedures” below.

Under its charter, the Corporate Governance Committee reviews and recommends to the Board of Directors the overall compensation program for directors, including retainer, meeting fees, perquisites, deferred compensation, stock option plans or other incentive or retirement plans, and medical and life insurance coverage, but the Board of Directors retains the authority to approve the compensation program. Towers Perrin provides the Corporate Governance Committee with market data and information on trends in directors’ compensation, which the Committee uses in reviewing and setting director compensation.

EXECUTIVE COMPENSATION

Compensation Discussion & Analysis

This Compensation Discussion & Analysis, or “CD&A,” provides our analysis of our compensation programs primarily as they apply to those executive officers named in the compensation tables (the “NEOs”), beginning on page 45 of this proxy statement. You should read the CD&A in conjunction with those compensation tables.

Overview of Executive Compensation Philosophy

We believe that attracting and retaining key executives is essential to our continued growth and strong performance. Our long-term success is enhanced by offering competitive and comprehensive executive compensation plans, programs and policies, which may include incentives and rewards designed to motivate and reward our executives for outstanding service, including awards that link compensation to applicable measures of our performance and the creation of shareholder value.

Our executive compensation programs allow us to pay benefits and grant awards that attract and retain key executives, while helping our executives to acquire and/or increase their proprietary interest in us and thereby align their financial interests with the interests of our shareholders. In addition, our executive compensation programs are designed to link executive compensation with our financial performance, and with each executive’s personal contribution towards our attainment of positive performance results. We strive to maintain compensation practices that:

 
·
Allow us to attract and retain the most talented individuals in the financial services industry by offering competitive compensation packages that reward exceptional individual and company performance;

 
·
Create a “pay for performance” culture with a strong nexus between levels of executive compensation and our long-term and short-term financial performance;

 
·
Create incentive for our NEOs to focus on and achieve our overall business strategy; and

 
·
Align the financial interests of our executives with those of our shareholders.

In order to attract and retain superior talent—the key to superior products and services—we have designed long-term and short-term incentive programs that reward above-average financial performance with above-average compensation. Conversely, our incentive programs are designed to reward average financial performance with average compensation. We structure our programs in this way because we believe that executive compensation should be highly leveraged and include a significant amount of at-risk compensation that will be earned only if performance objectives are achieved. The degree to which compensation is leveraged is highest at the highest levels of the organization (the CEO, CFO, President, and other NEOs), and less leveraged at lower levels.

Our goal is to sponsor compensation programs that are straightforward and can be easily communicated to and understood by both our executives and shareholders. We put a strong emphasis on “line of sight” factors. It is important to us and to our executives that performance be measured and compensation paid based on criteria that executives and shareholders can reasonably identify, and, in the case of our executives, influence and affect.

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Elements of Compensation

Our executives receive three primary types of compensation: base salary, annual and long-term incentive awards, and benefits. The fundamental building block of executive compensation is base salary, with the target amounts for annual incentive and long-term incentive awards expressed as percentages of base salary for each executive. In general, we strive to pay total compensation at median to our executives as compared to the compensation paid by similarly sized insurance-based organizations, with market data drawn from the following companies included in the Diversified Insurance Survey:

·  AEGON USA
·  ING
·  Aetna
·  Met Life
·  AFLAC
·  Nationwide
·  AIG
·  Phoenix
·  Allianz (Life USA)
·  Principal
·  Allstate
·  Prudential
·  AXA (Equitable)
·  Sun Life
·  CIGNA
·  UNUM Provident
·  The Hartford
 

However, for Mr. Coyne, the President of Lincoln National Investment Company and Delaware Management Holdings, Inc., the relevant source of market data used was Towers Perrin’s 2005 Financial Services Industry Executive Compensation Database, and McLagan Partners’ 2005 Investment Management Survey, including similarly sized investment management entities, such as:

·  American Century Investments
·  Loomis, Sayles & Company, L.P.
·  AXA Rosenberg Investment Management
·  Lord, Abbett & Co. LLC
·  Babson Capital Management LLC
·  Mellon Capital Management Corp.
·  Brandes Investment Partners, L.P.
·  Neuberger Berman, LLC
·  Eaton Vance Management
·  The Phoenix Companies, Inc.
·  Harris Associates, L.P.
·  Russell Investment Group
·  Jennison Associates, LLC
·  Western Asset Management Co.

In general, the fixed or certain elements of compensation—base salary and retirement and health and welfare benefits—make up the smallest percentage of total executive compensation, while the largest component of total compensation—incentive awards—fluctuates in value and is at risk based on our financial performance. This allocation of compensation supports our foundational “pay for performance” philosophy.

Our Compensation Committee may also award discretionary bonuses and/or other awards to our executives under certain circumstances. On February 22, 2007, our Compensation Committee approved discretionary restricted stock awards for three of our executive officers, including two of our NEOs: Dennis R. Glass, our President and Chief Operating Officer, and Westley V. Thompson, the President of our Employer Markets business. The purpose of the restricted stock award for Mr. Glass was to acknowledge and reward him for his strong performance in the role of our President and COO during the prior year, and for the key role he played in the efforts to integrate us and Jefferson-Pilot Corporation. Mr. Glass’s restricted stock award was for 39,749 shares and will fully vest on the third anniversary of grant date, or February 22, 2010. Mr. Thompson was also granted a discretionary restricted stock award to for 6,211 shares to acknowledge the significant contributions he made to the continuing efforts to integrate Jefferson-Pilot Corporation and us during the prior year, and to provide additional incentive for him to stay and see us through the challenges of the next 12 months. Mr. Thompson’s restricted stock award will fully vest on the first anniversary of grant date, or February 22, 2008.

Note, John H. Gotta, former President and CEO of The Lincoln National Life Insurance Company, resigned his executive officer position as of March 31, 2006, prior to the April 12, 2006 Compensation Committee meeting during which base salaries and incentive award targets and measures were set. Accordingly, the discussion below regarding those elements of compensation is inapplicable to Mr. Gotta, and “NEO” as discussed below does not include Mr. Gotta. Mr. Gotta received compensation pursuant to his Non-Compete and Anti-Solicitation Agreement, Waiver and General Release of Claims, dated January 12, 2006, which is described below under “Potential Payments Upon Termination and Change-in-Control” on page 61.
 
 
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Base Salary

We pay base salaries in order to draw key executive talent to the company and to retain this talent. The Compensation Committee of our Board of Directors approved the 2006 annual base salary levels for each of our executives at its first meeting subsequent to our merger, on April 12, 2006. Normally, executive base salaries are reviewed annually and set for the next calendar year during the preceding November’s Committee meeting. Because of our merger with Jefferson-Pilot Corporation on April 3, 2006, however, this process was delayed so that it could occur at the first scheduled meeting of the new, post-merger Committee. Because any increases in base salaries were intended to be effective for the entire 2006 calendar year—and had only been delayed due to the merger— pay increases were approved retroactive to January 1, 2006, even for former Jefferson-Pilot executives. In connection with the integration of the two companies, the Committee also decreased Mr. Glass’s salary from its pre-merger level. However, the decrease in salary was applied prospectively, not retroactively, and became effective on April 24, 2006, the first payroll period after the Committee meeting.

The process for setting the 2006 annual base salary levels for each of our NEOs, except for our CEO, began with our CEO and senior vice president of Human Resources reviewing relevant market data (based on data from the various companies included in the surveys mentioned above) and information about executive compensation trends provided by the Compensation Committee’s independent compensation consultant, Towers Perrin. The CEO and senior vice president of Human Resources also considered each NEO’s past performance and relevant experience, internal pay equity issues among our executives (specifically, this was necessary to integrate our new executives from Jefferson-Pilot into our pay structure), and the significance of each NEO’s role to our business strategy. Based on their review, the CEO and senior vice president of Human Resources recommended to the Compensation Committee base salary levels for the NEOs other than for the CEO. Although generally the base salary levels for each NEO were set at the median as compared to the relevant market data, there were some exceptions based on these other considerations.

For Mr. Boscia, the senior vice president of Human Resources met with Towers Perrin and the members of the Compensation Committee to review the relevant market data specific to the chief executive officer position (based on data from the Diversified Insurance Survey companies mentioned above) and to review information about executive compensation trends provided by Towers Perrin. The trends considered included, but were not limited to, the prevalence of the use of various forms of equity, such as options, and whether the use of options is increasing; the prevalence of performance-based awards; and the appropriate allocation of total direct compensation targets among base salary and annual and long-term incentive awards. The Committee members considered the CEO’s strong performance record, his years in the industry, and his tenure as a seasoned, results-oriented CEO. Based on this information and subsequent discussion, the Committee approved a base salary level for the CEO for 2006.

In general for each NEO, the Committee reviewed each executive’s current base salary amount and approved a 2006 base salary level in the context of each executive’s total compensation package: base salary, annual incentive and long-term incentive award targets. It also considered the relevant marketplace for each executive, and the executive’s experience and background. As a general rule, unless an executive’s current base salary level was +/- 15% when compared to the relevant market, an adjustment to base salary was not made. For the CEO, the Committee considered it appropriate to approve a base salary level that was slightly below median, but approved incentive award targets that were slightly above median, as discussed below. Each NEO’s 2006 base salary is set forth in the Summary Compensation Table on page 45.

Incentive Awards

The Compensation Committee believes that allocating the largest portion of executive compensation to incentive compensation helps to properly balance the financial interests of our executives with those of our shareholders by putting executive pay at risk based on our sustained success. Generally, more than half of NEO incentive compensation is “at risk” based upon our financial performance during the relevant period, reinforcing our “pay for performance” philosophy. The Amended and Restated ICP gives the Committee the authority to grant annual incentive awards upon the achievement of pre-established financial performance goals during a specified period—normally twelve-months. The annual incentive program is referred to as the “AIP.” The Amended and Restated ICP also gives the Committee the authority to grant options to purchase shares of our common stock and to grant long-term performance awards based upon multiple-year performance cycles. The 2006 long-term incentive compensation program, or 2006 LTI program, consisted of a combination of stock options and long-term performance awards. In the recent past, during our 2003, 2004, and 2005 grant cycles, long-term incentive compensation consisted solely of long-term performance awards.

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For each NEO, the 2006 AIP and LTI targets recommended to the Compensation Committee were expressed as a percentage of annual base salary. In the case of each NEO except for the CEO, our CEO and senior vice president of Human Resources recommended targets to the Committee after reviewing the relevant market data (compensation data from the companies listed above) and information about executive compensation trends provided by Towers Perrin (also described above). In addition to the market data and information about relevant trends, our CEO and senior vice president of Human Resources considered internal pay equity issues among the executive officers, the importance of each executive’s role to the success of our business, his or her unique responsibilities and past performance, and succession issues in determining appropriate recommended AIP and LTI targets.

To determine the appropriate AIP and LTI target recommendations for our CEO, the senior vice president of Human Resources met with Towers Perrin and the members of the Compensation Committee in the weeks prior to the April 12, 2006 meeting to review the relevant market data specific to the chief executive officer position (based on data from the Diversified Insurance Survey companies mentioned above) and information about executive compensation provided by Towers Perrin. Based on a review of these materials and consideration of the CEO’s strong performance record, the Committee approved the CEO’s 2006 target AIP and LTI award.
 
In general, incentive compensation for executive positions was targeted to the market median for comparable positions in similarly sized organizations. However, incentive compensation for some positions was targeted to a market premium (75% percentile) based on the individual executive’s unique skills, experience and work performance history, and due to succession considerations. The Committee considered all elements of total targeted direct compensation (base salary, AIP targets, and LTI targets) when setting incentive award targets.

For all of our executive officers, the percentage of total direct compensation that is awarded in the form of incentive compensation exceeds the amount of compensation granted as base salary. Specifically, for our NEOs, except Mr. Gotta, the following table shows the percentage of targeted direct compensation in the form of annual base salary, annual bonus awards (AIP), and long term incentive compensation (LTI).

 
NEOs
 
Base Salaries
“At Risk Compensation”
2006 AIP                              2006 LTI
 
Jon A. Boscia,
Chairman and CEO of LNC
$925,000
$2,312,500
$4,865,500
 
Frederick J. Crawford,
CFO of LNC
$400,000
$700,000
$700,000
 
Dennis R. Glass,1
President and COO
$900,000
$1,102,500
$2,475,000
 
Patrick P. Coyne, 2
President, Lincoln National Investment Company, Inc. and Delaware Management Holdings, Inc.
$450,000
$2,250,000
$675,000
 
Westley V. Thompson,
President, Employer Markets
$500,000
$1,018,134
$1,018,134
 
Warren H. May, 1
Former President of Lincoln Financial Distributors, Inc.
$347,106
$663,750
$663,750
 
1 As discussed further below, Messrs. Glass and May as former Jefferson-Pilot executives received only one-half of their 2006 LTI target set forth above in 2006-2008 performance awards. See “-- The 2006 LTI Option Awards” on page 37. Mr. Glass’s salary shown in the Summary Compensation Table reflects salary paid or earned from April 3, 2006, as opposed to his approved base salary.
2 Mr. Coyne’s base salary was increased in July 2006, when he moved into his current position.
 
 
 
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Note, although Mr. May received 2006 AIP and LTI target awards, his actual payouts were negotiated pursuant to his Agreement, Waiver and General Release, dated November 1, 2006, and were not based on the satisfaction of the performance measures. Accordingly, Mr. May’s performance goals are not discussed below.

The 2006 Annual Incentive Awards

The 2006 AIP is generally paid in cash. However, any executive who has failed to meet the applicable share ownership requirements (the share ownership guidelines for our executives are described in more detail below) would receive some or all of their AIP award in shares of our common stock. For 2006, all of our executive officers were on target to meet their required degree of share ownership and received the AIP in cash. The Committee approved the performance measures for the 2006 AIP at its first meeting subsequent to our merger, on April 13, 2006.

The chart below sets forth the various performance measures approved for the 2006 AIP for all corporate executives (including our CEO, President/COO, and CFO) as well as the relative weighting of each performance measure, the goals set for each measure, and the actual performance results for each measure. Actual results will be calculated using annualized financial performance, but adjusted to reflect only the period beginning April 1, 2006 and ending December 31, 2006.

 
Performance Measure
(Corporate Executives, including Jon A.
Boscia, Frederick J. Crawford, and Dennis
R. Glass)
 
Relative
Weight
 
Goal at
Minimum
 
Goal at
Target
 
Goal at
Maximum
 
Actual
Performance
Results
 
Growth in Income from Operations
Per Diluted Share
50%
$4.55
$4.70
$4.95
$5.25 (200%)
 
Growth in Sales (Gross Deposits &
Life Sales)
30%
5%
10%
20%
23.9% (200%)
 
Merger-Related Cost Savings (2006
Realized Savings Expressed in Millions)
20%
$49.5
$55
$60.5
$76.4 (200%)

For 2006 incentive compensation, “income from operations” is defined as net income determined in accordance with generally accepted accounting principles (“GAAP”), excluding, as applicable, the after-tax effects of: merger and integration expenses, realized gains (losses) on investments and derivative investments, restructuring charges, FAS 113 reserved development on business sold through indemnity reinsurance, gains (losses) related to reinsurance embedded derivative/trading securities, cumulative effect of accounting changes, gains (losses) on sale of subsidiaries, and loss on early retirement of debt. Income from operations is an internal measure used by us in the management of our operations. The Committee believes that this performance measure explains the results of our ongoing operations in a manner that allows for a better understanding of the underlying trends in our current business. Growth in sales is measured as the increase in sales for the period ending December 31, 2005 as compared to sales for the period ending December 31, 2006. For periods prior to the April 3, 2006 merger, we used combined LNC and Jefferson-Pilot data. Life sales are defined as described on page 65 of our 2006 Annual Report on Form 10-K.

For executive officers in each of the various business units, including Messrs. Coyne and Thompson, the corporate performance measures represented only 25% (in terms of relative weight) of 2006 AIP:

·  
15% growth in income from operations
·  
5% growth in sales; and
·  
5% merger related cost savings.

The remaining 75% of any potential annual incentive award for these executives was driven solely by three additional performance measures unique to their businesses, with the goals expressed as a percentage of

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achievement of financial plans specific to each business. For Mr. Coyne, however, an additional two performance measures (retail and institutional investment performance) were added because of the importance of fund and managed account investment performance to our investment management business’s ability to attract new sales, retain existing assets and improve net flows.

The charts below set forth the performance measures approved for the 2006 AIP for Messrs. Coyne and Thompson, as well as the relative weighting of each performance measure, the goals set for each measure, and the actual performance results for each measure, based on our annualized financial performance for the period beginning April 1, 2006 and ending December 31, 2006.

2006 AIP: Performance Measures for
Patrick P. Coyne
Relative
Weight
Goal at
Minimum
Goal at Target
Goal at
Maximum
Actual
Performance
Results
Corporate: Growth in Income from Operations
Per Diluted Share
15%
$4.55
$4.70
$4.95
$5.25 (200%)
Corporate: Growth in Sales (Gross Deposits & Life Sales)
5%
5%
10%
20%
23.9% (200%)
Corporate: Merger-Related Cost Savings (2006 Realized Savings in millions)
5%
$49.5
$55
$60.5
$76.4 (200%)
Income from Operations/Line of Business Earnings as % of Financial Plan
20%
$34.1
$35.9
$37.7
$55.1 (200%)
Growth in Sales for the Business Unit
20%
5%
10%
20%
49.4% (200%)
Line of Business Merger-Related Cost Savings as a % of Financial Plan
15%
$4.1
$4.6
$5.1
$4.9 (160%)
Retail Investment Performance*
10%
60%
65%
70%
69.2% (184%)
Institutional Investment Performance*
10%
62.5%
75%
87.5%
72.5% (90%)

* These compare the performance of retail funds and the performance of institutional composites relative to their one-year, three-year and five-year benchmarks.

2006 AIP: Performance Measures for
Westley V. Thompson
Relative
Weight
Goal at
Minimum
Goal at Target
Goal at
Maximum
Actual
Performance
Results
Corporate: Growth in Income from Operations
Per Diluted Share
15%
$4.55
$4.70
$4.95
$5.25 (200%)
Corporate: Growth in Sales (Gross Deposits & Life Sales)
5%
5%
10%
20%
23.9% (200%)
Corporate: Merger-Related Cost Savings
(2006 Realized Savings in millions)
5%
$49.5
$55
$60.5
$76.4 (200%)
Income from Operations/Line of Business Earnings as % of Financial Plan (in millions)
35%
$301.2
$317
$332.9
$352 (200%)
Growth in Sales for the Business Unit
25%
5%
10%
20%
3.7% (0%)
Line of Business Merger-Related Cost Savings as a % of Financial Plan (in millions)
15%
$3.2
$3.5
$3.9
$4.42 (200%)

In setting the goals to be achieved with respect to each of the 2006 AIP performance measures, both management and the Compensation Committee intended the target levels to present a challenge for our NEOs, and thus, create a strong incentive for growth. The 2006 AIP performance measures reflect our post-merger goals for 2006. The corporate income from operations per share performance measure was set after consideration of a number of factors, including the 2006 institutional brokers’ estimate system (IBES) estimates for us post-merger, and our financial plan. The goal for merger savings was based upon the savings in 2006 that would result in on-going annual savings of $90 million by the first anniversary date of the merger. However, our 2006 financial results exceeded expectations and resulted in above target payouts. Each NEOs AIP for 2006 is set forth in the Summary Compensation Table on page 45.
 

 
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The 2006 Long-Term Incentive Award Program

The 2006 LTI award program for our executives consists of options to purchase shares of our common stock, except for Messrs. Glass, May and Coyne, as discussed below, that vest ratably over a three-year period (not the achievement of performance measures), and of 2006-2008 long-term incentive performance cycle awards, the “2006-2008 performance awards.” The total LTI award is equally split between the two types of awards. The 2006-2008 performance awards, if any, will ultimately either vest as: (a) 100% shares of our common stock, or (b) 75% in shares of our common stock and 25% in cash, generally at the executive’s election. Executives were given the opportunity to elect the form of their ultimate vested awards (if any) within thirty (30) days of the date the 2006-2008 performance award cycle was established (by May 13, 2006). The change from our prior practice of granting all long-term incentive compensation in the form of performance-based awards was based on the following two factors:

·  
The executive compensation philosophy of Jefferson-Pilot Corporation included significant annual grants of stock options. The 2006 LTI program was an attempt to harmonize our executive compensation philosophy—which relied wholly on performance-based awards—with that of Jefferson-Pilot’s program.

·  
The Compensation Committee’s independent compensation consultant noted a greater use of stock options as part of executive compensation programs in recent years. In addition, the Committee believed that changes in accounting rules placed options on equal footing with other kinds of executive compensation, and arguably, options are easier for both shareholders and executives to understand—there is a more direct “line of sight” between increases in intrinsic option value and our successful financial performance—as expressed through movements in our stock price.

The purposes of our long-term incentive program remain to encourage executive behavior that yields increased shareholder returns by linking executive pay to the achievement of performance measures that drive shareholder return and to provide competitive compensation that will pay out above-median only when performance has been above average, consistent with our compensation philosophy.

The 2006 LTI Option Awards

As described above, our top executives, with the exception of Messrs. Glass, Coyne and May, received one-half of their 2006 LTI target compensation in the form of options to purchase shares of our common stock. Our options have ten-year terms, with the option price set at the fair market value of our stock as of the date of grant (April 13, 2006). Fair market value was determined using the average of the high and low prices of our common stock on the business day immediately preceding the date of grant. Our options vest ratably over a three-year period, with one-third of each option vesting on each anniversary of grant date. While the options are time-vested, not “performance vested”, the value of the 2006 option grants depends on the positive financial performance of our company, as expressed through the increase in share value.

Also as described above, Mr. Coyne received one-half of his 2006 LTI target in the form of a grant of options under the Delaware Investments U.S., Inc. (“DIUS”) Stock Option Plan. Mr. Coyne’s DIUS options are exercisable for shares of common stock of DIUS, our indirect wholly owned subsidiary, and will vest ratably over the next four years.

As an asset management firm, the ability to attract and retain world-class investment professionals is critical to the success of DIUS. The purpose of the DIUS Stock Option Plan is to assist DIUS in attracting, retaining, and rewarding executives, investment professionals, and other professionals who provide investment management-related sales and client services to DIUS. This DIUS Stock Option Plan was established to provide such professionals with the opportunity to participate in the increase in value of DIUS, to strengthen the alignment of interests between participants and our shareholders, and provide participants such as Mr. Coyne with long-term incentives to maximize the creation of shareholder value, which is typical in investment firms.

Unlike options granted under the Amended and Restated ICP, DIUS options are issued with an exercise price based upon an independent valuation of DIUS, performed by an independent valuation expert using a “market transaction” approach to value DIUS, with 40% of the value based on earnings before interest, taxes, deprecation, and amortization, 40% based on assets under management, and 20% based on revenues. The exercise and grant price of any DIUS option is based upon the most recent valuation performed. The valuations are performed at six month intervals--December 31st and June 30th. As of the date of this proxy statement, the December 31, 2006 valuation had not yet been completed.

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In addition, five former Jefferson-Pilot executives on our post-merger senior management team, including Messrs. Glass and May, had been awarded options to purchase shares of Jefferson-Pilot common stock in February 2006, and such options had been converted into options to purchase shares of our common stock by operation of the merger on April 3, 2006. The Committee discussed whether a second option grant in 2006 to these former Jefferson-Pilot executives would be appropriate. After considering each executive’s total direct compensation target for 2006 (annual base salary, annual incentive and long-term incentive compensation), the Committee determined that an additional option grant would have over-compensated these former Jefferson-Pilot executives relative to their peers and would have resulted in setting target compensation levels above median for these executives. The Committee ultimately awarded each of these executives one-half of the recommended 2006 LTI target amounts in the form of 2006-2008 performance awards, but decided not to award additional stock options at that time.

The 2006-2008 Performance Award Cycle

The 2006-2008 performance award cycle was established on April 13, 2006, based on a performance period beginning on January 13, 2006 and ending on December 31, 2008. The establishment of the 2006-2008 performance award cycle was delayed until the first meeting of the new Committee subsequent to our merger. The slightly abbreviated cycle was due to the requirement under Section 162(m) that financial measures for performance based compensation be set no later than 90 days after the beginning of the performance cycle. During the April 13, 2006 meeting, the Committee established the maximum award amounts payable to the NEOs, the relevant performance measures, the relative weighting of each performance measure, and the goals for minimum payout (50% of target), and maximum payout (200% of target). Usually, all of these items would have been approved during the February 2006 or March 2006 meeting of the Committee.

The 2006-2008 performance awards may be in the form of 100% stock, or 75% stock and 25% cash generally at the election of the NEO. Each NEO had to make his form of award election at the beginning of the cycle, and all of the NEOs chose an award in the form of 100% stock. The maximum award, 200% of target, will occur when performance is superior, and a minimum award, 50% of target, will result when a threshold level of performance is met. For a performance award in shares or cash to ultimately vest, the threshold or minimum achievement level for at least one of the three performance measures must be attained. The 2006-2008 performance awards granted the NEOs are set forth in the Grants of Plan-Based Awards table on page 47 below.

The chart below sets forth the various performance measures approved for the 2006-2008 performance award cycle for all executives, as well as the relative weighting for each performance measure. Actual results will be calculated using annualized financial performance, but the first year of the performance cycle, 2006, will be adjusted to reflect only the period beginning January 13, 2006 and ending December 31, 2006 (income from operations and growth in sales are as defined on page 35 above):

 
2006-2008 LTI
Performance Award Measures
 
Relative
Weight
 
Growth in Income from Operations Per Diluted Share
 
33 1/3%
 
Growth in Sales (Gross Deposits & Life Sales)
 
33 1/3%
 
Return on Equity Based on Income from Operations
 
33 1/3%

Growth in income from operations, return on equity, and growth in sales are all absolute measures.

In setting the goals to be achieved with respect to each of the 2006-2008 LTI performance measures, both management and the Compensation Committee noted that the target levels set presented a challenge for management and were designed to create appropriate incentives for our executives to create financial growth and value for shareholders. As with the 2006 AIP, the 2006-2008 LTI performance measures reflect our post-merger goals, and our lack of history as a merged entity. Whether we meet or exceed those goals will depend upon performance over the entire three-year performance cycle. The corporate income from operations per share and return on equity performance measures were set after consideration of a number of factors, including the 2006 institutional brokers’ estimate system (IBES) estimates for us post-merger, and our financial plan. The sales growth component was based
 
 
 
- 38 -

 
 
upon on our financial plan and management’s assessment of the level of achievement needed to maintain or grow market share in our target markets.

In addition, as stated above, in order to harmonize our former Jefferson-Pilot executive officers’ LTI compensation programs with our executive officers’ LTI compensation programs, the Committee granted each of the three former Jefferson-Pilot executives, including Mr. Glass, a pro-rated award in the 2004-2006 and 2005-2007 performance award cycles, with credit for service back to January 1, 2006. For the 2004-2006 performance award cycle, in which the executive was credited with one year of service out of a three year performance period, an award was granted equal to one-third of the executive’s 2006 LTI target award. Similarly, for the 2005-2007 performance award cycle, the executive was granted two years of service out of a three year performance period, and a target award equal to two-thirds of their 2006 long-term incentive target award.

In addition, on June 8, 2006, Compensation Committee increased the overall 2006 LTI target amounts for four of our executives, including Mr. Thompson. For these executives, the 2006 LTI targets approved by the Committee were inadvertently lower than the 2005 LTI targets. In the interest of fairness to the individuals affected, the Committee increased their targets. On June 8, the Committee granted additional 2006-2008 performance award shares with a value equal to the amount by which the 2006 LTI target was increased by the Committee on that date.

Other 2006 Equity Awards

Stock Options: As discussed above, during 2006 our stock options played a more significant role in executive compensation than in recent years. Formerly, stock options had been an elective part of our long-term incentive program, with the executive choosing to receive the award in one of seven combinations of stock, cash, and options. In addition, the stock options are also awarded when executives exercise reload options. Reload options are options that contain a feature that provides for the automatic grant of a new option when an optionee uses shares that he/she already owns to exercise the reload options. The number of “new” reload options is equal to the number of shares used to exercise the original option with the reload feature. More information about reload options can be found in footnote 1 to the Grants of Plan-Based Awards table on page 47. Reload options that are granted as a result of a stock exercise of a reload option also contain a reload feature. We have not granted options with a reload feature since 2002.

Restricted Stock: The Amended and Restated ICP also gives the Compensation Committee the authority to grant shares of restricted stock. We use grants of restricted stock in the process of recruiting new talent, with the dollar value of the restricted stock based on market data compiled by our Human Resources Department, and, in the case of new executive officers, by Towers Perrin. In 2006, restricted shares also played a role in our annual equity grants to certain of our NEOs. Mr. Crawford, our CFO, received a restricted stock grant in 2006 in recognition of his work on the merger with Jefferson-Pilot. As stated above, we also granted Messrs. Glass and Thompson restricted stock awards. Restricted stock is typically restricted from sale or trade for three years after the date of grant, except in cases of the grantee’s death, disability, or a change in control. Grantees may vote their restricted stock during the period that the shares are issued but restricted, and are generally paid dividends on the shares, or are compensated for dividends that would have been paid if the shares had not been restricted. Generally, no dividends or dividend-related compensation is paid until restrictions have lapsed.

Forfeiture of Equity Awards

Our equity awards, including options, are subject to non-compete and non-disclosure provisions. Violations of these provisions may result, at the Committee’s discretion, in the shares or options being forfeited or cancelled—or, in the case of an option exercised within six months of a violation—the exercise rescinded and the amount of gain realized or payment received by the executive returned to us.

Equity Grant Procedures

On November 8, 2006, the Compensation Committee formally approved equity grant procedures, including procedures for granting stock options. For the most part, these procedures, as outlined below, articulate long-standing corporate policy regarding stock option grants. We have not and do not time our equity grants in coordination with the release of material, non-public information. For stock options granted prior to November 8, 2006, the fair market value used to determine exercise price as of a particular grant date was determined by using the average of the high and low sales price of a share of our common stock as quoted on the composite transactions table of the New York Stock Exchange on the day prior to the grant date. This former practice allowed the Committee to approve a number of options based on a specific dollar value for the target award and offered some protection against any short-term
 
 
- 39 -

 
 
volatility in the stock price. However, on November 8, 2006, we adopted the new pricing procedure to reflect prevailing “best practices.” Under the new procedures, all options are now granted at the closing price of our common stock, as reported on the composite transactions table of the NYSE, on the date of grant. Only the Compensation Committee or the Board of Directors has the authority to make equity grants with respect to our executive officers.

The Compensation Committee generally grants equity awards once annually as part of our long-term incentive compensation program. These grants are made during a regularly scheduled meeting of the Compensation Committee (usually in February or early March). However, the Compensation Committee or the Board of Directors may also grant equity awards at other regularly scheduled meetings. For equity granted at a regularly scheduled meeting of the Board or Committee, the grant date shall be the date of the meeting. However, if the equity is granted at a “special” meeting of the Board or Committee, and such meeting does not occur during the period in which trading of our securities is permitted under our Insider Trading and Confidentiality Policy, i.e. a window period, then the grant becomes effective on the first business day of the next window period. Window periods generally begin the later of the second business day after our quarterly earnings release or the first business day after our public call with investors.

In cases where the Compensation Committee or the Board of Directors grants equity awards by written consent, the grant becomes effective on the first business day of the week following the effective date of the written consent; provided, however, that if such business day is not during a window period, the grant becomes effective on the first business day of the next window period.

The 2004 Long-Term Incentive Award Program

On February 22, 2007, the Compensation Committee approved the vesting of awards for the 2004-2006 performance award cycle, based on its review of the various reports and analysis provided to it by management regarding our performance during this cycle, and after determining that the performance measures had been satisfied to the extent required by the Amended and Restated ICP and the program. Vested awards for the 2004-2006 performance award cycle could range from 0% of each executive’s individual target award amount to a maximum of 200% of each executive’s target award amount. Overall financial performance for the 2004-2006 performance award cycle resulted in a vested amount equal to 161.33% of target.

For the 2004-2006 performance cycle, executive officers were provided with the option of choosing an award in the form of cash, stock or stock options, or a combination thereof upon the satisfaction of the performance measures. The executives had to make their award elections at the beginning of the cycle. To the extent that an executive chose an all cash award, the executive was granted only 78% of his/her target amount. The discount reflects the relative value and potential risk associated with cost as compared to stock and options. The awards for the 2004-2006 performance period could have ranged from 0% to 200% of each executive’s target award. Overall financial performance for the 2004-2006 performance cycle resulted in a final award equal to 161.33% of target. Options are limited to the target award such that the above target award vests in additional shares. The options have a ten-year term, which begins to run from the date of the long-term incentive award to which they relate, and fully vest upon satisfaction of the performance criteria.

The chart below sets forth the various performance measures approved for the 2004-2006 performance award cycle, as well as the relative weighting, the goals set, and the actual performance results for each performance measure, based on financial performance for the period beginning January 1, 2004 and ending December 31, 2006:

 
 
Performance Measure
 
Relative
Weight
 
Goal at
Minimum
 
Goal at
Target
 
Goal at
Maximum
 
Actual
Performance
Results
 
Growth in Income from Operations Per Diluted Share
 
40%
 
9%
 
12%
 
15%
 
16.1%
 
Total Shareholder Return
 
20%
 
25th
percentile
 
60th
percentile
 
75th
percentile
 
73rd
percentile
 
Return on Equity
 
40%
 
12%
 
14%
 
15%
 
14.1%

For the 2003 and 2004 long term incentive programs, we used the same definition of “income from operations.” Income from operations for the 2004-2006 LTIP performance award cycle was defined as net income determined in accordance with GAAP, excluding, as applicable, the after-tax effects of: realized gains (losses) on investments and derivative instruments, restructuring charges, net gains (losses) related to reinsurance embedded
 
 
- 40 -

 
 
derivatives/trading securities, cumulative effect of accounting changes, FAS 113 reserve development on business sold through indemnity reinsurance, gains (losses) on sale of subsidiaries, and loss on early retirement of debt. Income from operations is an internal measure that we use in the management of our operations. The Committee believes that this performance measure explains the results of our ongoing operations in a manner that allows for a better understanding of the underlying trends in our current business. Growth in income from operations per share was expressed as compound growth rate based on the point-to-point difference between EPS for year prior to the beginning of the cycle and the EPS of the final year of the cycle.

Growth in income from operations and ROE for the 2004-2006 performance award cycle are absolute, not relative measures—a change from the previous 2003-2005 performance award cycle. The Total Shareholder Return measure reflects our percentile rank versus the performance of companies in the S&P 500 Index at the beginning of the performance period. The awards were a mixture of cash, options, and shares, as elected by each participant at the beginning of the cycle. The vested 2004-2006 performance cycle awards are provided in the Outstanding Equity Awards at Fiscal Year-End table on page 50 below.

The 2003 Long-Term Incentive Award Program

On March 9, 2006, the Compensation Committee approved the vesting of the 2003-2005 performance awards. The Committee reviewed the various reports and analysis provided to it by management regarding the outcomes for the relevant performance measures during the period beginning January 1, 2003 and ending December 31, 2005. The Committee determined that the performance measures had been satisfied to the extent required by the ICP and the program. The 2003-2005 performance award cycle could result in vested awards ranging from 0% of each executive’s individual target award amount to a maximum of 200% of each executive’s target award amount. Overall financial performance for the 2003-2005 performance cycle resulted in a vested amount equal to 137.11% of target.

For the 2003-2005 performance cycle, executive officers were allowed to choose to have any award vest in cash, stock or stock options, or a combination thereof upon the satisfaction of the performance measures. The executives had to elect the form of their awards at the beginning of the cycle. An NEO electing vesting in stock options was granted options equal in value to 100% of his/her target award (or that portion of target award elected in options).  To the extent that an executive chose stock or cash, however, the NEO was granted stock or cash equal to only 80% or 67%, respectively, of their target award amount.  The discount in award value applied with respect to stock or cash reflects the relative value and potential risk of those types of awards as compared to options.

The chart below sets forth the various performance measures approved for the 2003-2005 performance cycle, as well as the relative weighting, the goals, and the actual results for each performance measure:

 
 
Performance Measure
 
Relative
Weight
 
Goal at
Minimum*
 
Goal at
Target*
 
Goal at
Maximum*
 
Actual
Performance
Results
 
Growth in Income from Operations
Per Diluted Share
 
40%
 
25th
percentile
 
60th
percentile
 
75th
percentile
 
77.7th
percentile
 
Total Shareholder Return
 
40%
 
25th
percentile
 
60th
percentile
 
75th
percentile
 
33.33rd
percentile
 
Return on Equity
 
20%
 
25th
percentile
 
60th
percentile
 
75th
percentile
 
88.8th
percentile
     * represents percentile rankings versus the peer group.

Total Shareholder Return was weighted 20%, and represents share price change plus total shareholder dividends paid during the performance cycle. The shareowner return calculation was based on the average of the closing stock prices of LNC for each trading day in the month of December preceding the beginning of a cycle and the average of the closing prices for each trading day in the last December of the cycle. Return on Equity represents the weighted average of ROE through the performance cycle, with ROE for year one weighted 20%, year two 30% and year three 50%. 
 
Each of the performance measures for the 2003-2005 LTIP performance cycle were relative, not absolute, measures, with our financial results for the performance period compared against those of our peer group of companies. Our peer companies for this cycle included AmerUs Group Co., The Hartford Life Company, Jefferson-Pilot Corporation, MetLife, Inc., Manulife Financial Corporation, MONY, Nationwide Financial Services, Inc., The
 
 
- 41 -

 
 
Principal Financial Group, Inc., Prudential Financial, Inc. and Sun Life Financial Services CDA, Inc. However, because of merger activity in the industry, two of the companies, John Hancock Financial Services and MONY Group, were removed from the cycle, pursuant to the program’s operational documents. The awards were paid in a mixture of cash, options, and shares, as elected by each participant at the beginning of the cycle.

The vested 2003-2005 performance awards for an NEO, if any, are reflected in the Option Exercise and Stock Vested table for vested shares on page 52 below.

Share Ownership

Besides promoting our “pay for performance” philosophy, our long-term incentive compensation programs are vehicles for granting equity to our executives. Share ownership is an important LNC shared value. Our share ownership guidelines help us to achieve our goal of matching the financial interests of our executives with those of our shareholders. On March 9, 2006, the Compensation Committee determined the appropriate share ownership requirements, and associated penalties, for each of the various positions listed below:

Position
Expected Level of Ownership
Multiple of Base Salary
 
CEO
 
5 times base salary
 
President & COO
 
4 times base salary
 
Managing Senior Contributor (EVP or equivalent)
 
3 times base salary
 
Senior Contributor (SVP or equivalent)
 
2 times base salary
 
VP (or equivalent)
 
1 times base salary

On February 22, 2007, the Committee approved new share ownership requirements for our executives. The applicable 2007 requirements are based on officer position or category, rather than title, a departure from previous years. In part, this change was made as a result of our merger with Jefferson-Pilot, and the difficulty of internally harmonizing similar titles across the entire organization.

Officer
Position
Expected Level of 2007 Ownership
Multiple of Base Salary
 
CEO
 
5 times base salary
 
President & COO
 
4 times base salary
 
Executive Officers (other than the CEO and COO)
 
3 times base salary
 
Corporate Leadership Group (CLG)
 
2 times base salary

Amounts invested in shares of LNC common stock through our qualified savings plan, or in the LNC common stock unit investment option offered under our non-qualified deferred compensation plans, are counted for determining whether share ownership targets have been met. Time-vested restricted shares are also counted for this purpose. In addition, beginning in 2006, 30% of all vested stock options—to the extent that they are “in-the-money”—were considered for meeting the applicable share ownership requirements. Officers have five years, or in the case of Delaware officers (including Mr. Coyne), six years, to achieve the applicable multiple of base salary. If any officer were to fail to achieve the expected level of share ownership, we would enforce the requirement by paying out the annual incentive bonuses in shares of LNC common stock, rather than in cash.

All of our NEOs have met or exceeded their share ownership requirements for 2006.

Benefits

Many of the benefits that we offer to our executive officers are the same benefits that are offered to our general employee population. With some exceptions, the additional benefits enjoyed by our executives are offered through plans and programs that promote tax efficiency and replacement of benefit opportunities lost due to regulatory limits in the broad-based tax-qualified plans, as explained in more detail below. In addition to providing retirement income, our benefits help to protect our employees and executives from the financial catastrophes that can result from
 
 
- 42 -

 
unexpected illness, disability, or death. Also, these types of benefits are typically offered by the peer group of companies with whom we compete. Offering compensation benefits helps us to attract and retain key employees.

For 2006, we used the following peer group of companies to evaluate our non-qualified or “top-hat” plans:

·  Aetna
·  MetLife
·  Allstate
·  Nationwide
·  Amerus
·  Phoenix Sun
·  CIGNA
·  Principal
·  Genworth
·  Prudential
·  The Hartford
·  UNUM Provident

Supplemental Retirement and Deferred Compensation Plans

Supplemental Retirement Plans

Our supplemental retirement plans pay or “restore” benefits that would have been paid under the tax-qualified retirement plans if certain limits did not exist under Section 401(a) of the Internal Revenue Code of 1986, as amended (“IRS rules”). The Lincoln National Corporation Executives’ Excess Compensation Pension Benefit Plan restores benefits limited by IRS rules under the LNC Employees’ Retirement Plan. The Jefferson-Pilot Corporation Supplemental Benefit Plan restores benefits limited by IRS rules under the Jefferson-Pilot Employees’ Retirement Plan. These supplemental retirement plans calculate benefits using the same formula as the qualified retirement plan that they “restore,” but without the imposition of IRS limits. The qualified retirement benefit payment is deducted from, or offsets, the benefit calculated under each supplemental retirement plan. The present value of the accumulated benefit under each supplemental retirement plan for the NEOs is set forth and described in the Pension Benefits table and accompanying narrative on page 53.

Enhancements to benefits payable under the LNC Executives’ Excess Compensation Pension Benefit Plan, or the LNC Excess Plan (but not the JP Supplemental Benefit Plan) are provided in the case of a change-of-control, as defined in the LNC Excess Plan. In addition, enhancements to both supplemental retirement plan benefits are provided to executives participating in the Lincoln National Corporation Executives’ Severance Benefit Plan and the Jefferson-Pilot Executive Change of Control Severance Plan, in the case of a change of control, as defined under those plans. The benefit enhancements provided in each case are discussed below under “Potential Payments upon Termination or Change-in-Control” beginning on page 58.

Deferred Compensation Plan

The Lincoln National Corporation Executive Deferred Compensation Plan for Employees (the “LNC Deferred Compensation Plan”) allows our executives to defer salary and receive company contributions (matching contributions) with respect to such salary deferrals, without being affected by the tax code limits on deferrals and employer contributions. Amounts deferred and contributed under the LNC Deferred Compensation Plan are credited to “notional” or bookkeeping accounts, and are subsequently credited with earnings or losses mirroring the performance of the Plan’s available investment options. These are the same investment options that are available under the LNC 401(k) Plan. The LNC Deferred Compensation Plan is an unfunded plan and represents an unfunded promise to pay the benefits credited to each participant.

For every dollar deferred once the executive has reached $175,000 in annual compensation, we contribute both basic and discretionary matching contributions under the LNC Deferred Compensation Plan. Information regarding each NEO’s salary deferrals and our contributions to the Plan on behalf of the NEO during 2006, as well as each executive’s aggregate balance under that Plan as of December 31, 2006, can be found in the Nonqualified Deferred Compensation Plan table and accompanying narrative beginning on page 56.

Mr. Coyne, as an employee of Delaware Investments, participates in the Delaware Management Holdings, Inc. Retirement Plan (“DRP”), along with all other eligible Delaware employees. The DRP is a money purchase pension retirement plan—a defined contribution plan to which we contribute 7.5% of Mr. Coyne’s eligible compensation annually. Any amount of our contribution that exceeds the applicable IRS limits is credited to an account in the LNC Deferred Compensation Plan on Mr. Coyne’s behalf. Participants do not contribute to the DRP. Amounts credited under the DRP may be invested by Mr. Coyne in a variety of investment options from the Delaware Investments Family of Funds that comprise the current investment alternatives available under the DRP. The amounts contributed to the DRP by us on Mr. Coyne’s behalf are set forth in footnote 4 to the Summary Compensation Table.
 
 
 
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Change of Control Arrangements

We sponsor two plans where the payment of benefits is triggered by a termination of employment (under specific circumstances) after a change of control: the Lincoln National Corporation Executives’ Severance Benefit Plan, or the LNC COC Plan, and the Jefferson-Pilot Executive Change of Control Severance Plan, or the JP COC Plan. In addition, as referenced above, there are also separate change of control triggered enhancements to the LNC Excess Compensation Pension Benefit Plan (but not the JP Supplemental Benefit Plan), to the Salary Continuation Plan for Executives of Lincoln National Corporation and Affiliates, and to the Jefferson-Pilot Executive Special Supplemental Benefit Plan. These enhancements, and the latter two plans in general, are described below in “Potential Payments upon Termination or Change-in-Control” beginning on page 58.

  The objectives of the LNC COC Plan and the JP COC Plan are:

·  
To attract and retain qualified executives in the face of an actual or threatened change of control of Lincoln National Corporation (in the case of the LNC COC Plan) - we assumed any obligations under the terms of the JP COC Plan related to the change of control of Jefferson-Pilot as a result of our merger,

·  
To enable such executives to help our Board assess any proposed change of control of us and advise the Board as to whether such a proposal is in our best interests, our shareholders’ best interests, and in the best interests of our policyholders and customers without being unduly influenced by the possibility of employment termination, and

·  
To demonstrate to those executives our desire to treat them fairly in such circumstances.

A full description of the benefits provided under the LNC COC Plan and the JP COC Plan is provided below under “Potential Payments upon Termination or Change-in-Control” beginning on page 58.

Section 162(m) of the Internal Revenue Code

Section 162(m) of the Internal Revenue Code caps a public company’s corporate income tax deduction at $1 million per year for each NEO. However, compensation that qualifies as performance-based compensation is not subject to this cap. The incentive awards that we pay are intended to qualify as performance-based compensation under Section 162(m) and are subject to limits established under the Amended and Restated ICP in compliance with the rules of that Section. Under the Amended and Restated ICP, our 2006 awards could in no event exceed, in the case of a cash award, $8,000,000, or, in the case of equity awards or stock options, two million shares. The Compensation Committee further limits such awards.

In the case of our performance awards, the Compensation Committee retains the discretion to reduce or increase any executive’s individual payout, to the extent permissible under Section 162(m), based on certain extraordinary circumstances that may occur during the cycle. The Committee may consider extraordinary circumstances that could impact performance results such as changing economic and market conditions, mergers or acquisitions, sale of a business, restructuring charges, reserve strengthening or release, and/or extraordinary natural occurrences or man-made events (e.g. acts of war). In making such changes, the Committee would consider investor reaction, stock price performance, performance of peers and the CEO’s recommendation. The guiding principle in making adjustments and modifications would be to encourage and reward management for consistently high financial and shareholder return performance relative to peers, while taking into consideration creation of shareholder value.

Compensation Committee Report

The members of the Committee have reviewed and discussed this Compensation Discussion & Analysis with management. Based on that review and discussion, the Committee has recommended to the Board of Directors of the Corporation that the Compensation Discussion & Analysis be included in our Form 10-K for the year ended December 31, 2006 and this proxy statement.

William H. Cunningham
Michael F. Mee
Patrick S. Pittard
Glenn F. Tilton [resigned effective March 20, 2007]

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Summary Compensation Table

The table below contains information about our NEOs’ compensation earned or paid during the fiscal year ended December 31, 2006. The NEOs are:

·  
our CEO and CFO,
·  
our three other most highly compensated executive officers employed on December 31, 2006, and
·  
one former executive.


 
SUMMARY COMPENSATION TABLE
 
 
 
 
 
NAME AND PRINCIPAL POSITION
(a)
 
 
 
 
 
 
YEAR
(b)
 
 
 
 
 
SALARY
($)
(c)
 
 
 
 
STOCK AWARDS
($)1
(e)
 
 
 
 
OPTIONS
AWARDS
($)1
(f)
 
 
NON-EQUITY
INCENTIVE
PLAN COMPENSATION
($)2
(g)
CHANGE IN PENSION VALUE AND NON-QUALIFIED
DEFERRED COMPENSATION EARNINGS
($)3
(h)
 
 
 
ALL OTHER COMPEN-SATION
($)4
(i)
 
 
 
 
 
TOTAL
($)
(j)
JON A. BOSCIA
Chairman and CEO of LNC
 
 
2006
 
925,000
 
617,687
 
6,591,815
 
7,393,423
 
2,140,170
 
460,810 6
 
18,128,905
FREDERICK J.
CRAWFORD
CFO of LNC
 
 
 
2006
 
 
400,000
 
 
921,525
 
 
116,169
 
 
1,495,830
 
 
121,313
 
 
76,850
 
 
3,131,687
DENNIS R. GLASS5
President and COO
of LNC
 
 
2006
 
700,000
 
1,366,623
 
--
 
2,205,000
 
432,573
 
504,708 7
 
5,208,904
PATRICK P. COYNE
President, Lincoln National Investment Company, Inc. and Delaware Management Holdings, Inc.
 
 
 
2006
 
 
395,000
 
 
22,816
 
 
759,210
 
 
4,081,500
 
 
--
 
 
231,554
 
 
5,490,080
WESTLEY V.
THOMPSON
President, Employer
Markets
 
 
 
2006
 
 
500,000
 
 
1,905,653
 
 
218,176
 
 
1,527,201
 
 
186,878
 
 
163,083 8
 
 
4,500,991
JOHN H. GOTTA
Former President and CEO of The Lincoln National Life Insurance Company
 
 
 
2006
 
 
360,000
 
 
1,825,320
 
 
259,963
 
 
--
 
 
265,236
 
 
2,909,414 9
 
 
5,619,933
WARREN H. MAY
Former President of Lincoln Financial Distributors, Inc.
 
2006
 
347,106
 
363,250
 
178,057
 
--
 
260,614
 
3,586,448 10
 
4,735,475
 
            1.
Represents the proportionate amount of the total fair value of stock and option awards that we recognized as an expense in 2006 for financial accounting purposes, disregarding for this purpose the estimate of forfeitures related to service-based vesting conditions. The fair values of these awards and the amounts expensed in 2006 were determined in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment (FAS 123R).  All assumptions made in calculating the compensation cost of stock and option awards are set forth in Note 9 of the Notes to the Consolidated Financial Statements, included in Item 8 of the Form 10-K for the fiscal year ended December 31, 2006. The details of the incentive cash, stock and option awards granted in 2006 are described in more detail in the Grants of Plan-Based Awards table. Because Mr. Boscia will become eligible for retirement during the vesting periods for his stock and option awards, the stock and option awards are expensed during the period up to the date he becomes retirement eligible. For Mr. Glass, all stock and option awards are fully expensed during the year of grant because he is retirement eligible. The amounts shown for Mr. Coyne in column (f) reflect the amount expensed for options granted to Mr. Coyne under the Delaware Investments U.S., Inc. (“DIUS”) Stock Option Plan. These options are exercisable for shares of common stock of DIUS, our indirect wholly owned subsidiary.

As a result of his termination, Mr. May forfeited his LTI awards representing the amounts in column (e) above.

 
2.
Represents the annual incentive plan (AIP) award paid in cash for the 2006 performance period under the Amended and Restated ICP. Each of these amounts was paid in February 2007. More information on the AIP, including the applicable performance targets, is provided in the Grants of Plan-Based Awards table below and the CD&A on page 31. Mr. May’s received a $663,750 pro rata AIP target award paid in accordance with his termination agreement as described under “Potential Payments Upon Termination or Change-in-Control” beginning on page 58 and not upon satisfaction of performance goals. Therefore, that amount is included in column (i) above.
 
 
- 45 -


 
Also included is the cash portion of the long-term incentive award, or LTI award, for the 2004-2006 performance cycle under the Amended and Restated ICP for Messrs. Boscia ($2,768,423) and Crawford ($95,830). Each of these amounts vested in February 2007. The performance option and share awards, if any, for the 2004-2006 performance cycle are reflected in columns (d) and (i) of the Outstanding Equity Awards at Fiscal Year-End table below because the Compensation Committee did not certify that the performance conditions had been met until February 2007. Dividends accrue to any portion of a long-term incentive award elected to be vested in stock. The dividend equivalents are payable in stock, based upon normal dividend rates, only if the related long-term incentive award actually vests. More information on the LTI awards for the 2004-2006 performance cycle, including the applicable performance targets, are provided in the CD&A on page 40.

 
3.
The total amount reflects solely the actuarial increase in the present value of the NEO’s benefits under all of our pension plans from the pension plan measurement date used for financial reporting purposes for each NEO, using the same interest rate and mortality rate assumptions as those used in Note 8 of the Note to our Consolidated Financial Statements, included in Item 8 of the Form 10-K for the fiscal year ended December 31, 2006. The NEOs did not have any preferential non-qualified deferred compensation earnings during 2006.

 
4.
All Other Compensation includes amounts that we contribute for the NEOs under our Employees’ Savings and Profit-Sharing Plan, or 401(k) plan, and the Deferred Compensation Plan. Our matching contributions to the 401(k) Plan in fiscal 2006 were as follows: Mr. Boscia, $19,200, Mr. Crawford, $16,408, Mr. Glass, $1,320, Mr. Coyne, $16,125, Mr. Thompson, $17,512, Mr. May, $3,209 and Mr. Gotta, $16,875. Our matching contributions to the Deferred Compensation Plan for fiscal 2006 were as follows: Mr. Boscia, $398,129, Mr. Crawford, $60,442, Mr. Coyne, $136,679, Mr. Thompson, $135,571 and Mr. Gotta, $143,078. In addition, Mr. Coyne, as an employee of Delaware Investments, participates in the Delaware Management Holdings, Inc. Retirement Plan (“DRP”). The DRP is a money purchase pension plan—a defined contribution plan—to which the company contributes a fixed percentage of eligible compensation. The amount contributed to the DRP on Mr. Coyne’s behalf for 2006 was $78,750. Because the DRP is a tax-qualified plan, only $15,750 of the total amount could be contributed to the DRP because of Internal Revenue Code limits, with the excess amount of $63,000, contributed to the Deferred Compensation Plan on Mr. Coyne’s behalf. The DRP is described further under “Narrative Disclosure to the Summary Compensation and Grants of Plan-Based Awards Tables” below on page 49.

All Other Compensation also includes the perquisites and other personal benefits, the aggregate incremental cost of which for an NEO equaled or exceeded $10,000 and applicable tax gross ups as described in footnotes 6, 7, 8 and 10 below. More information regarding perquisites and personal benefits, including the manner in which we value personal use of the corporate aircraft is discussed under “Narrative Disclosure to the Summary Compensation and Grants of Plan-Based Awards Tables” below on page 48.

 
5.
Mr. Glass’s compensation reflects the period from April 3, 2006 (the date of closing of our merger with Jefferson-Pilot) to December 31, 2006. 

 
6.
Includes the following perquisites (any perquisite with an aggregate incremental cost exceeding $25,000 is quantified): $33,481 representing the aggregate incremental cost of personal use of corporate aircraft and matching gifts made by Lincoln Financial Foundation Inc. on behalf of Mr. Boscia.

 
7.
Includes the following perquisites (any perquisite with an aggregate incremental cost exceeding $25,000 is quantified):

·  
$323,453 for relocation expenses;
·  
$41,617 representing the aggregate incremental cost of personal use of corporate aircraft;
·  
the cost of operating, maintaining and insuring a company-owned automobile;
·  
annual cost of a country club membership; and
·  
matching gifts made by Lincoln Financial Foundation Inc. on behalf of Mr. Glass.

We are required to provide Mr. Glass with costs associated with his country club membership and use of a company-owned automobile pursuant to his employment agreement, which is further described under “Narrative Disclosure to the Summary Compensation and Grants of Plan-Based Awards Tables” on page 48 below. His amount also includes a $123,969 tax gross-up relating to his relocation expenses.

 
8.
Includes $10,000 in matching gifts made on Mr. Thompson’s behalf by Lincoln Financial Foundation Inc.

 
9.
Mr. Gotta retired effective July 31, 2006. In addition to the amounts set forth in footnote 4 above, the amount includes $2,758,506 paid in connection with his retirement pursuant to his Non-compete and Anti-solicitation Agreement, Waiver and General Release of Claims, dated as of January 19, 2006, which is described under “Potential Payments Upon Termination or Change-in-Control -- Gotta’s Non-Compete Agreement” on page 61 below.

 
10.
Mr. May ceased being an executive officer in August 2006. In addition to the amounts in footnote 4 above, the amount includes $3,370,172 paid or accrued pursuant to his termination, which is described under “Potential Payments Upon Termination or Change-in-Control -- May’s Agreement” on page 61 below. The amount also includes a $36,666 tax gross-up relating to his relocation expenses. The amount also includes the following perquisites (any perquisites with an aggregate incremental cost exceeding $25,000 is quantified):

·  
$175,163 for relocation expenses;
·  
the aggregate incremental cost of gifts given to all attendees of a sales incentive trip; and
·  
a matching gift made by the Lincoln Financial Foundation, Inc. on Mr. May’s behalf.

Mr. May’s relocation expenses include the 2006 carrying cost of his house that we purchased in 2006, including interest costs under the mortgage we have assumed, insurance costs and interest expense in financing the purchase.

- 46 -


Grants of Plan-Based Awards

The table below provides information on grants of plan-based awards during fiscal year 2006 to the NEOs. Except for Mr. Coyne, all awards were granted under the Amended and Restated ICP. Mr. Coyne’s options were granted under the DIUS Stock Option Plan. Mr. Coyne’s DIUS options are exercisable for shares of common stock of DIUS, our indirect wholly owned subsidiary.
 
                 
 
 
ESTIMATED POSSIBLE PAYOUTS
UNDER NON-EQUITY INCENTIVE
PLAN AWARDS2
 
ESTIMATED FUTURE PAYOUTS UNDER
EQUITY INCENTIVE PLAN AWARDS
 
 
 
 
 
 
 
 
 
 
 
 
 
NAME
(a)
 
 
 
 
 
 
 
 
 
GRANT DATE
(b)
 
 
 
 
 
 
THRESH-
OLD
($)
(c)
 
 
 
 
 
 
 
TARGET
($)
(d)
 
 
 
 
 
 
MAXI-
MUM
($)
(e)
 
 
 
 
 
 
 
THRESHOLD
(#)
(f)
 
 
 
 
 
 
 
TARGET
(#)
(g)
 
 
 
 
 
 
 
MAXI-
MUM
(#)
(h)
 
ALL OTHER STOCK AWARDS: NUMBER OF SHARES OF STOCK OR UNITS
(#)
(i)
 
ALL OTHER OPTION AWARDS: NUMBER OF SECURITIES UNDER-
LYING OPTIONS
(#)
(j)
 
 
 
EXERCISE
OR BASE
PRICE OF
OPTION
AWARDS
($/SH)6
(k)
 
 
 
 
 
 
 
CLOSING PRICE ON GRANT DATE
($/SH)
(l)
 
GRANT
DATE
FAIR
VALUE
OF STOCK
AND
OPTION
AWARDS
($)8
(n)
                         
JON A.
BOSCIA
1/05/20061
 
 
 
 
 
 
--
15,152
53.91
54.12
51,517
 
4/10/20061
 
 
 
 
 
 
 
14,282
57.19
57.05
21,709
 
4/13/2006
1,156,250
2,312,500
4,625,000
 
 
 
 
 
 
 
 
 
4/13/20063
 
 
 
21,714
43,427
85,854
 
 
 
 
2,432,781
 
4/13/20063
 
 
 
 
 
 
 
278,375
56.02
56.30
3,259,771
 
5/4/20061
 
 
 
 
 
 
 
13,780
59.27
58.03
7,441
FREDERICK
J.
CRAWFORD
4/13/2006
350,000
700,000
1,400,000
 
 
 
 
 
 
 
 
 
4/13/20063
 
 
 
3,124
6,248
12,496
 
 
 
 
350,013
 
4/13/20064
 
 
 
 
 
 
6,000
 
 
 
325,200
 
4/13/20063
 
 
 
 
 
 
 
40,050
56.02
56.30
468,986
DENNIS R.
GLASS
4/13/2006
551,250
1,102,500
2,205,000
 
 
 
--
--
--
--
 
 
4/13/20063
 
 
 
11,046
22,091
44,182
 
 
 
 
1,237,538
 
4/13/20065
 
 
 
3,682
7,364
14,728
 
 
 
 
412,531
 
4/13/20065
 
 
 
7,364
14,727
29,454
 
 
 
 
825,007
PATRICK P.
COYNE
11/8/20065
1,125,000
2,250,000
4,500,000
 
 
 
 
 
 
 
 
 
11/8/20063
 
 
 
2,597
5,194
10,388
 
 
 
 
337,558
 
11/8/20063
 
 
 
 
 
 
 
7,000
209.38
N/A
446,530 7
WESTLEY V.
THOMPSON
4/13/2006
509,067
1,108,134
2,036,268
 
 
 
--
 
 
 
 
 
4/13/20063
 
 
 
4,544
9,088
18,176
 
 
 
 
509,110
 
4/13/20063
 
 
 
 
 
 
 
58,252
56.02
56.30
682,131
 
6/8/20063
 
 
 
756
1,511
3,022
 
 
 
 
86,097
JOHN H.
GOTTA
--
--
--
--
--
--
--
--
--
--
--
--
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WARREN H.
MAY
4/13/20069
331,875
663,750
1,327,500
 
 
 
--
--
--
--
 
 
4/13/20063,9
 
 
 
2,936
5,872
11,744
 
 
 
 
328,949
 
4/13/20065,9
 
 
 
1,958
3,915
7,830
 
 
 
 
219,318
 
4/13/20065,9
 
 
 
979
1,958
3,916
 
 
 
 
109,687

 
1.
Reflect reload option grants in 2006 in connection with the exercise of options for which the NEO delivered shares (equal to the number of shares underlying the option) to pay the exercise price. Reload options also have reload features. The reload options have the same expiration date as the option to which they relate. The reload options generally vest on the second anniversary of the grant date, but may not be exercised unless the value of the reload option has appreciated by at least 25%. However, if the options expire within two years of grant date, they will vest 30 days prior to expiration without any other restriction. The exercise price of an option is based on the average of the high and low prices of our common stock as quoted on the composite transactions table on the NYSE, on the last trading day prior to the date on which the option is granted. As stated in footnote 6 below, all reload grants relating to options granted prior to the adoption of our Equity Grant Procedures in November 2006 will be priced using the method described in the prior sentence.

 
2.
Represents the potential 2006 AIP awards. Actual amounts earned by the NEOs are reflected in the Summary Compensation Table. More information on the 2006 AIP awards, including the applicable performance targets, is provided in the CD&A on page 35.

 
3.
As described in the CD&A on page 37 above, one-half of each NEO’s LTI target for the 2006-2008 cycle was awarded in the form of options as reflected in column (j) above. The options granted in connection with the 2006-2008 performance cycle have ten year terms, with the option price (except for Mr. Coyne’s options) determined by using the average of the high and low price of our common stock on the NYSE composite transactions tape on the day before grant. See footnote 6 below. The options vest ratably over a three-year period (or four-year period for Mr. Coyne), with one-third vesting on each anniversary of the grant date. These options do not have a reload feature.

The remaining portion of the 2006-2008 LTI target was granted in the form of long-term incentive performance awards shown in columns (f), (g) and (h). For information on the 2006-2008 performance awards and a description of the 2006-2008 performance goals applicable to the awards, see the CD&A on page 38 . Dividends accrue to any portion of a long-term incentive award elected in the form of stock. The dividend equivalents are payable in stock, based upon normal dividend rates, only if the related long-term incentive award actually vests. For a discussion of the grant made to Mr. Thompson on June 8, 2006 see the CD&A on page 39.

 
4.
Represents a restricted stock award for Mr. Crawford’s work on the Jefferson-Pilot merger.

 
5.
In addition to their normal LTI award for 2006-2008, Messrs. Glass and May were granted a prorated LTI for both the 2004-2006 and 2005-2007 performance cycles.

 
6.
As stated in the CD&A beginning on page 39, we adopted Equity Grant Procedures in November 2006, which provide that, except as noted below, all options granted after that date will use the closing price of our common stock as quoted on the composite transactions tape of the NYSE on the date of grant as the exercise price. However, options granted prior to the adoption of the policy were priced using the average of the high and low price of our common stock on the NYSE composite transactions tape on the day prior to date of grant. In addition, reload options based on options granted prior to the adoption of the Equity Grant Procedures will continue to be priced using this method.
 
 
- 47 -


 
 
7.
DIUS shares are valued semi-annually by the Compensation Committee of our Board of Directors utilizing a report prepared by an independent valuation firm using a market-transaction approach based on profit margin, revenues and assets. Therefore, the closing price is not calculated on a daily basis. The exercise price for this option will be based on a December 31, 2006 valuation. The December 31, 2006 valuation was not ready at the date of this proxy statement. Accordingly, the exercise price shown is an estimate of the December 31, 2006 valuation.

 
8.
Represents the grant date fair value of the award determined in accordance with FAS 123R. All assumptions made in calculating the aggregate fair value are set forth in Note 9 of the Notes to the Consolidated Financial Statements, included in Item 8 of the Form 8-K for the fiscal year ended December 31, 2006.
 
 
9.
As part of his agreement described under “Potential Payments Upon Termination or Change-in-Control—May’s Agreement” on page 61 below, Mr. May received a prorated portion of his AIP target award for 2006, plus interest of $33,188 and will receive $428,557 in 2007 as settlement of all of the outstanding LTI cycles.

Narrative Disclosure to the Summary Compensation and Grants of Plan-Based Awards Tables

In general, the fixed or certain elements of compensation—base salary and retirement and health and welfare benefits—make up the smallest percentage of total executive compensation, while the largest component of total compensation, incentive awards, fluctuates and is at risk based on our financial performance. 

Mr. Glass’s Employment Agreement

As discussed in the CD&A, Mr. Glass entered into an employment agreement with Jefferson-Pilot Corporation on December 6, 2003 which is effective through March 1, 2008. We assumed the obligations under this agreement in the merger. The agreement provided for base salary, annual bonus, stock options, LTIP payouts and certain additional benefits, including severance benefits. Under the agreement, Mr. Glass’s base salary was set at $925,000. On April 12, 2006, the Compensation Committee approved a change to Mr. Glass’s 2006 base salary level to $900,000, effective on the first payroll period subsequent to the April 13th meeting (April 24, 2006), reflecting his new position as President and Chief Operating Officer. Mr. Glass also agreed to an amendment to his employment agreement to clarify that annual bonuses and long-term incentive compensation will be paid under our existing programs. In addition, Mr. Glass’s employment agreement contains various severance provisions, as described under “Potential Payments Upon Termination or Change-in-Control—Glass’s Employment Agreement” on page 60 below.

Perquisites and Personal Benefits

The following discusses the primary perquisites and personal benefits offered to the NEOs in 2006 not all of which were used by the NEOs. Under the financial planning and tax preparation program, all officers with a title of executive vice president or above, which includes each NEO, were eligible for reimbursement of the costs of utilizing a Lincoln Financial Network financial planner to provide financial planning services. The reimbursement was equal to 100% of the first $1,800 of costs, plus 50% of costs above that amount up to a maximum of $6,000. In addition, the same officer group was eligible to receive up to $2,700 for reimbursement of tax preparation services provided by any fee-for-service, tax preparer, who was a certified public accountant, excluding Ernst & Young, LLP, our independent registered public accounting firm. If the officer does not use the entire tax preparation reimbursement in a year, any remaining amount may be applied to the financial planning reimbursement, but not vice versa.

In 2005, the Committee adopted a policy advising our CEO to use the corporate aircraft for personal travel as well as business, when practical. In 2006, this policy was extended to the President and COO. The policy was adopted due to security concerns and to allow for more efficient travel time so that the CEO and President can devote more time to our business. We do not have a specific policy with respect to other executive officers personal use of the corporate aircraft. However, to the extent any executive and guest of an executive uses corporate aircraft for personal purposes, the usage was treated as a perquisite for proxy statement reporting purposes. For purposes of determining the value of such services, the personal use is calculated based on the aggregate incremental cost to us. For personal flights on corporate aircraft, aggregate incremental cost is calculated based on a cost-per-flight-hour charge that reflects the operating costs of the aircraft, including parts, labor, overhauls (but not engine overhauls of the type incurred every 5-10 years), fuel, landing and parking fees/taxes and crew travel expenses. We also include, as an aggregate incremental cost, any empty aircraft flights necessary to reposition the corporate aircraft (i.e., dead head flights) resulting from a personal flight.
 
 
- 48 -


As a result of assuming Mr. Glass’s employment agreement in the merger with Jefferson-Pilot, we are required to provide Mr. Glass with costs associated with his obtaining and maintaining membership in business and social clubs reasonably acceptable to us. In addition, under Mr. Glass’s employment agreement, we must provide him with a company-owned automobile and must pay the cost of operating, maintaining and insuring the automobile.

We also have a matching charitable gift program. Under the program, in 2006, all NEOs were eligible to apply for matching contributions of up to $10,000, except that as a former Jefferson-Pilot executive Mr. Glass had a $15,000 limit. Our full-time employees are eligible to apply for up to $2,500 in matching contributions.

Other Considerations

In addition to the material terms of grants described in the footnotes to the Grants of Plan-Based Awards table above, we wish to point out the following:

·  
The exercise price and tax withholding obligations related to the exercise of all options may be paid by delivery of shares or by offset of the underlying shares, subject to certain conditions.

·  
With respect to stock awards, we automatically withhold a sufficient number of shares to satisfy the NEO’s tax withholding obligations.

·  
Options and stock awards are not transferable except by will or pursuant to the laws of descent and distribution, unless the Compensation Committee permits such a transfer. The Committee has not permitted (nor historically permitted) a transfer with respect to any of the awards shown in the Grants of Plan-Based Awards table above.

·  
In cases where an executive participating in the 2006 LTI program dies, is disabled, voluntarily leaves the company after attaining age 55 with 5 years of service, or is involuntarily terminated for any reason other than for cause and signs a general release of claims against us, the executive's 2006 options will immediately vest, and the executive (or the executive's beneficiary) will receive a pro-rated performance award based on the number of days of service out of the total number of days in the three-year performance cycle. 

·  
The 2006 options also vest upon a change of control, as defined in the LNC Executive Severance Benefit Plan. 

Any vested 2006 options may be exercised by the executive, or his/her beneficiary (as applicable), until the earliest to occur of:

·  
the expiration of the term of the option,
·  
the first anniversary of the date the executive died or was disabled,
·  
the fifth anniversary of the date the executive voluntarily left the company after attaining age 55, or
·  
three months from the date the executive was involuntarily terminated for any reason other than for cause.

Finally, Mr. Coyne, as an employee of Delaware Investments, participates in the DRP. The DRP is a money purchase pension retirement plan—a defined contribution plan—to which we contribute 7.5% of Mr. Coyne’s eligible compensation annually. For any plan year, eligible compensation is defined as 100% of Mr. Coyne’s base salary, plus bonus. The amount of bonus is capped such that only 50% of any bonus amount over $100,000 is considered eligible compensation. Eligible compensation is also subject to the IRS limits described above. Amounts credited under the DRP may be invested by Mr. Coyne in a variety of investment options from the Delaware Investments Family of Funds that comprise the current investment alternatives available under the DRP. Our contributions to the DRP on Mr. Coyne’s behalf for 2006 are set forth in footnote 4 to the Summary Compensation Table.
 
 
- 49 -


Outstanding Equity Awards at Fiscal Year-End

The table below provides information with respect to unexercised options to purchase shares of our common stock, unvested stock awards and unvested equity incentive plan awards for each NEO as of December 31, 2006 on an award-by-award basis. However, Mr. Coyne’s unexercised options are options granted pursuant to the DIUS Stock Option Plan. Mr. Coyne’s DIUS options are exercisable for shares of common stock of DIUS, our indirect wholly owned subsidiary.
 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
 OPTION AWARDS
STOCK AWARDS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NAME
(a)
 
 
 
 
 
 
 
NUMBER
OF
SECURITIES
UNDERLY-
ING
UNEXER-
CISED
OPTIONS
(#)
EXERCIS-
ABLE1
(b)
 
 
 
 
 
 
 
NUMBER
OF
SECURITIES
UNDERLY-
ING
UNEXER-
CISED
OPTIONS
(#)
UNEXER-
CISABLE1
(c)
 
 
 
 
EQUITY
INCENTIVE
PLAN
AWARDS:
NUMBER
OF
SECURITIES
UNDERLY-
ING
UNEXER-
CISED
UNEARNED
OPTIONS
(#)
(d)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OPTION
EXERCISE
PRICE
($)
(e)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OPTION
EXPIRATION
DATE
(f)
 
 
 
 
 
 
 
NUMBER
OF
SHARES
OR UNITS
OF
STOCK
THAT
HAVE
NOT
VESTED
(#)
(g)
 
 
 
 
 
 
MARKET
VALUE
OF
SHARES
OR UNITS
OF
STOCK
THAT
HAVE
NOT
VESTED6
($)
(h)
 
 
EQUITY
INCENTIVE
PLAN
AWARDS:
NUMBER
OF
UNEARNED
SHARES,
UNITS OR
OTHER
RIGHTS
THAT
HAVE
NOT
VESTED
(#)
(i)
EQUITY
INCENTIVE
PLAN
AWARDS:
MARKET
OR
PAYOUT
VALUE
OF
UNEARNED
SHARES,
UNITS
OR OTHER
RIGHTS
THAT
HAVE NOT
VESTED6
($)
(j)
JON A.
BOSCIA
52,000
 
 
29.47
05/14/07
--
--
48,980 3
3,252,272
 
220,000
 
 
44.93
05/13/08
 
 
78,255 4
5,196,132
 
200,000
 
 
50.83
05/12/09
 
 
88,532 5
5,878,525
 
100,000
 
 
24.72
03/09/10
 
 
 
 
 
184,000
 
 
43.48
03/08/11
 
 
 
 
 
200,000
 
 
52.10
03/14/12
 
 
 
 
 
 
 
272,827 3
47.58
03/11/14
 
 
 
 
 
 
 
301,385 4
46.77
03/10/15
 
 
 
 
 
 
278,375 5
 
56.02
04/13/16
 
 
 
 
FREDERICK
J.
CRAWFORD
 
4,000
 
 
--
 
43.48
 
03/08/11
 
6,116 7
 
406,100
 
16,802 3
 
1,115,653
 
5,000
 
 
52.10
03/14/12
 
 
33,692 4
2,237,149
 
 
40,050 5
 
56.02
04/13/16
 
 
12,738 5
845,803
 
49,077
 
--
42.33
02/07/09
--
--
12,181 3
808,818
 
81,795
 
 
32.97