DEF 14A 1 d326696ddef14a.htm DEF 14A DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.     )

 

Filed by the Registrant ☒  Filed by a Party other than the Registrant ☐

Check the appropriate box:

 

☐   Preliminary Proxy Statement

 

☐  Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

☒  Definitive Proxy Statement

 

☐  Definitive Additional Materials

 

☐  Soliciting Material Pursuant to §240.14a-12

Prudential Financial, Inc.

 

(Name of Registrant as Specified In Its Charter)

 

  

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

No fee required.

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

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☐  Fee paid previously with preliminary materials.

 

☐  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

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LOGO

 

PRUDENTIAL FINANCIAL, INC. PROXY STATEMENT

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 9, 2017


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LOGO

 

“The justification of the company’s existence is its advancement of the efforts of its policyholders and their families for better economic and social condition which confront the [middle] class.”

John F. Dryden, founder of The Prudential Friendly Society (a predecessor of Prudent al Financial, Inc.)

Prudential was founded more than 140 years ago on the belief that everyone should have the opportunity to achieve financial security and the peace of mind that comes with it.

Today, as Prudential’s global footprint continues to grow, our commitment to shared success remains strong. The company’s approach to creating innovative financial solutions draws on our expertise, our strong stakeholder relationships and the breadth and depth of our business model. In 2016, we continued to build upon our efforts to advance the well-being of a broad array of stakeholders. Three examples are highlighted below:

Prudential’s global investment management business, PGIM, is five years into its journey to create employment pathways for opportunity youth, young people who are not in school nor formally employed. Through a partnership with YouthBuild, an international organization that trains opportunity youth in both job and life skills, PGIM Real Estate is leveraging its business relationships, along with associate expertise, to accelerate the job placement of YouthBuild graduates.

Prudential remains committed to closing the insurance protection gap, and in 2016, demonstrated this by building on its relationship with LeapFrog Investments. The partnership’s long-term objective is to partner with local life insurance providers in high-growth African markets such as Ghana, Kenya and Nigeria to provide appropriate and affordable insurance products while simultaneously spurring the growth of the African middle class.

In keeping our commitment to diversity in practice, Prudential was a proud founding donor and sponsor of the Smithsonian National Museum of African American History and Culture’s grand opening in Washington, D.C. The museum’s opening reignited a national dialogue around the rich and complex heritage of the African American community.

Every day, more than 49,000 Prudential employees serve millions of people around the globe, delivering on our founding belief. We know the value we create for our stakeholders, combined with the societal value we create as a company, helps build a shared and lasting prosperity.


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LOGO  

Prudential Financial, Inc.

751 Broad Street,

Newark, NJ 07102

 

 

 

March 21, 2017

Letter from the Board of Directors

to Our Shareholders

As directors, we strive to govern Prudential in a prudent and transparent manner that helps the Company achieve sustainable operating and financial performance, and deliver long-term value for our shareholders. We focus our attention on overseeing the Company’s business strategies, risk management, talent development, and succession planning. We are pleased to share with you our progress on specific actions undertaken in 2016.

BUSINESS STRATEGY

Our Board has and will continue to be vigilant in the oversight of our firm’s long-term strategy. By focusing on our long-term outlook, we are best able to support our common goal of creating enduring value in our firm and for our shareholders. At each Board meeting and during our annual strategy planning session, we contribute to management’s strategic plan by engaging Prudential’s senior leadership in robust discussions about the Company’s overall strategy, priorities for its businesses, and long-term growth opportunities.

BOARD RISK OVERSIGHT

Prudent risk-taking is an inherent part of Prudential’s business, and we approach our responsibility for oversight of Prudential’s risk profile—in its operations, product development and deployment of capital—very seriously. Fulfilling the Company’s long-term promises is only achievable by developing and maintaining an appropriate risk framework, transparency of risk reporting, and rigorous testing methodologies.

Through our oversight, we set standards for managing risks and monitoring how the Company manages those risks. The Risk Committee is comprised of the chairs of each of the other Board committees, enabling us to more closely coordinate the Board’s risk oversight function. The Risk Committee has metrics in place to monitor and review market, insurance, investment, and operational risk.

TALENT DEVELOPMENT AND DIVERSITY

We recognize that over the long-term, our talent and culture provide our biggest competitive advantage. That is why we consider leadership and talent a priority throughout the Company. This “talent mindset” means embracing collaboration and diversity. We work diligently to build on our success as an organization where top talent across a variety of disciplines, and from a diverse set of backgrounds, aspires to work.

The Board’s composition is indicative of our commitment to diversity and inclusion. Our Directors reflect diverse perspectives, including a complementary mix of skills, experience and backgrounds, which we believe are paramount to our ability to represent your interests as shareholders. In the last two years, four new directors have been elected. The average tenure of our directors is now six years, and two-thirds of the Board is diverse.

ENGAGEMENT AND OUTREACH

Accountability to shareholders is not only a mark of good governance, but an important component of Prudential’s success. We value our shareholders’ views and insights and believe that positive, two-way dialogue builds informed relationships that promote transparency and accountability.

 

Notice of Annual Meeting of Shareholders and 2017 Proxy Statement   |       1  


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LOGO  

Letter from the Board of Directors

 

 

 

In 2016, we spoke with representatives from mutual funds, public pension funds, labor unions and other institutional investors that represent the majority of our outstanding shares. Topics discussed included strategy and performance; corporate governance matters, such as Board composition and refreshment, succession planning and Board leadership structure; and our executive compensation program. This continuous and transparent communication with our shareholders serves as the foundation for our policy development and informs our business strategy.

CULTIVATING A STRONG ETHICAL CULTURE

For more than 140 years, our commitment to helping customers achieve financial security has never wavered. We know that only by doing business the right way, every day, do we continue to earn their trust.

Our corporate philosophy and practice of strong ethical values are reflected in the naming of Prudential as a 2016 World’s Most Ethical Company® by the Ethisphere Institute. This recognition is bestowed only on organizations that demonstrate a culture of ethics and transparency at every level.

CORPORATE RESPONSIBILITY

Prudential was founded to address a social need—helping working families afford life insurance to achieve financial security and peace of mind. Since then, we have stayed true to our purpose of powering the ambitions of people, organizations and communities, and to driving social progress.

We believe everyone should have access to financial security. We recognize that equitable access to capital enhances prosperity and accelerates growth. We are committed to enabling economic prosperity through the work we do not only in our core businesses, but also through targeted efforts like our emerging manager program, which invests in women- and minority-owned firms. Through this and other initiatives, these core beliefs permeate our interaction with all of our stakeholders.

OUR INTERNATIONAL BUSINESSES ANCHORED BY JAPAN

Our international businesses present long-term opportunities for our Company. More than half of our employees work in our operations outside of the U.S. Today, Japan is central to our international strategy. Consequently, in November 2016, we held our Board meeting in Tokyo, Prudential’s headquarters in Japan. Over the course of several days, we met with the senior management of our Asian businesses to discuss their strategies, outlook, challenges and opportunities. We also met employees, whose observations and experiences reinforced the strength of Prudential’s culture, and our commitment to doing business the right way and maintaining a sharp focus on talent management.

YOUR VIEWPOINT IS IMPORTANT

We value your support, and we encourage you to share your opinions, suggestions, interests, and concerns with us. You can do so by writing to us at the address below. You can also send an email to the independent directors at independentdirectors@ prudential.com or provide feedback on executive compensation via our website at www.prudential.com/executivecomp.

If you would like to write to us, you may do so by addressing your correspondence to Prudential Financial, Inc., Board of Directors, c/o Margaret M. Foran, Chief Governance Officer, 751 Broad Street, Newark, New Jersey 07102.

We suggest you access the two short videos of our Lead Independent Director, Karl Krapek, and the Chair of our Corporate Governance and Business Ethics Committee, Gilbert Casellas, from the Corporate Governance section of our website at www.prudential.com/directorvideos.

The Board of Directors of Prudential Financial, Inc.

 

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LOGO  

 

 

Dear Fellow Shareholders:

You are invited to the Annual Meeting of Shareholders on May 9, 2017, at 751 Broad Street, Newark, NJ, at 2:30 p.m. We hope that you will attend the meeting, but whether or not you attend, please designate the proxies on the proxy card to vote your shares.

We are excited that shareholder voting has increased each year and are again offering a voting incentive to registered shareholders. Because of your active participation, we have planted more than 730,000 trees through the incentive initiative.

Every shareholder’s vote is important. Thank you for your commitment to the Company and please vote your shares.

Sincerely,

 

LOGO

 

 

LOGO

John R. Strangfeld

Chairman and Chief Executive Officer

Prudential Financial, Inc.

751 Broad Street

Newark, NJ 07102

 

Notice of Annual Meeting of Shareholders and 2017 Proxy Statement   |       3  


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LOGO  

 

 

Notice of Annual Meeting of Shareholders of

Prudential Financial, Inc.

 

   

      Place:

      Prudential’s Corporate

      Headquarters

      751 Broad Street

      Newark, NJ 07102

 

      Date:

      May 9, 2017

 

      Time:

      2:30 p.m.

   

AGENDA:

 

•    Election of 12 directors named in the Proxy Statement;

 

•    Ratification of appointment of PricewaterhouseCoopers LLP
as our independent registered public accounting firm for 2017;

 

•    Advisory vote to approve named executive officer compensation;

 

•    Advisory vote on the frequency of future advisory votes to approve named executive officer compensation;

 

•    Shareholder proposal regarding an independent Board Chairman,
if properly presented at the meeting; and

 

•    Shareholders also will act on such other business as may
properly come before the meeting or any adjournment or
postponement thereof.

 

   

 

Record date: You can vote if you were a shareholder of record on March 10, 2017.

 

If you are attending the meeting, you will be asked to present your admission ticket and valid, government-issued photo identification, such as a driver’s license, as described in the Proxy Statement.

 

By Order of the Board of Directors,

 

LOGO

 

LOGO

Margaret M. Foran

Chief Governance Officer,

Senior Vice President and Corporate Secretary

 

March 21, 2017

 

Prudential Financial, Inc.

751 Broad Street

Newark, NJ 07102

 

4     |   Notice of Annual Meeting of Shareholders and 2017 Proxy Statement


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LOGO  

 

Summary Information

To assist you in reviewing the proposals to be acted upon at the Annual Meeting, we call your attention to the following information about the Company’s 2016 financial performance and key executive compensation actions and decisions, and corporate governance highlights. The following description is only a summary. For more complete information about these topics, please review the Company’s Annual Report on Form 10-K and this Proxy Statement.

Business

 

   

We reported net income of $4.37 billion, or $9.71 per share of Common Stock in 2016, compared to $5.64 billion, or $12.17 per share, in 2015, based on U.S. generally accepted accounting principles (“GAAP”). Net income for 2015 included a greater benefit from gains driven by market impacts including interest rates than in 2016.

 

 

 

LOGO

 

   
   

We reported after-tax adjusted operating income of $4.11 billion, or $9.13 per share of Common Stock in 2016, compared to $4.65 billion or $10.04 per share, in 2015.(1) 2016 after-tax adjusted operating income was negatively affected by actuarial assumption updates, compared to a positive impact in 2015.

 

 

LOGO

 

   
     
   

We reported GAAP book value of $104.91 per share of Common Stock as of December 31, 2016, compared to $92.39 per share as of year-end 2015.

 

Adjusted book value amounted to $78.95 per share of Common Stock as of December 31, 2016, compared to $73.59 per share as of year-end 2015.(1)

 

 

LOGO

 

   

 

We reported return on average equity based on income from continuing operations of 8.8% for 2016, compared to 13.3% for 2015.

 

We reported operating return on average equity of 12% for 2016, compared to 14.5% for 2015 and to the long term target of 13% to 14% we had set in 2011.(1) Our return on equity for 2016 reflects solid core performance from our businesses, partly offset by the impact of a number of inherently variable and episodic items including our annual actuarial review. Given the multi-year impact of very low interest rates in our two largest markets, the U.S. and Japan, and the short term impact of strategic investing in our businesses, we have moderated our expectations for operating return on average equity to 12% to 13% over the near to intermediate term.

 

 

 

LOGO

 

 

(1) Consolidated adjusted operating income (“AOI”) and operating return on average equity are non-GAAP measures of financial performance. Adjusted book value is a non-GAAP measure of financial position. We use earnings per share (“EPS”) based on AOI, operating return on average equity, and adjusted book value as performance measures in our incentive compensation programs. For a discussion of these measures and for reconciliations to the nearest comparable GAAP measures, see Appendix A to this Proxy Statement.

 

Notice of Annual Meeting of Shareholders and 2017 Proxy Statement   |       5  


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Summary Information

 

 

 

Assets under management reached $1.264 trillion at December 31, 2016, an increase from $1.184 trillion a year earlier.

  LOGO

We returned a total of $3.2 billion of capital to shareholders in 2016, including $2.0 billion through our share repurchase program and $1.2 billion in the form of Common Stock dividends, compared to a total of $2.1 billion of shareholder distributions in 2015.

 

LOGO

 

 

COMPENSATION HIGHLIGHTS

The Compensation Committee has instituted a number of changes to our executive compensation program over the last several years to align with evolving competitive and governance practices and to strengthen the link to performance and rigor of our program. Highlights of our program include:

 

    We establish both target and maximum award levels under our annual incentive program.

 

    We use multiple diverse performance metrics to determine annual incentive awards: EPS achieved versus guidance; annual growth in EPS; and ROE relative to peer life insurance companies.

 

    90% or more of our named executive officers’ (“NEOs”) total direct compensation is performance based.

 

    Our NEOs are required to defer 30% of their annual incentive awards into our Book Value Performance Program.

 

    The performance metrics under our annual incentive and long-term incentive programs balance our absolute performance and our relative performance versus peer life insurance companies.

 

    We maintain a clawback policy for our executive officers covering all incentive-based awards and addressing
   

material financial restatements and misconduct (including failure to report), which includes a robust disclosure policy if such events occur.

 

 

  The Compensation Committee closely monitors the risks associated with our executive compensation program and individual compensation decisions to ensure they do not encourage excessive risk-taking.  

 

  The stock ownership guideline for our CEO is 700% of base salary.  

 

  In addition to stock ownership guidelines, we have stock retention requirements covering shares acquired upon the exercise of stock options or the payment or vesting of any performance shares and restricted stock units.  

 

  Each year we engage with our shareholders and bring back their feedback to the Compensation Committee and the Board.  
 

 

For additional information, see the Compensation Discussion and Analysis (“CD&A”) Section in this Proxy Statement.

The compensation of our NEOs reflects both our 2016 performance and the rigor of our executive compensation program.

 

Named Executive Officer   

2016 Base Salary

($)

    

2016 Annual Incentive

Award (as adjusted for

mandatory deferrals)(1)

($)

    

2016 Long-Term

Incentive Award Value(2)

($)

    

2016 Total

Direct Compensation

($)

 
John R. Strangfeld    $ 1,400,000      $ 4,183,200      $ 11,792,800      $ 17,376,000  
Robert M. Falzon    $ 770,000      $ 2,093,000      $ 4,897,000      $ 7,760,000  
Mark B. Grier    $ 1,190,000      $ 3,556,000      $ 9,524,000      $ 14,270,000  
Charles F. Lowrey    $ 770,000      $ 2,789,500      $ 6,195,500      $ 9,755,000  
Stephen Pelletier    $ 770,000      $ 2,789,500      $ 5,695,500      $ 9,255,000  

 

1 The following amounts are not included in the 2016 Annual Incentive Award column because they have been mandatorily deferred into our Book Value Performance Program: $1,792,800 for Mr. Strangfeld, $897,000 for Mr. Falzon, $1,524,000 for Mr. Grier, $1,195,500 for Mr. Lowrey, and $ 1,195,500 for Mr. Pelletier.

 

2 Represents long-term incentive awards granted in 2017 for 2016 performance. Amounts include portions of the 2016 Annual Incentive Awards mandatorily deferred into our Book Value Performance Program.

Response to advisory vote and shareholder feedback

Approximately 95% of the votes cast at the 2016 Annual Meeting of Shareholders on the non-binding advisory vote on the compensation of our named executive officers were voted in support of our executive compensation program. Consistent with its strong commitment to engagement, communication, and transparency, the Compensation Committee continues to regularly receive feedback from our shareholders and review our executive compensation program to ensure alignment between the interests of our senior executives and shareholders. In part based on feedback from our shareholders, we made several modifications to the compensation program for our NEOs as discussed above and in more detail in the CD&A.

 

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Summary Information

 

 

Corporate Governance Highlights

In 2016, management and Board members engaged with shareholders who hold a majority of our shares. During these discussions, shareholders were encouraged to identify potential Board candidates and share feedback on the Company, its governance practices and policies, and its compensation framework and programs. Our 2016 corporate governance highlights include:

 

    Executive Compensation Program. Received 95% shareholder support in 2016.  

 

    Shareholder Engagement. In 2016, management and Board members met with shareholders who own the majority of our shares.  

 

    Board Refreshment. Elected four new directors since 2015, including three in 2016, enhancing the Board’s breadth and depth of experience and diversity.  

 

    Investor Communications. Nominated for Best Proxy Statement for a Large Cap Company by Corporate Secretary Magazine.  

Boards of Directors Nominees and Committees

 

Name/Age   Independent    Director Since   Committee Membership   Other Public Boards
Thomas J. Baltimore, 53   Yes    Oct. 2008  

•    Executive

•    Compensation

 

•    Investment (Chair)

•    Risk

  2
Gilbert F. Casellas, 64   Yes    Jan. 2001  

•    Corporate Governance & Business Ethics (Chair)

 

•    Executive

•    Risk

  0
Mark B. Grier, 64   No    Jan. 2008           0
Martina Hund-Mejean, 56   Yes    Oct. 2010  

•    Audit

      0
Karl J. Krapek, 68   Yes    Jan. 2004  

•    Lead Independent
Director (Since May 2014)

•    Compensation (Chair)

 

•    Executive (Chair)

•    Risk (Chair)

  1
Peter R. Lighte, 68   Yes    Mar. 2016  

•    Corporate Governance & Business Ethics

 

•    Investment

  0
George Paz, 61   Yes    Mar. 2016  

•    Audit

      2
Sandra Pianalto, 62   Yes    Jul. 2015  

•    Corporate Governance & Business Ethics

 

•    Finance

  2
Christine A. Poon, 64   Yes    Sep. 2006  

•    Executive

•    Finance (Chair)

 

•    Investment

•    Risk

  3
Douglas A. Scovanner, 61   Yes    Nov. 2013  

•    Audit (Chair)

•    Executive

 

•    Risk

  0
John R. Strangfeld, 63   No    Jan. 2008  

•    Executive

      0
Michael A. Todman, 59   Yes    Mar. 2016  

•    Compensation

 

•    Finance

  2

Annual Meeting Proposals

 

Proposal    Recommendation of Board
Election of Directors    FOR each of the nominees
Ratification of Auditors    FOR
Advisory vote to approve named executive officer compensation    FOR
Advisory vote on the frequency of future advisory votes to approve named executive officer compensation    For “EVERY YEAR”
Shareholder proposal regarding an independent Board Chairman    AGAINST

 

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Contents

 

 

 

 

Voting Securities and Principal Holders

    32  

General Information About the Meeting

    77  

Voting Instructions and Information

    77  

Board Recommendations

    78  

Attending the Annual Meeting

    78  

Submission of Shareholder Proposals and Director Nominations

    79  

Proxy Statement

The Board of Directors of Prudential Financial, Inc. (“Prudential Financial” or the “Company”) is providing this Proxy Statement in connection with the Annual Meeting of Shareholders to be held on May 9, 2017, at 2:30 p.m., at Prudential Financial’s Corporate Headquarters, 751 Broad Street, Newark, NJ 07102, and at any adjournment or postponement thereof. Proxy materials or a Notice of Internet Availability were first sent to shareholders on or about March 21, 2017.

ADVISORY VOTES TO APPROVE NAMED

EXECUTIVE OFFICER COMPENSATION

AND FREQUENCY OF VOTE, AND CD&A

Page

 

 

29

 

29

 

Item 3 – Advisory Vote to Approve Named Executive Officer Compensation

 

Item 4 – Advisory Vote on the Frequency of Future Advisory Votes to Approve Named Executive Officer Compensation

35   Compensation Discussion and Analysis (“CD&A”) Executive Summary
41   Philosophy and Objectives of Our Executive Compensation Program
42   How We Make Compensation Decisions
42   Role of the Compensation Consultant
44   Components of Our Executive Compensation Program
57   Supplemental Compensation Analysis
61   Compensation Recovery (“Clawback”) Policy
63   Compensation Committee Report
64   2016 Summary Compensation Table
67   Grants of Plan-Based Awards
69   Pension Benefits
72   Nonqualified Deferred Compensation

 

SHAREHOLDER PROPOSAL REGARDING AN INDEPENDENT BOARD CHAIRMAN

Page

 

 

30   Item 5 – Shareholder Proposal Regarding an Independent Board Chairman
 

 

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Item 1–Election of Directors

Our Board of Directors has nominated 12 directors for election at this Annual Meeting to hold office until the next annual meeting and the election of their successors. All of the nominees are currently directors. Each agreed to be named in this Proxy Statement and to serve if elected. All of the nominees are expected to attend the 2017 Annual Meeting. All 12 directors, then serving on the Board, attended the 2016 Annual Meeting.

James Cullen, a member of the Board, will have attained the age of 74 and will not stand for re-election. As a result, the Board will be reduced to 12 members immediately prior to the Annual Meeting.

We have no reason to believe that any of the nominees will be unable or unwilling for good cause to serve if elected. However, if any nominee should become unable for any reason or unwilling for good cause to serve, proxies may be voted for another person nominated as a substitute by the Board, or the Board may reduce the number of directors.

Director Criteria, Qualifications, Experience and Tenure

Prudential Financial is a financial services company that offers a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds, and investment management. The Corporate Governance and Business Ethics Committee performs an assessment of the skills and the experience needed to properly oversee the interests of the Company. Generally, the Committee reviews both the short- and long-term strategies of the Company to determine what current and future skills and experience are required of the Board in exercising its oversight function. The Committee then compares those skills to the skills of the current directors and potential director candidates. The Committee conducts targeted efforts to identify and recruit individuals who have the qualifications identified through this process, keeping in mind its commitment to diversity.

BOARD HIGHLIGHTS

 

BOARD DIVERSITY

 

While the Company does not have a formal policy on Board diversity, our Corporate Governance Principles and Practices place great emphasis on diversity, and the Committee actively considers diversity in recruitment and nominations of directors. The current composition of our Board reflects those efforts and the importance of diversity to the Board:

Two-thirds of our Board is diverse

 

    3    

 

director nominees have worked outside
the United States

    2     director nominees are African-American
    1     director nominee is Asian-American
    2     director nominees are Hispanic
    3     director nominees are Women
    1     director nominee is LGBT
  12     Total number of director nominees
 

 

 

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Item 1—Election of Directors: Director Nominees

 

 

 

 

LOGO

It is of critical importance to the Company that the Committee recruit directors who help achieve the goal of a well-rounded, diverse Board that functions collegially as a unit.

The Committee expects each of the Company’s directors to have proven leadership skills, sound judgment, integrity and a commitment to the success of the Company. In evaluating director candidates and considering incumbent directors for nomination to the Board, the Committee considers each nominee’s independence, financial literacy, personal and professional accomplishments, and experience in light of the needs of the Company. For incumbent directors, the factors also include attendance, past performance on the Board and contributions to the Board and their respective committees.

 

Below each nominee’s biography, we have included an assessment of the skills and experience of such nominee. We have also included a chart that covers the assessment for the full Board.

Director Nominees

 

The Board of Directors recommends that shareholders vote “FOR” each of the nominees.

 

 
     LOGO  

Thomas J. Baltimore  

 

Age: 53

Director Since: October 2008

 

  

Prudential Committees:

 

  Executive

 

  Compensation

 

  Investment (Chair)

 

  Risk

 

Former Directorships Held During the Past Five Years:

 

  Integra Life Sciences Corporation (August 2012)

 

  RLJ Lodging Trust (May 2016)

  

Public Directorships:

 

  Duke Realty Corporation(1)

 

  Park Hotels & Resorts, Inc.

  
    

 

(1)  Mr. Baltimore will not be standing for re-election at the annual meeting in April 2017.

  
          

 

Mr. Baltimore has been the President and Chief Executive Officer (CEO) of Park Hotels & Resorts, Inc. (a NYSE-listed lodging real estate investment trust) since January 2017. Between May 2016 and January 2017, Mr. Baltimore was the President and CEO of the planned Hilton Real Estate Investment Trust. Previously, he was President and CEO of RLJ Lodging Trust (a NYSE-listed real estate investment company) from May 2011 to May 2016. He served as Co-Founder and President of RLJ Development, LLC (RLJ Lodging’s predecessor company) from 2000 to May 2011. He served as VP, Gaming Acquisitions, of Hilton Hotels Corporation from 1997 to 1998 and later as VP, Development and Finance, from 1999 to 2000. He also served in various management positions with Host Marriott Services, including VP, Business Development, from 1994 to 1996.

Skills & Qualifications

 

  Business Head/Administration
  Business Operations
  Corporate Governance
  Investments
  Real Estate
  Talent Management
 

 

BOARD TENURE FOR 2017 NOMINEES Our directors’ expertise combines to provide a broad mix of skills, qualifications and proven leadership abilities. The Corporate Governance and Business Ethics Committee practices a long-term approach to board refreshment. With the assistance of an independent search firm, the Committee regularly identifies individuals who have expertise that would complement and enhance the current board’s skills and experience. In addition, as part of our shareholder engagement dialogue, we routinely ask our investors for input regarding director recommendations. Director Tenure (Average 6.25 years)

 

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Item 1—Election of Directors: Director Nominees

 

 

 

 

 
     LOGO  

Gilbert F. Casellas

 

Age: 64

Director Since: January 2001

(Director of Prudential Insurance since
April 1998)

 

  

Prudential Committees:

 

  Corporate Governance and Business Ethics (Chair)

 

  Executive

 

  Risk

 

     
          

 

Mr. Casellas has been Chairman of OMNITRU (a consulting and investment firm) since 2011. He was the VP, Corporate Responsibility of Dell Inc. (a global computer manufacturer) from 2007 to 2010. He served as a Member of Mintz Levin Cohn Ferris Glovsky & Popeo, PC from June 2005 to October 2007. He served as President of Casellas & Associates, LLC (a consulting firm) from 2001 to 2005. During 2001, he served as President and CEO of Q-linx, Inc. He served as the President and COO of The Swarthmore Group, Inc. from January 1999 to December 2000. Mr. Casellas served as Chairman, U.S. EEOC from 1994 to 1998, and General Counsel, U.S. Department of the Air Force, from 1993 to 1994.

Skills & Qualifications

 

    Business Ethics

    Business Head/Administration

    Business Operations

    Corporate Governance

    Environmental/Sustainability/Corporate Responsibility

    Government/Public Policy

    Investments

 

  Risk Management

  Talent Management

 

 

 
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Mark B. Grier

 

Age: 64

Director Since: January 2008

 

  

Prudential Committees:

 

    None

 

     
          

 

Mr. Grier has served as Vice Chairman since 2007 and a member of the Office of the Chairman of Prudential Financial since August 2002. From April 2007 through January 2008, he served as Vice Chairman overseeing the International Insurance and Investments divisions and Global Marketing and Communications. Mr. Grier was Chief Financial Officer (CFO) of Prudential Insurance from 1995 to 1997 and has served in various executive roles. Prior to joining Prudential, Mr. Grier was an executive with Chase Manhattan Corporation.

Skills & Qualifications

 

    Business Ethics

    Business Head/Administration

    Business Operations

    Corporate Governance

    Environmental/Sustainability/Corporate Responsibility

    Finance/Capital Allocation

    Financial Services Industry

    Government/Public Policy

  

    Insurance Industry

    International

    Risk Management

    Talent Management

    Technology/Systems

 

 

 
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Martina Hund-Mejean

 

Age: 56

Director Since: October 2010

 

  

Prudential Committees:

 

    Audit

 

     
          

 

Ms. Hund-Mejean has served as the CFO and a member of the Executive Committee at MasterCard Worldwide (a global transaction processing and consulting services company) since 2007. Ms. Hund-Mejean served as Senior Vice President (SVP) and Corporate Treasurer at Tyco International Ltd. from 2003 to 2007; SVP and Treasurer at Lucent Technologies from 2000 to 2002; and held management positions at General Motors Company from 1988 to 2000. Ms. Hund-Mejean began her career as a credit analyst at Dow Chemical in Frankfurt, Germany.

Skills & Qualifications

 

    Business Head/Administration

    Business Operations

    Corporate Governance

    Finance/Capital Allocation

    Financial Services Industry

    International

    Investments

  

    Risk Management

    Talent Management

 

 

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Item 1—Election of Directors: Director Nominees

 

 

 

 

 
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Karl J. Krapek

 

Age: 68

Director Since: January 2004

Lead Independent Director since May 2014

 

  

Prudential Committees:

 

    Compensation (Chair)

 

    Executive (Chair)

 

    Risk (Chair)

 

 

Former Directorships Held During the Past Five Years:

 

    Visteon Corporation (June 2012)

    The Connecticut Bank & Trust Company (April 2012)

  

Public Directorships:

 

    Northrop Grumman Corporation

  
          

 

Mr. Krapek served as the President and COO of United Technologies Corporation (UTC) from 1999 until his retirement in January 2002. Prior to that time, Mr. Krapek held other management positions at UTC, which he joined in 1982. Mr. Krapek is also the co-founder of The Keystone Companies, which was founded in 2002 and develops residential and commercial real estate.

Skills & Qualifications

 

    Business Head/Administration

    Business Operations

    Corporate Governance

    Environmental/Sustainability/Corporate Responsibility

    Finance/Capital Allocation

    International

    Real Estate

  

    Risk Management

    Talent Management

    Technology/Systems

 

 

 
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Peter R. Lighte

 

Age: 68

Director Since: March 2016

 

  

Prudential Committees:

 

    Corporate Governance and Business Ethics

    Investment

     
          

 

Mr. Lighte served as the Vice Chairman, J.P. Morgan Corporate Bank, China, from 2010 to 2014, and was the founding Chairman of J.P. Morgan Chase Bank China, from 2007 to 2010. Prior to that, he headed the Company’s International Client Coverage for Treasury and Securities Services in J.P. Morgan’s European Global Operating Services Division and was instrumental in re-establishing its corporate bank in London. Mr. Lighte previously served as the President of Chase Trust Bank in Tokyo from 2000 to 2002. He was also the founding representative in Beijing of Manufacturers Hanover Trust Company. Mr. Lighte has also taught at several academic institutions, including Middlebury College and the University of Santa Clara.

Skills & Qualifications

 

    Academia/Education

    Business Head/Administration

    Business Operations

    Corporate Governance

    Finance/Capital Allocation

    Financial Services Industry

    Government/Public Policy

  

    Insurance Industry

    International

    Investments

    Risk Management

    Talent Management

 

 

 

 
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George Paz

 

Age: 61

Director Since: March 2016

 

  

Prudential Committees:

 

    Audit

  

Public Directorships:

 

    Express Scripts Holding Company

 

    Honeywell International, Inc.

  
          

 

Mr. Paz is the Non-Executive Chairman of Express Scripts Holding Company (Express Scripts), a prescription benefit management company, and served as the CEO of Express Scripts from April 2005 to May 2016. Mr. Paz also served as the President of Express Scripts from October 2003 to February 2014 and has been a director since January 2004. He joined Express Scripts in 1998 as SVP and CFO. Prior to joining Express Scripts, Mr. Paz was a partner at Coopers and Lybrand from 1988 to 1993 and 1996 to 1998 and served as Executive Vice President and CFO for Life Partners Group from 1993 to 1995.

 

Skills & Qualifications

 

    Business Head/Administration

    Business Operations

    Corporate Governance

    Finance/Capital Allocation

    Financial Services Industry

    Government/Public Policy

    Insurance Industry

  

    Risk Management

    Talent Management

 

 

 

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Item 1—Election of Directors: Director Nominees

 

 

 

 
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Sandra Pianalto

 

Age: 62

Director Since: July 2015

 

  

Prudential Committees:

 

    Corporate Governance and Business Ethics

 

    Finance

  

Public Directorships:

 

    Eaton Corporation plc

 

    The J.M. Smucker Company

  
          

 

Ms. Pianalto served as the President and CEO of the Federal Reserve Bank of Cleveland (the Cleveland Fed) from February 2003 until her retirement in May 2014. She was the First Vice President and COO of the Cleveland Fed from 1993 to 2003 and served as its VP and Secretary to the Board of Directors from 1988 to 1993. Ms. Pianalto also served in various supervisory roles at the Cleveland Fed from 1983 to 1988. Prior to joining the Cleveland Fed, Ms. Pianalto was an economist at the Board of Governors of the Federal Reserve System and served on the staff of the Budget Committee of the US House of Representatives.

 

Skills & Qualifications

 

    Academia/Education

    Business Head/Administration

    Business Operations

    Corporate Governance

    Finance/Capital Allocation

    Financial Services Industry

    Government/Public Policy

  

    Risk Management

    Talent Management

 

 

 

 
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Christine A. Poon

 

Age: 64

Director Since: September 2006

 

  

Prudential Committees:

 

    Executive

 

    Finance (Chair)

 

    Investment

 

    Risk

  

Public Directorships:

 

    Koninklijke Philips Electronics NV

 

    Regeneron Pharmaceuticals

 

    The Sherwin-Williams Company

  
          

 

Ms. Poon served as Dean of Fisher College of Business at The Ohio State University from May 2009 until November 2014 and is now a member of the faculty. She served as Vice Chairman and a member of the Board of Directors of Johnson & Johnson from 2005 until her retirement in March 2009. Ms. Poon joined Johnson & Johnson in 2000 as Company Group Chair in the Pharmaceuticals Group. She became a Member of Johnson & Johnson’s Executive Committee and Worldwide Chair, Pharmaceuticals Group, in 2001, and served as Worldwide Chair, Medicines and Nutritionals from 2003 to 2005. Prior to joining Johnson & Johnson, she served in various management positions at Bristol-Myers Squibb for 15 years.

Skills & Qualifications

 

  Academia/Education
  Business Head/Administration
  Business Operations
  Corporate Governance
  International
  Marketing/Sales
  Talent Management

 

 

 

 
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Douglas A. Scovanner

 

Age: 61

Director Since: November 2013

 

  

Prudential Committees:

 

    Audit (Chair)

 

    Executive

 

    Risk

 

     
          

 

Mr. Scovanner has been the Founder and Managing Member of Comprehensive Financial Strategies, LLC, a management consulting firm, since October 2013. Previously, he served as the CFO (1994 to 2012) and Executive Vice President (2000 to 2012) of the Target Corporation (a North American retailer). Prior to joining the Target Corporation, Mr. Scovanner held various management positions at The Fleming Companies, Inc., Coca-Cola Enterprises, Inc., The Coca-Cola Company and the Ford Motor Company from 1979 to 1994.

Skills & Qualifications

 

    Business Head/Administration

    Business Operations

    Corporate Governance

    Finance/Capital Allocation

    Financial Services Industry

    Investments

    Real Estate

  

    Risk Management

    Talent Management

 

 

 

 

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Item 1—Election of Directors: Director Nominees

 

 

 

 

 
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John R. Strangfeld

 

Age: 63

Director Since: January 2008

(Elected Chairman May 2008)

 

  

Prudential Committees:

 

    Executive

 

     
          

 

Mr. Strangfeld has served as CEO and President of Prudential Financial since January 2008 and Chairman of the Board since May 2008. Mr. Strangfeld is a member of the Office of the Chairman of Prudential Financial and served as Vice Chairman of Prudential Financial from 2002 through 2007, overseeing the U.S. Insurance and Investment divisions. Prior to his position as Vice Chairman, Mr. Strangfeld held a variety of senior investment positions at Prudential, both within the U.S. and abroad.

Skills & Qualifications

 

    Business Ethics

    Business Head/Administration

    Business Operations

    Corporate Governance

    Environmental/Sustainability/Corporate Responsibility

    Finance/Capital Allocation

    Financial Services Industry

    Insurance Industry

  

    International

    Investments

    Risk Management

    Talent Management

    Technology/Systems

 

 

 

 
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Michael A. Todman

 

Age: 59

Director Since: March 2016

 

  

Prudential Committees:

 

  Compensation

 

  Finance

  

Public Directorships:

 

    Brown-Forman Corporation

 

    Newell Rubbermaid, Inc.

  
          

 

Mr. Todman served as Vice Chairman of the Whirlpool Corporation (Whirlpool), a global manufacturer of home appliances, from November 2014 to December 2015. Mr. Todman previously served as President of Whirlpool International from 2006 to 2007 and 2010 to 2014, as well as President, Whirlpool North America from 2007 to 2010. Mr. Todman held several senior positions including Executive Vice President and President of Whirlpool Europe from 2001 to 2005 and Executive Vice President, Whirlpool North America, in 2001. Prior to joining Whirlpool, Mr. Todman served in a variety of leadership positions at Wang Laboratories Inc. and Price Waterhouse and Co.

Skills & Qualifications

 

    Business Head/Administration

    Business Operations

    Corporate Governance

    Finance/Capital Allocation

    Government/Public Policy

    International

    Marketing/Sales

  

    Risk Management

    Talent Management

 

 

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Item 1—Election of Directors: Director Nominees

 

 

 

 

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Corporate Governance

The Company is committed to good corporate governance, which helps us compete more effectively, sustain our success and build long-term shareholder value. The Company is governed by a Board of Directors and committees of the Board that meet throughout the year. Directors discharge their responsibilities at Board and committee meetings and also through other communications with management.

The Board has adopted Corporate Governance Principles and Practices to provide a framework for the effective governance of the Company. The Corporate Governance Principles and Practices are reviewed regularly and updated as appropriate. The full text of the Corporate Governance Principles and Practices, which includes the definition of independence adopted by the Board, the charters of the Corporate Governance and Business Ethics, Compensation and Audit Committees, the Lead Independent Director Charter, the Code of Business Conduct and Ethics and the Related Party Transaction Approval Policy can be found at www.prudential.com/governance. Copies of these documents also may be obtained from the Chief Governance Officer and Corporate Secretary.

Governance is a continuing focus at the Company, starting with the Board and extending to management and all employees. Therefore, the Board reviews the Company’s policies and business strategies and advises and counsels the CEO and the other executive officers who manage the Company’s businesses, including reviewing, on at least an annual basis, the Company’s strategic plans.

In addition, we solicit feedback from shareholders on governance and executive compensation practices and engage in discussions with various groups and individuals on governance issues and improvements.

Process for Selecting Directors

The Corporate Governance and Business Ethics Committee screens and recommends candidates for nomination by the full Board. The Company’s By-laws provide that the size of the Board may range from 10 to 24 members. The Board’s current view is that the optimal size is between 10 and 15 members. The Committee is assisted with its recruitment efforts by an independent third party search firm, which recommends candidates that satisfy the Board’s criteria. The search firm also provides research and pertinent information regarding candidates, as requested.

 

 

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Source Candidate Pool from Independent Search Firms Shareholders Independent Directors Our People In-Depth Review by the Committee Consider Skills Matrix Screen qualifications Consider diversity Review independence and potential conflicts Meet with directors Recommend Selected Candidate for Appointment to our Board Review by full board Select Director(s) 4 new directors since May 2016

 

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Corporate Governance

 

 

 

 

Shareholder Nominations and Recommendations of Director Candidates

We amended our By-laws in March 2015 to permit a group of up to 20 shareholders who have owned at least 3% of our outstanding capital stock for at least three years to submit director nominees for up to 20% of the Board for inclusion in our Proxy Statement if the shareholder(s) and the nominee(s) meet the requirements in our By-laws.

Shareholders who wish to nominate directors for inclusion in our Proxy Statement or directly at an Annual Meeting in accordance with the procedures in our By-laws should follow the instructions under “Submission of Shareholder Proposals and Director Nominations” in this Proxy Statement.

Shareholders who wish to recommend candidates for consideration should send their recommendations to the attention of Margaret M. Foran, Chief Governance Officer, Senior Vice President and Corporate Secretary, at 751 Broad Street, Newark, NJ 07102. The Committee will consider director candidates recommended by shareholders in accordance with the criteria for director selection described under “Director Criteria, Qualifications, Experience and Tenure.”

Director Attendance

During 2016, the Board of Directors held 11 meetings. Together, the directors attended 99% of the combined total meetings of the full Board and the committees on which they served in 2016, and no director attended less than 83% of the combined total meetings of the full Board and the committees on which he or she served in 2016.

Director Independence

The current Board consists of 13 directors, two of whom are currently employed by the Company (Messrs. Strangfeld and Grier). The Board conducted an annual review and affirmatively determined that all of the non-employee directors (Mss. Hund-Mejean, Pianalto and Poon, and Messrs. Baltimore, Casellas, Cullen, Krapek, Lighte, Paz, Scovanner and Todman) are “independent” as that term is defined in the listing standards of the NYSE and in Prudential Financial’s Corporate Governance Principles and Practices. In addition, the Board previously determined that Mr. Bethune and Ms. Horner, who did not stand for re-election at our 2016 Annual Meeting, were “independent” directors.

Independent Director Meetings

The independent directors generally meet in an executive session at both the beginning and the end of each regularly scheduled Board meeting, with the Lead Independent Director serving as Chair.

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Corporate Governance

 

 

 

Board Leadership

Currently, our Board leadership structure consists of a Lead Independent Director, a Chairman (who is also our CEO) and strong committee chairs. The Board believes that our structure provides independent Board leadership and engagement while providing the benefit of having our CEO, the individual with primary responsibility for managing the Company’s day-to-day operations, chair regular Board meetings as key business and strategic issues are discussed. At this time, the Board believes that the Company is best served by having the same individual as both Chairman of the Board and CEO, but considers the continued appropriateness of this structure at least annually.

 

In 2016, independent directors and our Chief Governance Officer engaged with shareholders, who held a majority of our shares, on their thoughts on our Board leadership structure. Our Lead Independent Director also met with certain of our shareholders in 2016. The discussions and feedback from these meetings has been given to the Board and will be considered during the annual review of the appropriateness of the Board leadership structure.

Under our Corporate Governance Principles and Practices, the independent directors annually elect an independent director to serve as Lead Independent Director for a term of at least one year, but for no more than three years. Mr. Krapek has served as our Lead Independent Director since May 2014. A new Lead Independent Director will be elected by the independent directors immediately after the 2017 Annual Meeting. The responsibilities and authority of the Lead Independent Director include:

 

  presiding at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors;

 

  authorization to call meetings of the independent directors;

 

  serving as a liaison between the Chairman and the independent directors;

 

  approving information sent to the Board, including the quality, quantity, appropriateness and timeliness of such information;

 

  approving meeting agendas for the Board;

 

  approving meeting schedules to assure there is sufficient time for discussion of all agenda items;

 

  authorization to retain outside advisors and consultants who report directly to the Board of Directors on board-wide issues; and

 

  ensuring that he/she be available, if requested by shareholders, when appropriate, for consultation and direct communication.

 

COMPREHENSIVE STEPS TO ACHIEVE BOARD EFFECTIVENESS The Board is committed to a rigorous self evaluation process. Through evaluation, directors review the Board’s performance, including areas where the Board feels it functions effectively, and importantly, areas where the Board believes it can improve.1. Process is Initiated Corporate Governance and Business Ethics Committee Chair Initiates annual board evaluation process with the help of an independent third party consultant and our chief governance officer. 2. Evaluation The evaluation solicits each director’s opinion regarding the board’s effectiveness in monitoring and reviewing topics such as: The strategic planning process The annual budget process and financial performance Management compensation, performance and ethics Risk strategy and management Succession planning 3. Feedback Analysis Directors are encouraged to speak to the independent third party with specific feedback on individual directors, committees or the Board in general. The independent third party synthesizes the results and comments and may have oral interviews with directors regarding the full Board or any committee on which the director serves. 4. Presentation of Findings At the January board meeting, the Corporate Governance and Business Ethics chair, in conjunction with the independent, third party consultant, presents the findings to each Committee, followed by review of the full Board 5. Follow Up Results requiring additional consideration are addressed at subsequent board and committee meetings and reported back to full Board, where appropriate. The Board followed-up on its most recent self-evaluation by reviewing materials about the competitive and regulatory environment as well as discussing talent at almost every scheduled Board meeting. For 2017, the Board has asked for more information in the following areas: Technology and Future Products Product Development Management Succession Planning Executive Compensation

 

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Letter from the Lead Independent Director

Under Prudential’s Corporate Governance Principles, the independent directors of the Board annually elect a Lead Independent Director for a term of at least one year, but for no more than three years. I am honored that my fellow independent directors elected me to serve for the last three years. My term ends in May 2017, effective at our Annual Meeting. Our directors share my commitment to strong, independent leadership, Board effectiveness and oversight. In this context, I would like to share insights into our philosophy and practices on several important issues.

Strategic Oversight

As part of the annual strategic planning process, our Board reviews the Company’s strategy, opportunities, challenges, capabilities and leadership to ensure the Company is well-positioned to continue creating value for shareholders. My fellow independent directors and I are committed to, and value, our dialogue with management regarding the Company’s disciplined risk assessment, capital allocation strategy and long-term plans for growth.

Board Governance

Effective governance means ongoing and thoughtful evaluation of our governance structure, and constructive shareholder engagement on emerging governance issues. In 2016, our engagement efforts, which included my personal involvement and that of other directors, reached investors holding the majority of our outstanding shares.

Our recent shareholder engagement dialogue about governance has focused on, among other things, Board composition, refreshment and our Board’s leadership structure. Understanding the importance of the Board’s responsibility to provide effective oversight, we strive to maintain an appropriate balance of tenure, diversity, skills, and experience on the Board. Since 2015, four new independent directors have joined our Board to replace long-tenured directors. In addition, directors from diverse backgrounds comprise two-thirds of our Board.

Board Evaluation

We are committed to provide transparency to our robust Board and committee evaluation process, which is led by an independent third-party consultant. Our proxy statement not only describes each step of the evaluation process, but also provides specific areas where our directors seek improvement.

Governance Policies and Practices

We continue to maintain our focus on strong governance practices that we believe are important to our shareholders and protect the long-term vitality of the Company. Our accountability to you is indicative in our policies such as: proxy access, a strong Lead Independent Director, the right of shareholders to call a special meeting, majority vote, annual election of directors, and a robust clawback policy.

My board colleague, Gilbert Casellas, chairman of our Corporate Governance and Business Ethics Committee, and I address these topics in two short videos. You can access the videos from the Corporate Governance section of our website at www.prudential.com/directorvideos. We see these videos as an important component of our ongoing efforts to share information with shareholders.

Prudential’s founder, John Dryden, stated that the “justification of the company’s existence is its advancement of the efforts of its policy holders and their families for better economic and social condition.” More than 140 years after Mr. Dryden’s proclamation, my fellow directors and I are proud to carry on this purpose on your behalf.

 

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Karl J. Krapek

Lead Independent Director

 

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Corporate Governance

 

 

 

Board Risk Oversight

The Board oversees the Company’s risk profile and management’s processes for assessing and managing risk, both as a whole Board and through its committees. At least annually, the Board reviews strategic risks and opportunities facing the Company and certain of its businesses. Other important categories of risk are assigned to designated Board committees (which are comprised solely of independent directors) that report back to the full Board. In general, the committees oversee the following risks:

 

  Audit Committee: risks related to financial controls, legal, regulatory and compliance issues, and the overall risk management governance structure and risk management function;

 

  Compensation Committee: the design and operation of the Company’s compensation programs so that they do not encourage unnecessary or excessive risk-taking;

 

  Corporate Governance and Business Ethics Committee: the Company’s political contributions, lobbying expenses and overall political strategy, as well as the Company’s environmental, sustainability and corporate social responsibility to minimize reputational risk and focus on future sustainability;

 

  Finance Committee: risks related to capital and liquidity management, incurrence and repayment of borrowings, the capital structure of the enterprise, funding of benefit plans, and the levels of insurance reserves and policyholder dividends;

 

  Investment Committee: investment risk, and the strength of the investment function; and

 

  Risk Committee: the governance of significant risks throughout the Company, the Company’s overall risk profile, and coordination of the risk oversight functions of the other Board committees.

In performing its oversight responsibilities, the Board and its committees review policies and guidelines that senior management uses to manage the Company’s exposure to material categories of risk. As these issues sometimes overlap, committees hold joint meetings when appropriate and address certain issues at the full Board level. During 2016, the full Board received a report from the Chief Risk Officer on the important strategic issues and risks facing the Company. In addition, the Board and committees review the performance and functioning of the Company’s overall risk management function.

The Risk Committee is comprised of the chairs of each of the other Board committees. The principal activities of the Risk Committee are to: oversee the Company’s assessment and reporting of material risks by reviewing the metrics used by management to quantify risk, applicable risk limit structures and risk mitigation strategies; review the Company’s processes and procedures for risk assessment and risk management, including the related assumptions used across the Company’s businesses and material risk types; and receive reports from management on material and emerging risk topics that are reviewed by the Company’s internal management committees.

The Company, under the Board’s oversight, is organized to promote a strong risk awareness and management culture. The Chief Risk Officer sits on many management committees and heads an independent enterprise risk management department; the General Counsel and Chief Compliance Officer also sit on key management committees and the functions they oversee operate independently of the businesses to separate management and oversight. Employee appraisals evaluate employees with respect to risk and ethics.

We monitor the risks associated with our executive compensation program and individual compensation decisions on an ongoing basis. Each year management undertakes a review of the Company’s various compensation programs to assess the risks arising from our compensation policies and practices. Management presents these risk assessments to the Compensation Committee. The risk assessments have included a review of the primary design features of the Company’s compensation plans, the process to determine compensation pools and awards for employees and an analysis of how those features could directly or indirectly encourage or mitigate risk-taking. As part of the risk assessments, it has been noted that the Company’s compensation plans allow for discretionary negative adjustments to the ultimate outcomes, which serves to mitigate risk-taking.

Moreover, senior management is subject to a share retention policy, and historically a large percentage of senior management compensation has been paid in the form of long-term equity awards. In addition, senior management compensation is paid over a multiple-year cycle, a compensation structure that is intended to align incentives with appropriate risk-taking. The Company’s general risk management controls also serve to preclude decision-makers from taking excessive risk to earn the incentives provided under our compensation plans. The Compensation Committee agreed with the conclusion that the identified risks were within our ability to effectively monitor and manage, and that our compensation programs do not encourage unnecessary or excessive risk-taking and do not create risks that are reasonably likely to have a material adverse effect on the Company.

 

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Corporate Governance

 

 

 

Succession Planning

The Board is actively engaged and involved in talent management. The Board reviews the Company’s “people strategy” in support of its business strategy at least annually and frequently discusses talent issues at its meetings. This includes a detailed discussion of the Company’s global leadership bench and succession plans with a focus on key positions at the senior officer level.

In addition, the committees of the Board regularly discuss the talent pipeline for specific critical roles. High potential leaders are given exposure and visibility to Board members through formal presentations and informal events. More broadly, the Board is regularly updated on key talent indicators for the overall workforce, including diversity, recruiting and development programs.

Communication with Directors

Shareholders and other interested parties may communicate with any of the independent directors, including Committee Chairs and the Lead Independent Director, by using the following address:

Prudential Financial, Inc.

Board of Directors

c/o Margaret M. Foran, Chief Governance Officer,

Senior Vice President and Corporate Secretary

751 Broad Street

Newark, NJ 07102

Email: independentdirectors@ prudential.com

Feedback on Executive Compensation: You can also provide feedback on executive compensation at the following website: www.prudential.com/ executivecomp.

The Chief Governance Officer and Corporate Secretary of the Company reviews communications to the independent directors and forwards those communications to the independent directors as discussed below. Communications involving substantive accounting or auditing matters will be immediately forwarded to the Chair of the Audit Committee and the Company’s Corporate Chief Ethics Officer consistent with time frames established by the Audit Committee for the receipt of communications dealing with these matters. Communications that pertain to non-financial matters will be forwarded promptly. Items that are unrelated to the duties and responsibilities of the Board will not be forwarded, such as: business solicitation or advertisements; product-related inquiries; junk mail or mass mailings; resumes or other job-related inquiries; spam and overly hostile, threatening, potentially illegal or similarly unsuitable communications.

 

SHAREHOLDER ENGAGEMENT

This year, we continued our practice of engagement, communication, and transparency in a variety of ways, including the following:

 

    released two videos featuring Board members, Karl J. Krapek, our Lead Independent Director, and Gilbert Casellas, Chair of our Corporate Governance and Business Ethics Committee, sharing their views on Prudential’s Board and governance practices;  

 

    provided multiple avenues for shareholders to communicate with the Company and the Board. We have received almost 15,000 shareholder comments in the last six years. Shareholders also continued to use the mechanisms available through www.prudential.com/governance to provide input;  

 

    promoted greater communication with our institutional shareholders on corporate governance issues by engaging with shareholders who collectively held a majority of our shares;  

 

    advanced open Board communication by facilitating interaction between our directors and shareholders; and  

 

    received nomination from Corporate Secretary Magazine for Best Proxy Statement for a Large Cap Company.  

 

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Corporate Governance

 

 

 

Committees of the Board of Directors

The Board has established various committees to assist in discharging its duties, including: Audit, Compensation, Corporate Governance and Business Ethics, Executive, Finance, Investment and Risk. The primary responsibilities of each of the committees are set forth below, together with their current membership and the number of meetings held in 2016. Committee charters can be found on our website at www.prudential.com/governance. Each member of the Audit, Compensation, and Corporate Governance and Business Ethics Committees has been determined by the Board to be independent for purposes of the NYSE Corporate Governance listing standards. In addition, directors who serve on the Audit Committee and the Compensation Committee meet additional, heightened independence and qualification criteria applicable to directors serving on these committees under the NYSE listing standards.

 

Committees    Members & Meetings in 2016    Description

Audit

Committee

 

Meetings in 2016: 10

  

Douglas Scovanner (Chair)

Martina-Hund Mejean

George Paz

  

 

The Audit Committee provides oversight of the Company’s accounting and financial reporting and disclosure processes, the adequacy of the systems of disclosure and internal control established by management, and the audit of the Company’s financial statements. The Audit Committee oversees risks related to financial controls and legal, regulatory and compliance matters, and oversees the overall risk management governance structure and risk management function.

 

Among other things, the Audit Committee:

 

(1) appoints the independent auditor and evaluates its independence and performance;

 

(2) reviews the audit plans for and results of the independent audit and internal audits; and

 

(3) reviews reports related to processes established by management to provide compliance with legal and regulatory requirements.

 

The Board of Directors has determined that all of our Audit Committee members are financially literate and are audit committee financial experts as defined by the SEC.

 

Compensation

Committee

 

Meetings in 2016: 7

  

Karl J. Krapek (Chair)

Thomas J. Baltimore

Michael A. Todman

  

The Compensation Committee oversees the Company’s compensation and benefits policies and programs. For more information on the responsibilities and activities of the Compensation Committee, including the Committee’s processes for determining executive compensation, see the CD&A.

 

Corporate

Governance & Business Ethics Committee

 

Meetings in 2016: 6

  

Gilbert F. Casellas (Chair)

Peter R. Lighte

Sandra Pianalto

  

 

The Corporate Governance and Business Ethics Committee oversees the Board’s corporate governance procedures and practices, including the recommendations of individuals for the Board, making recommendations to the Board regarding director compensation and overseeing the Company’s ethics and conflict of interest policies, its political contributions and lobbying expenses policy, and its strategy and reputation regarding environmental stewardship and sustainability responsibility throughout the Company’s global businesses.

Executive

Committee

 

Meetings in 2016: 0

  

Karl J. Krapek (Chair)

Thomas J. Baltimore

Gilbert F. Casellas

Christine A. Poon

Douglas A. Scovanner

John R. Strangfeld

  

 

The Executive Committee is authorized to exercise the corporate powers of the Company between meetings of the Board, except for those powers reserved to the Board by our By-laws or otherwise.

Finance

Committee

 

Meetings in 2016: 7

  

Christine A. Poon (Chair)

James G. Cullen

Sandra Pianalto

Michael A. Todman

  

 

The Finance Committee oversees, takes actions, and approves policies with respect to capital, liquidity, borrowing levels, reserves, subsidiary structure and major capital expenditures.

Investment

Committee

 

Meetings in 2016: 4

  

Thomas J. Baltimore (Chair)

James G. Cullen

Peter R. Lighte

Christine A. Poon

  

 

The Investment Committee oversees and takes actions with respect to the acquisition, management and disposition of invested assets; reviews the investment performance of the pension plan and funded employee benefit plans; and reviews investment risks and exposures, as well as the investment performance of products and accounts managed on behalf of third parties.

Risk

Committee

 

Meetings in 2016: 7

  

Karl J. Krapek (Chair)

Thomas J. Baltimore

Gilbert F. Casellas

Christine A. Poon

Douglas A. Scovanner

  

 

The Risk Committee oversees the governance of significant risks throughout the enterprise, including by coordinating the risk oversight functions of each Board committee and seeing that matters are appropriately elevated to the Board.

In addition to the above Committee meetings, the Board held 11 meetings in 2016.

 

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Corporate Governance

 

 

 

Certain Relationships and Related Party Transactions

The Company has adopted a written Related Party Transaction Approval Policy that applies:

 

  to any transaction or series of transactions in which the Company or a subsidiary is a participant;

 

  when the amount involved exceeds $120,000; and

 

  when a related party (a director or executive officer of the Company, any nominee for director, any shareholder owning an excess of 5% of the total equity of the Company and any immediate family member of any such person) has a direct or indirect material interest (other than solely as a result of being a director or trustee or in any similar position or a less than 10 percent beneficial owner of another entity).

The policy is administered by the Corporate Governance and Business Ethics Committee. The Committee will consider relevant facts and circumstances in determining whether or not to approve or ratify such a transaction, and will approve or ratify only those transactions that are, in the Committee’s judgment, appropriate or desirable under the circumstances.

In the ordinary course of business, we may from time to time engage in transactions with other corporations or financial institutions whose officers or directors are also directors of Prudential Financial. In all cases, these transactions are conducted on an arm’s-length basis. In addition, from time to time executive officers and directors of Prudential Financial may engage in transactions in the ordinary course of business involving services we offer, such as insurance and investment services, on terms similar to those extended to employees of Prudential Financial and its subsidiaries and affiliates generally. The Corporate Governance and Business Ethics Committee has determined that certain types of transactions do not create or involve a direct or indirect material interest, including (i) any sales of financial services or products to a related party in the ordinary course of business on terms and conditions generally available in the market place (or at ordinary employee discounts, if applicable) and in accordance with applicable law and (ii) all business relationships between the Company and a 5% shareholder or a business affiliated with a director, director nominee or immediate family member of a director or director nominee made in the ordinary course of business on terms and conditions generally available in the market place and in accordance with applicable law.

Pursuant to our policy, the Corporate Governance and Business Ethics Committee determined that there were two transactions that qualified as related party transactions since the beginning of 2016. The brother of Robert Falzon, our Executive Vice President and Chief Financial Officer, Michael Falzon, is a Vice President for Infrastructure Systems Development. In 2016, the total compensation paid to Michael Falzon, including salary, bonus and the grant date value of long-term incentive awards, was approximately $480,300. The son-in-law of Barbara Koster, our Senior Vice President and Chief Information Officer, Joshua D. Howard, is an associate in Quantitative Management Associates, a subsidiary of the Company. In 2016, the total compensation paid to Mr. Howard, including salary and bonus, was approximately $141,500. In both cases the compensation is similar to the compensation of other employees holding equivalent positions. Neither individual is in the reporting chain of the executive officer.

 

SUSTAINABILITY AND ENVIRONMENT

At Prudential, sustainability represents how the Company anticipates and manages future risks and opportunities to meet its long-term promises. Sustainability advocates have noted Prudential’s work in the field, especially the active involvement of the Board and senior leadership. Sustainability highlights in 2016 include:

 

    Providing the Board’s Corporate Governance and Business Ethics Committee with a formal report on the Company’s strategy and developments.

 

    Engaging with industry groups, advocates and shareholders on our efforts. A team of Prudential senior leaders participated in a dialogue with the leader of the Geneva Association’s Extreme Events and Climate Risk Working Group.

 

    Facilitating a dialogue between Ceres, a non-profit advocating sustainability leadership, and selected Company executives on Prudential’s sustainability progress. Prudential receives feedback on its sustainability efforts from Ceres and as part of ongoing stakeholder engagement.
    Receiving LEED Gold Certification from the U.S. Green Building Council for the new Prudential tower in Newark, NJ.  

 

    Inviting registered shareholders to steward natural resource conservation by accessing shareholder materials online, voting online and registering for direct deposit of dividends.  

 

    Releasing our annual sustainability report — Build, Preserve. Repeat. — with stakeholder input shaping the content. To review the report visit www.prudential.com/sustainability.  

 

    Adhering to the criteria for inclusion in the FTSE4Good Index Series since 2011, which measures the performance of companies’ environmental, social and governance (ESG) practices.  
 

 

 

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Corporate Governance

 

 

 

Policy on Shareholder Rights Plan

We do not have a shareholder rights plan. The Board will obtain shareholder approval prior to adopting a future shareholder rights plan unless the Board, in the exercise of its fiduciary duties, determines that under the circumstances then existing, it would be in the best interests of the Company and our shareholders to adopt a rights plan without prior shareholder approval. If a rights plan is adopted by the Board without prior shareholder approval, the plan must provide that it will expire within one year of adoption unless ratified by shareholders.

Political Contributions and Lobbying Expenditure Oversight and Disclosure

The Corporate Governance and Business Ethics Committee reviews and approves an annual report on political activities, contributions and lobbying expenses. It monitors and evaluates the Company’s ongoing political strategy as it relates to overall public policy objectives for the next year and provides guidance to the Board. We provide on our website a description of our oversight process for political contributions and a summary of PAC contributions. We also include information on annual dues, assessments and contributions of $25,000 or more to trade associations and tax-exempt advocacy groups and a summary of Company policies and procedures for political activity. This disclosure is available at www.prudential.com/governance under the heading “Political Activity & Contributions.”

 

In 2016, Prudential received a CPA-Zicklin designation as Trendsetter. This honor represents a top-five ranking for political disclosure and accountability in the 2016 CPA-Zicklin Trendsetters Designation Index of Corporate Political Disclosure and Accountability.

Environmental, Sustainability and Corporate Social Responsibility

The Corporate Governance and Business Ethics Committee has oversight of environmental issues and policies. In addition, three of our Board members sit on the Corporate Social Responsibility Oversight Committee. These directors inform the Company’s social responsibility efforts in investing for financial and social returns, strategic philanthropy, employee engagement and corporate community involvement.

 

CORPORATE RESPONSIBILITY

The Office of Corporate Social Responsibility extends the reach of Prudential’s business model to create pathways for all individuals and families to achieve financial and social mobility.

In 2016, Prudential invested:

 

    $41 million in grants to non-profit organizations through The Prudential Foundation;

 

    $237 million in impact investments to non-profits and businesses that seek to create both a financial and social return. In 2016, the company reached the halfway mark to achieving its goal of having a $1 billion impact investment portfolio by 2020; and
    $15 million in corporate contributions to non-profit organizations, including $5 million in projects serving U.S. veterans.
 

 

Prudential employees continued the Company’s long tradition of corporate community involvement. For these efforts, Prudential has once again been named to the Civic 50 list celebrating America’s most community-minded companies, an honor awarded by the non-profit organization Points of Light.

 

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Corporate Governance: Good Governance Practices

 

 

 

 

LOGO

 

GOOD GOVERNANCE PRACTICES Board Strong Lead Independent Director including charter to guide oversight and independent leadership Majority Independent Directors – 10 of the 12 director nominees are independent Annual Election of Directors by majority votes cast in an uncontested election Shareholder Rights Proactive Adoption of Proxy Access Special Meeting Threshold of 10% No Poison Pill Director Stock Ownership Guidelines – within six years of joining the Board, each director is expected to own common stock or deferred stock units with a value equivalent to six times their annual retainer Annual Board Evaluation – overseen by independent third party every year Board Continuing Education – new director orientation and continuing education on critical topics and issues Compensation Annual Say on Pay Shareholder Vote Clawback Policy Prohibition of Derivatives Trading, and Hedging and Pledging of Our Securities

 

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Item 2–Ratification of the Appointment of the

Independent Registered Public Accounting Firm

The Audit Committee of the Board of Directors has appointed PricewaterhouseCoopers LLP (“PricewaterhouseCoopers” or “PwC”) as the Company’s independent registered public accounting firm (independent auditor) for 2017. We are not required to have the shareholders ratify the selection of PricewaterhouseCoopers as our independent auditor. We nonetheless are doing so because we believe it is a matter of good corporate practice.

If the shareholders do not ratify the selection, the Audit Committee will reconsider whether or not to retain PricewaterhouseCoopers, but may nevertheless retain it as the Company’s independent auditor. Even if the selection is ratified, the Audit Committee, in its discretion, may change the appointment at any time during the year if it determines that such a change would be in the best interest of Prudential Financial and its shareholders. Representatives of PricewaterhouseCoopers will be present at the Annual Meeting and will have the opportunity to make a statement and be available to respond to appropriate questions by shareholders.

FEES PAID TO PRICEWATERHOUSECOOPERS LLP

The following is a summary and description of fees for services provided by PricewaterhouseCoopers in 2016 and 2015.

Worldwide Fees (In Millions)

 

Service

     2016        2015  

Audit(A)

     $ 51        $ 50  

Audit-Related(B)

     $ 4        $ 4  

Tax(C)

     $ 3        $ 2  

All Other

                 
Total      $ 58        $ 56  

 

(A) The aggregate fees for professional services rendered for the integrated audit of the consolidated financial statements of Prudential Financial and, as required, audits of various domestic and international subsidiaries, the issuance of comfort letters, agreed-upon procedures required by regulation, consents and assistance with review of documents filed with the SEC.

 

(B) The aggregate fees for assurance and related services including internal control and financial compliance reports, agreed-upon procedures not required by regulation, and accounting consultation on new accounting standards, acquisitions and potential financial reporting requirements.

 

(C) The aggregate fees for services rendered by PricewaterhouseCoopers’ tax department for tax return preparation, tax advice related to mergers and acquisitions and other international, federal and state projects, and requests for rulings. In 2016, tax compliance and preparation fees totaled $1.4M and tax advisory fees totaled $1.1M, and in 2015, tax compliance and preparation fees totaled $1.6M and tax advisory fees totaled $0.5M.

PricewaterhouseCoopers also provides services to domestic and international mutual funds and limited partnerships not consolidated by Prudential Financial, but which are managed by Prudential Financial. PricewaterhouseCoopers identified fees related to audit, audit-related, and tax services paid by these entities of $14M in 2016 and $14M in 2015.

The Audit Committee has advised the Board of Directors that in its opinion the non-audit services rendered by PricewaterhouseCoopers during the most recent fiscal year are compatible with maintaining its independence.

PwC has been the Company’s independent auditor since 2001.

 

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Item 2—Ratification of the Appointment of the Independent Registered Public Accounting Firm

 

 

 

 

In determining whether to reappoint the independent auditor, the Audit Committee annually considers several factors including:

 

    the length of time the firm has been engaged;

 

    the firm’s independence and objectivity;

 

    PwC’s capability and expertise in handling the breadth and complexity of Prudential’s global operations, including the expertise and capability of the Lead Audit Partner;

 

    historical and recent performance, including the extent and quality of PwC’s communications with the Audit Committee, and the results of a management survey of PwC’s overall performance;

 

    data related to audit quality and performance, including recent Public Company Accounting Oversight Board inspection reports on the firm; and

 

    the appropriateness of PwC’s fees, both on an absolute basis and as compared with its peers.

 

In accordance with SEC rules, independent audit partners are subject to rotation requirements limiting their number of consecutive years of service to our Company to no more than five. In 2016, Prudential’s Audit Committee oversaw a rigorous process of selecting a new Lead Audit Partner with PwC. PwC provided a list of qualified potential lead audit partners. The candidates were interviewed and assessed based on their related experience and industry expertise. Interviews were conducted and the Chair met with and interviewed the final candidate. The new Lead Audit Partner selected was approved by the Audit Committee and will assume oversight of the external audit of Prudential Financial effective for the 2017 audit.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

The Audit Committee has established a policy requiring its pre-approval of all audit and permissible non-audit services provided by the independent auditor. The policy identifies the guiding principles that must be considered by the Audit Committee in approving services to ensure that the independent auditor’s independence is not impaired; describes the Audit, Audit-Related, Tax and All Other services that may be provided and the non-audit services that may not be performed; and sets forth the pre-approval requirements for all permitted services. The policy provides for the general pre-approval of specific types of Audit, Audit-Related and Tax services and a limited fee estimate range for such services on an annual basis. The policy requires specific pre-approval of all other permitted services. The independent auditor is required to report periodically to the Audit Committee regarding the extent of services provided in accordance with their pre-approval and the fees for the services performed to date. The Audit Committee’s policy delegates to its Chair the authority to address requests for pre-approval of services with fees up to a maximum of $250,000 between Audit Committee meetings if the Chief Auditor deems it reasonably necessary to begin the services before the next scheduled meeting of the Audit Committee, and the Chair must report any pre-approval decisions to the Audit Committee at its next scheduled meeting. The Audit Committee may not delegate to management the Audit Committee’s responsibility to pre-approve permitted services of the independent auditor.

All Audit, Audit-Related, Tax and All Other services described above were approved by the Audit Committee before services were rendered.

 

The Board of Directors recommends that shareholders vote “FOR” ratification of the appointment of PricewaterhouseCoopers as the Company’s Independent Auditor for 2017.

 

ENHANCING COMMUNICATION THROUGH AUDIT COMMITTEE REPORTING

The Center for Audit Quality and a group of nationally recognized U.S. corporate governance and policy organizations, jointly released a paper entitled “Enhancing the Audit Committee Report: A Call to Action,” which encouraged audit committees of public companies to proactively consider strengthening their public disclosures to more effectively convey the critical work of audit committees to investors and stakeholders. Prudential was featured as an example of a company exhibiting voluntary practices strengthening audit committee disclosures.

 

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Item 2—Ratification of the Appointment of the Independent Registered Public Accounting Firm

 

 

 

REPORT OF THE AUDIT COMMITTEE

Three non-management directors comprise the Audit Committee. The Committee operates under a written charter adopted by the Board.

In addition, the Board of Directors has determined that all of our Audit Committee members, Messrs. Paz and Scovanner and Ms. Hund-Mejean, satisfy the financial expertise requirements of the NYSE and have the requisite experience to be designated an audit committee financial expert as that term is defined by rules of the SEC.

Management is responsible for the preparation, presentation and integrity of the financial statements of Prudential Financial and for maintaining appropriate accounting and financial reporting policies and practices, and internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Prudential Financial’s independent registered public accounting firm (independent auditor), PricewaterhouseCoopers, is responsible for auditing the consolidated financial statements of Prudential Financial and expressing an opinion as to their conformity with generally accepted accounting principles, as well as expressing an opinion on the effectiveness of internal control over financial reporting in accordance with the requirements of the Public Company Accounting Oversight Board (“PCAOB”).

In performing its oversight function, the Audit Committee reviewed and discussed the audited consolidated financial statements of Prudential Financial as of and for the year ended December 31, 2016 and Management’s Annual Report on Internal Control Over Financial Reporting with management and Prudential Financial’s independent auditor. The Audit Committee also discussed with Prudential Financial’s independent auditor the matters required to be discussed by the independent auditor with the Audit Committee under the rules adopted by the PCAOB.

The Audit Committee received from the independent auditor the written disclosures and the letter required by applicable requirements of the PCAOB regarding the independent auditor’s communications with the Audit Committee concerning independence, and has discussed with the independent auditor its independence.

The Audit Committee has discussed with, and received regular status reports from, Prudential Financial’s Chief Auditor and independent auditor on the overall scope and plans for their audits of Prudential Financial, including their scope and plans for evaluating the effectiveness of internal control over financial reporting. The Audit Committee meets with the Chief Auditor and the independent auditor, with and without management present, to discuss the results of their respective audits, in addition to private meetings with the Chief Financial Officer, Chief Risk Officer, General Counsel, Chief Actuary and Chief Compliance Officer. In determining whether to reappoint PricewaterhouseCoopers as Prudential Financial’s independent auditor, the Audit Committee took into consideration a number of factors, including the length of time the firm has been engaged, the firm’s independence and objectivity, PwC’s capability and expertise in handling the breadth and complexity of Prudential’s global operations, including the expertise and capability of the Lead Audit Partner, historical and recent performance, including the extent and quality of PwC’s communications with the Audit Committee, and the results of a management survey of PwC’s overall performance, data related to audit quality and performance, including recent PCAOB inspection reports on the firm, and the appropriateness of PwC’s fees, both on an absolute basis and as compared with its peers.

In addition, the Audit Committee reviewed and amended its Charter and received reports as required by its policy for the receipt, retention and treatment of financial reporting concerns received from external and internal sources.

Based on the reports and discussions described in this report and subject to the limitations on the roles and responsibilities of the Audit Committee referred to above and in its Charter, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements of Prudential Financial and Management’s Annual Report on Internal Control Over Financial Reporting be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for filing with the SEC.

THE AUDIT COMMITTEE

Douglas A. Scovanner (Chair)

Martina Hund-Mejean

George Paz

 

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Item 3–Advisory Vote to Approve

Named Executive Officer Compensation

The Board is committed to excellence in governance and recognizes the interest our shareholders have in our executive compensation program. As a part of that commitment, and in accordance with SEC rules, our shareholders are being asked to approve a non-binding advisory resolution on the compensation of our named executive officers, as reported in this Proxy Statement. This proposal, commonly known as a “Say on Pay” proposal, gives shareholders the opportunity to endorse or not endorse our 2016 executive compensation program and policies for our named executive officers through the following resolution:

RESOLVED, that the shareholders of Prudential approve, on an advisory basis, the compensation of the Company’s named executive officers set forth in the Compensation Discussion and Analysis, the Summary Compensation Table and the related compensation tables and narrative in this Proxy Statement.

This vote is not intended to address any specific item of compensation, but rather our overall compensation policies and practices relating to our named executive officers. Accordingly, your vote will not directly affect or otherwise limit any existing compensation or award arrangement of any of our named executive officers. Because your vote is advisory, it will not be binding upon the Board. The Board will, however, as it has done in prior years, take into account the outcome of the “Say on Pay” vote when considering future compensation arrangements.

The Board has adopted a policy providing for annual “Say on Pay” votes. Accordingly, subject to the outcome of Item 4 and the decision of the Board, the next “Say on Pay” vote will occur in 2018.

 

The Board of Directors recommends that shareholders vote “FOR” the advisory vote to approve our named executive officer compensation.

Item 4–Advisory Vote on the Frequency of

Future Advisory Votes to Approve Named

Executive Officer Compensation

As described in Item 3, our shareholders are being asked to vote to approve the compensation of our named executive officers, as reported in this Proxy Statement. In accordance with SEC rules, Item 4 gives you the opportunity to cast a non-binding vote on how often the Company should include an advisory vote on named executive officer compensation in its proxy materials for future annual or other meetings for which the Company must include executive compensation information. Shareholders may vote to have the advisory vote on executive compensation every year, every two years, or every three years. Shareholders may also abstain from voting.

The Board believes that these votes should occur every year so shareholders may annually express their views on our executive compensation program. The Company has been providing an advisory vote on executive compensation on an annual basis. The Board values the opportunity to receive feedback and will continue to consider the outcome of these votes in making executive compensation decisions.

 

The Board of Directors recommends that shareholders vote For “EVERY YEAR” on the frequency of future advisory votes to approve named executive officer compensation.

 

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Item 5–Shareholder Proposal Regarding an

Independent Board Chairman

In accordance with SEC rules, we have set forth below a shareholder proposal, along with the supporting statement of the shareholder proponent. The Company is not responsible for any inaccuracies it may contain. The shareholder proposal is required to be voted on at our Annual Meeting only if properly presented. As explained below, our Board unanimously recommends that you vote “AGAINST” the shareholder proposal.

John Chevedden, 2215 Nelson Avenue, No. 205, Redondo Beach, California, 90278, beneficial owner of 100 shares of Common Stock, is the proponent of the following shareholder proposal. The proponent has advised us that a representative will present the proposal and related supporting statement at the Annual Meeting.

Independent Board Chairman

Shareholders request our Board of Directors to adopt as policy, and amend our governing documents as necessary, to require the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next CEO transition, implemented so it does not violate any existing agreement. If the Board determines that a Chair who was independent when selected is no longer independent, the Board shall select a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. This proposal requests that all the necessary steps be taken to accomplish the above.

Caterpillar reversed itself by naming an independent board chairman in October 2016 after Caterpillar opposed a shareholder proposal for an independent board chairman at its June 2016 annual meeting. Wells Fargo also reversed itself and named an independent board chairman in October 2016.

According to Institutional Shareholder Services 53% of the Standard & Poors 1,500 firms separate these 2 positions—“2015 Board Practices,” April 12, 2015. This proposal topic won 50%-plus support at 5 major U.S. companies in 2013 including 73%-support at Netflix.

It is the responsibility of the Board of Directors to protect shareholders’ long-term interests by providing independent oversight of management. By setting agendas, priorities and procedures, the Chairman is critical in shaping the work of the Board.

A board of directors is less likely to provide rigorous independent oversight of management if the Chairman is also the CEO, as is the case with our Company. Having a board chairman who is independent of management is a practice that will promote greater management accountability to shareholders and lead to a more objective evaluation of management.

According to the Millstein Center for Corporate Governance and Performance (Yale School of Management), “The independent chair curbs conflicts of interest, promotes oversight of risk, manages the relationship between the board and CEO, serves as a conduit for regular communication with shareowners, and is a logical next step in the development of an independent board.”

A number of institutional investors said that a strong, objective board leader can best provide the necessary oversight of management. Thus, the California Public Employees’ Retirement System’s Global Principles of Accountable Corporate Governance recommends that a company’s board should be chaired by an independent director, as does the Council of Institutional Investors. An independent director serving as chairman can help ensure the functioning of an effective board.

Please vote to enhance shareholder value: Independent Board Chairman—Proposal 5

 

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Item 5—Shareholder Proposal Regarding an

Independent Board Chairman

 

 

 

Board of Directors’ Statement in Opposition to the Proposal

Your Board recommends a vote against this proposal because it believes that it is in the best interest of our shareholders for the Board to have the flexibility to determine the best person to serve as Board Chair, whether that person is an independent director or the CEO.

Every year, the Governance Committee reviews and makes a recommendation on the appropriate governance framework for Board leadership. The Committee takes into consideration governance best practices, the facts and circumstances of our Board and feedback that we receive from our shareholders. Specifically, our Board proactively asks for feedback from our shareholders and regularly meets with our shareholders in various settings. In 2016, independent directors, as well as the Company’s Chief Governance Officer, engaged with many investors on the issue of our Board leadership structure, among other things, and have presented their feedback to the Board as part of its decision-making process on the appropriate Board leadership structure going forward.

The Governance Committee has most recently determined that Board leadership is provided through the combination of a unified Chair and CEO, a clearly defined and significant Lead Independent Director role, active and strong committee chairs, and independent-minded, skilled, engaged, diverse and committed directors.

Our Board believes that its current structure and governance allows it to provide effective oversight of management. Specifically, we have a strong Lead Independent Director with significant responsibilities that are described in detail in this Proxy Statement, including approval of all Board agendas and information sent to the Board, shareholder engagement, oversight of the annual Board evaluation process by an independent third party, Board refreshment and succession planning, and guiding the Board’s overall governance processes. We also refer you to the Lead Independent Director’s letter which is contained in this Proxy Statement, as well as the Lead Independent Director’s video and Lead Independent Director Charter at www.prudential.com/governance. Mr. Krapek’s skills, experience, commitment and the time he devotes to serve his role all make him well qualified to serve as our Lead Independent Director.

Our independent directors meet regularly in executive sessions, at the beginning and end of each Board meeting. These are chaired by our Lead Independent Director with no member of management present. Independent directors use these executive sessions to discuss matters of concern, as well as evaluations of the CEO and senior management, management and Board successions, matters to be included on Board agendas, and additional information the Board would like management to provide to them, as well as other relevant matters.

The Chairs and all members of the Board committees are strong, independent directors. These Chairs shape the agenda and information presented to their committees. Oversight of critical issues within these committees is owned by the independent directors.

All directors have full access to all members of management and all employees on a confidential basis.

The proposed policy would unduly impair the Board’s flexibility to annually elect the individual it deems best suited to serve as Board Chair. Shareholders of Prudential are best served when the Board has the flexibility to elect the individual it deems best suited to serve as Board Chair at any particular time, depending on the circumstances. Our Board believes that a clearly defined and significant Lead Independent Director role, independent and strong committee chairs, experienced, diverse and committed directors, and frequent executive sessions provide a framework for effective direction and oversight by the Board.

 

THEREFORE, YOUR BOARD RECOMMENDS THAT YOU VOTE “AGAINST” THIS PROPOSAL.

 

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Voting Securities and Principal Holders

Beneficial Ownership

The following table shows all entities that are the beneficial owners of more than 5% of the Company’s Common Stock:

 

Name and Address of Beneficial Owner      Amount and Nature        Percent of Class  

BlackRock, Inc.

55 East 52nd Street, New York, NY 10055

       31,440,194 (1)         7.3%  

The Vanguard Group

100 Vanguard Boulevard, Malvern, PA 19355

       29,303,986 (2)         6.81%  

 

(1) Based on information as of December 31, 2016 contained in a Schedule 13G/A filed with the SEC on January 25, 2017 by BlackRock, Inc. The Schedule 13G/A indicates that BlackRock, Inc. has sole dispositive power with respect to all of the shares, sole voting power with respect to 26,485,202 of the shares, and shared dispositive and voting power with respect to none of the shares.

 

(2) Based on information as of December 31, 2016 contained in a Schedule 13G/A filed with the SEC on February 13, 2017 by The Vanguard Group. The Schedule 13G/A indicates that The Vanguard Group has sole dispositive power with respect to 28,546,218 of the shares, shared dispositive power with respect to 757,768 of the shares, sole voting power with respect to 686,194 of the shares, and shared voting power with respect to 78,890 of the shares.

To our knowledge, except as noted above, no person or entity is the beneficial owner of more than 5% of our Common Stock.

The following table sets forth information regarding the beneficial ownership of our Common Stock as of March 10, 2017, by:

 

  each director and NEO; and

 

  all directors and executive officers of the Company as a group.

Voting Securities and Principal Holders

The following table sets forth information regarding the beneficial ownership of our Common Stock as of March 10, 2017, by:

 

  each Director and Named Executive Officer, and

 

  all Directors and Executive officers of Prudential Financial as a group.

 

Name of Beneficial Owner    Common Stock      Number of shares
Subject to
Exercisable Options
     Total Number of Shares
Beneficially Owned
1
    

Director Deferred Stock
Units / Additional
Underlying

Units 2,3,4

     Total Shares
Beneficially Owned
Plus Underlying
Units
 
Thomas J. Baltimore, Jr.      250                 250        37,710        37,960  
Gilbert F. Casellas      500                 500        29,744        30,244  
James G. Cullen      2,033                 2,033        43,896        45,929  
Martina Hund-Mejean      128                 128        15,505        15,633  
Karl J. Krapek      1,007                 1,007        44,599        45,606  
Peter R. Lighte      80                 80        4,180        4,260  
George Paz      500                 500        4,177        4,677  
Sandra Pianalto      200                 200        3,765        3,965  
Christine A. Poon      11,583                 11,583        13,411        24,994  
Douglas A. Scovanner      12,000                 12,000        11,559        23,559  
Michael A. Todman      450                 450        4,180        4,630  
John R. Strangfeld      287,821        814,369        1,102,190        328,995        1,431,185  
Mark B. Grier      364,887        334,973        699,860        231,322        931,182  
Robert Falzon      44,987        34,434        79,421        112,154        191,575  
Charles F. Lowrey      46,358        325,337        371,695        142,313        514,008  
Stephen Pelletier      7,051        0        7,051        166,861        173,912  
All directors and executive officers as a group (22 persons)      973,268        1,865,564        2,838,832        1,582,788        4,421,620  

 

(1) Individual directors and executive officers as well as all directors and executive officers as a group beneficially own less than 1% of the shares of Common Stock outstanding, as of March 10, 2017.

 

(2) Includes the following number of shares or share equivalents in deferred units through the Deferred Compensation Plan for Non-Employee Directors and the Prudential Insurance Company of America Deferred Compensation Plan, as to which no voting or investment power exists: Mr. Baltimore, 37,710; Mr. Casellas, 29,744; Mr. Cullen, 43,896; Ms. Hund-Mejean 15,505; Mr. Krapek,44,599; Mr. Lighte, 4,180; Mr. Paz, 4,177; Ms. Pianalto, 3,765; Ms. Poon, 13,411; Mr. Scovanner, 11,559; Mr. Todman, 4,180; Mr. Strangfeld, 41,598; and Mr. Pelletier, 31,847.

 

(3) Includes the following shares representing the target number of shares to be received upon the attainment of ROE goals under the performance share program described under “Compensation Discussion and Analysis”: Mr. Strangfeld, 101,030; Mr. Grier, 81,554; Mr. Falzon, 38,952; Mr. Lowrey, 50,389; and Mr. Pelletier, 46,103.

 

(4) Includes the following unvested stock options: Mr. Strangfeld, 186,367; Mr. Grier,149,768; Mr. Falzon,73,202; Mr. Lowrey,91,924; and Mr. Pelletier, 88,911.

Compliance With Section 16(a) of the Exchange Act

Each director, executive officer of the Company and greater than 10% beneficial owner of Common Stock is required to report to the SEC, by a specified date, his or her transactions involving our Common Stock. Based solely on a review of the copies of reports furnished to the Company and written representations that no other reports were required to be filed, the Company believes that during 2016 all reports required by Section 16(a) were timely filed.

 

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Compensation of Directors

The Corporate Governance and Business Ethics Committee reviews the compensation of our non-employee directors periodically (generally every three years) and recommends changes to the Board, when it deems appropriate.

The following table describes the components of the non-employee directors’ compensation for 2016:

 

Compensation Element    Director Compensation Program
Annual Cash Retainer    $150,000, which may be deferred, at the director’s option
Annual Equity Retainer    $150,000 in restricted stock units that vest after one year (or, if earlier, on the date of the next Annual Meeting)
Board and Committee Fees    None
Chair Fee   

$35,000 for the Audit and Risk Committees

$30,000 for the Compensation Committee

$20,000 for all other committees*

Lead Independent Director Fee    $50,000
Meeting Fee for members of the Company’s Community Resources Oversight Committee**    $1,250 per meeting
New Director Equity Award (one-time grant)    $150,000 in restricted stock units that vest after one year
Stock Ownership Guideline    Ownership of Common Stock or deferred stock units that have a value equivalent to six times the annual cash retainer to be satisfied within six years of joining the Board***

 

* Includes any non-standing committee of the Board that may be established from time to time, but excluding the Executive Committee.

 

** This is a committee comprised of members of management and the Board. This Committee typically meets on a separate day following the Board and Board committee meetings. The non-employee directors on this Committee currently consist of Mr. Casellas, Ms. Pianalto and Ms. Poon. The Community Resources Oversight Committee met three times in 2016.

 

*** As of December 31, 2016, each of our non-employee directors satisfied this guideline, with the exception of Ms. Pianalto, who joined the Board in July 2015, and Messrs. Lighte, Paz and Todman, who joined the Board in March 2016, each of whom has six years to satisfy the guideline since he or she joined the Board. For purposes of the stock ownership guideline, once a non-employee director satisfies his or her stock ownership level, the director will be deemed to continue to satisfy the guideline without regard to fluctuation in the value of the Common Stock owned by the director.

The Company maintains a Deferred Compensation Plan for Non-Employee Directors (the “Plan”). Since 2011, 50% of the annual Board and committee retainer has been awarded in restricted stock units that vest after one year (or if earlier, on the date of the next Annual Meeting). A non-employee director can elect to invest the cash portion of his or her retainer, fees and equity retainer upon vesting in accounts under the Plan that replicate investments in either shares of our Common Stock or the Fixed Rate Fund, which accrues interest in the same manner as funds invested in the Fixed Rate Fund offered under the Prudential Employee Savings Plan (“PESP”). The Plan provides for distributions to commence upon termination of Board service or while a director remains on the Board.

Each director receives dividend equivalents on the restricted stock units contained in his or her deferral account under the Plan, which are equal in value to dividends paid on our Common Stock. The dividend equivalents credited to the account are then reinvested in the form of additional share units.

Under the director compensation program, if a non-employee director satisfies the stock ownership guideline, the restricted stock units granted as the annual equity retainer are payable upon vesting in cash or shares of our Common Stock (at the director’s option), and may be deferred beyond vesting at the director’s election. If a director does not satisfy the stock ownership guideline, the restricted stock units are automatically deferred until termination of Board service.

 

DIRECTOR STOCK OWNERSHIP GUIDELINE

Each director is expected, within six years of joining the Board, to own Common Stock or deferred stock units that have a value equivalent to six times his or her annual cash retainer.

 

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Compensation of Directors

 

 

 

2016 Director Compensation Table

 

     Fees Earned or Paid in                    
Name    Cash($)       

Stock

Awards($)(1)

      

All Other

Compensation($)(2)

       Total($)  
Thomas J. Baltimore      170,000          150,000                     320,000  
Gordon M. Bethune      62,500          0                     62,500  
Gilbert F. Casellas      173,750          150,000                     323,750  
James G. Cullen      150,000          150,000          5,000          305,000  
Constance J. Horner2      63,750          0          25,000          88,750  
Martina Hund-Mejean      150,000          150,000          5,000          305,000  
Karl J. Krapek      265,000          150,000          5,000          420,000  
Peter R. Lighte3      125,000          300,000          5,000          430,000  
George Paz3      125,000          300,000          5,000          430,000  
Sandra Pianalto      152,500          150,000          5,000          307,500  
Christine A. Poon      173,750          150,000                     323,750  
Douglas A. Scovanner      185,000          150,000                     335,000  
Michael A. Todman3      125,000          300,000          5,000          430,000  

 

(1) Represents amounts that are in units of our Common Stock. The amounts reported represent the aggregate grant date fair value of the restricted stock units granted during the fiscal year, as calculated under the Financial Accounting Standards Board’s Accounting Codification Topic 718. Under ASC Topic 718, the grant date fair value is calculated using the closing market price of our Common Stock on the date of grant, which is then recognized, subject to market value changes, over the requisite service period of the award. As of December 31, 2016, the aggregate balance in each of the non-employee directors’ accounts in the Deferred Compensation Plan denominated in units (which includes all deferrals from prior years) and the year-end values were as follows: Mr. Baltimore: 37,710 and $3,924,103; Mr. Casellas: 29,744 and $3,095,161; Mr. Cullen: 43,896 and $4,567,818; Ms. Hund-Mejean: 15,505 and $1,613,450; Mr. Krapek: 48,987 and $5,097,587; Mr. Lighte : 4,180 and $434,971; Mr. Paz: 4,177 and $434,659; Ms. Pianalto: 3,765 and $391,786; Ms. Poon: 13,411 and $1,395,549; Mr. Scovanner 11,559 and $1,202,830; and Mr. Todman: 4,180 and $434,971.

 

(2) Represents amounts for 2016 matching charitable contributions; and with respect to Ms. Horner, includes a $25,000 donation in her honor for her service on the Company’s Community Resources Oversight Committee.

 

(3) Messrs. Lighte, Paz, and Todman each received grants of restricted stock units valued at $150,000 upon joining the Board in March 2016.

 

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Compensation Discussion and Analysis

In this section, we describe the material components of our executive compensation program for our NEOs, whose compensation is set forth in the 2016 Summary Compensation Table and other compensation tables contained in this Proxy Statement:

 

NAMED EXECUTIVE OFFICERS (NEOS)

 

    John R. Strangfeld, our Chairman and Chief Executive Officer;

 

    Robert M. Falzon, our Executive Vice President and Chief Financial Officer;

 

    Mark B. Grier, our Vice Chairman;
    Charles F. Lowrey, our Executive Vice President and Chief Operating Officer, International Businesses; and

 

    Stephen Pelletier, our Executive Vice President and Chief Operating Officer, U.S. Businesses.
 

 

We also provide an overview of our executive compensation philosophy and our executive compensation program. In addition, we explain how and why the Compensation Committee of our Board (the “Committee”) arrived at the specific compensation decisions involving the NEOs for 2016.

Executive Summary

Business Highlights

OUR BUSINESS

We are a global financial services business with $1.264 trillion of assets under management as of December 31, 2016, and with operations in the United States, Asia, Europe, and Latin America. Through our subsidiaries and affiliates, we offer a wide array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds, and investment management. For more information about our business, please see “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on February 17, 2017.

2016 BUSINESS HIGHLIGHTS

In 2016, global market conditions and uncertainty continued to be factors in the markets in which we operate. Throughout this period, as a result of our steady leadership, we continued to seize opportunities and further differentiate ourselves from the competition. We view 2016 as a successful year for the Company. We continued our focus on capital deployment, disciplined risk management, a balanced business mix and effective execution of our individual business strategies. Consequently, we were able to deliver solid results in a challenging environment of continued low interest rates and far-reaching regulation of the financial services industry.

We achieved the following accomplishments in 2016:

 

   

We reported net income of $4.37 billion, or $9.71 per share of Common Stock in 2016, compared to $5.64 billion, or $12.17 per share, in 2015, based on U.S. generally accepted accounting principles (“GAAP”). Net income for 2015 included a greater benefit from gains driven by market impacts including interest rates than in 2016.

 

 

 

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We reported after-tax adjusted operating income of $4.11 billion, or $9.13 per share of Common Stock in 2016, compared to $4.65 billion or $10.04 per share, in 2015.(1) 2016 after-tax adjusted operating income was negatively affected by actuarial assumption updates, compared to a positive impact in 2015.

 

 

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(1) Consolidated adjusted operating income (“AOI”) and operating return on average equity are non-GAAP measures of financial performance. Adjusted book value is a non-GAAP measure of financial position. We use earnings per share (“EPS”) based on AOI, operating return on average equity, and adjusted book value as performance measures in our incentive compensation programs. For a discussion of these measures and for reconciliations to the nearest comparable GAAP measures, see Appendix A to this Proxy Statement.

 

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Compensation Discussion and Analysis: Executive Summary

 

 

 

   

We reported GAAP book value of $104.91 per share of Common Stock as of December 31, 2016, compared to $92.39 per share as of year-end 2015.

 

Adjusted book value amounted to $78.95 per share of Common Stock as of December 31, 2016, compared to $73.59 per share as of year-end 2015.(1)

 

 

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We reported return on average equity based on income from continuing operations of 8.8% for 2016, compared to 13.3% for 2015.

 

We reported operating return on average equity of 12% for 2016, compared to 14.5% for 2015 and to the long term target of 13% to 14% we had set in 2011.(1) Our 2016 return on equity reflects solid core performance from our businesses, partly offset by the impact of a number of inherently variable and episodic items including our annual actuarial review. Given the multi-year impact of very low interest rates in our two largest markets, the U.S. and Japan, and the short term impact of strategic investing in our businesses, we have moderated our ROE expectations to 12% to 13% over the near to intermediate term.

 

 

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Assets under management reached $1.264 trillion at December 31, 2016, an increase from $1.184 trillion a year earlier.

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We returned a total of $3.2 billion of capital to shareholders in 2016, including $2.0 billion through our share repurchase program and $1.2 billion in the form of Common Stock dividends, compared to a total of $2.1 billion of shareholder distributions in 2015.

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(1) Consolidated adjusted operating income (“AOI”) and operating return on average equity are non-GAAP measures of financial performance. Adjusted book value is a non-GAAP measure of financial position. We use earnings per share (“EPS”) based on AOI, operating return on average equity, and adjusted book value as performance measures in our incentive compensation programs. For a discussion of these measures and for reconciliations to the nearest comparable GAAP measures, see Appendix A to this Proxy Statement.

Also, in 2016:

 

  We took actions to restructure our Individual Annuities business to reduce capital volatility and improve earnings and cash flow prospects.

 

  We expanded our leading position in the pension risk transfer market, including the completion of approximately $5 billion of new funded cases.

 

  We completed the acquisition of a 40% stake in AFP Habitat, a leading provider of retirement services in Chile.

 

  We reduced total outstanding debt by $1.6 billion.

We believe that maintaining robust capital and liquidity positions provides us with a protective cushion during difficult periods, as well as the ability to pursue new opportunities.

 

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Compensation Discussion and Analysis: Executive Summary

 

 

Executive Compensation Highlights

The Committee has instituted a number of changes to our executive compensation program over the last several years to align with evolving competitive and governance practices, respond to feedback from our shareholders and strengthen the link to performance and rigor of our program. These changes have included:

 

  Strengthening the rigor of our Annual Incentive Program by setting target and maximum awards for senior executives, including the NEOs.  

 

  Requiring deferral of 30% of each NEO’s annual incentive award into the Book Value Performance Program.  

 

  Beginning in 2014, reducing the maximum performance share award from 150% to 125% of the target level.  

 

  Increasing our CEO’s stock ownership guideline from five to seven times base salary in 2015.  

 

  Expanding the clawback policy for executive officers to cover all incentive-based awards, to address a material financial restatement or misconduct, and to require  
 

disclosure to shareholders of action taken with regard to compensation recovery following a material restatement or misconduct.

 

 

  Diversifying the performance metrics used to determine awards under our Annual Incentive Program and applying a greater weight to relative ROE performance versus peer companies as a factor under our Annual Incentive Program in 2016, and Performance Share Program in 2017.  

 

  Excluding earnings from specified classes of non-coupon investments outside of a range of -10% to +10% of the earnings on these investments that are included in the Company’s EPS guidance range.  
 

 

As informed by our ongoing dialogue with our shareholders, and to more closely align with our value proposition to shareholders, this year, the Committee revised our Annual Incentive Program and Long-Term Incentive Program to further balance the financial metrics utilized by those programs between the Company’s absolute performance and its relative performance versus peer companies. Specifically, the Committee modified the Annual Incentive Program to eliminate the relative performance modifier and base the primary driver in determining the amount of the annual incentive awards for our NEOs, the initial annual performance factor, on three equally weighted performance metrics, including one relative metric:

 

  EPS, on an AOI basis, compared to our EPS target range;

 

  EPS growth, on an AOI basis, from the prior year period; and

 

  Relative ROE as compared to the North American Life Insurance subset of our peer group.

The Committee also revised the Annual Incentive Program to reduce the volatility of outcomes under the plan, by modifying the performance scales and by limiting the contribution of earnings that may come from specified classes of non-coupon investments (e.g., private equity, hedge funds, real estate funds, equity securities, and other real estate investments). Based on our discussions with shareholders and feedback from our engagement efforts, the short-term fluctuations in earnings on these non-coupon investments were generally not viewed by our shareholders as being reflective of true operating performance. The performance of these non-coupon investments is fully reflected under the Book Value Performance Program, a key component of our Long-Term Incentive Program.

The use of a weighted relative ROE metric, in lieu of a relative performance modifier, provides simplicity and transparency of results under the Annual Incentive Program and more effectively balances absolute and relative performance (e.g., the weighting of the previous relative performance modifier was limited to 10%).

 

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Compensation Discussion and Analysis: Executive Summary

 

 

Similarly, the Committee eliminated the relative performance modifier from the Performance Shares Program under our Long-Term Incentive Program for awards granted in 2017. Instead, the program now uses a relative ROE measure over a three-year performance period compared to the median ROE performance of the North American Life Insurance subset of our peer group, along with absolute performance versus our long-term ROE target.

Total Direct Compensation Summary

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  (1) 30% of the Annual Incentive Awards were mandatorily deferred into the Book Value Performance Program.
  (2) Represents long-term awards granted in 2017 and 2016 for 2016 and 2015 performance, respectively.

 

Consistent with our compensation philosophy, approximately 92% of our CEO’s total direct compensation for 2016 was performance-based.

    

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  (1) Performance-based compensation
  (2) Includes mandatory deferral of 30% of annual incentive
  (3) Based on average amounts

 

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Compensation Discussion and Analysis: Executive Summary

 

 

 

    WHAT WE DO       WHAT WE DON’T DO

 

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Establish target and maximum awards in our Annual Incentive Program.

 

 

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CEO participation in our severance plan.

   

 

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Executive officer severance payments and benefits exceeding 2.99 times salary and cash bonus without shareholder approval.

 

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Apply a formulaic framework based on the Company’s financial
results relative to pre-established targets for each incentive
program.

   
     
     

 

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Exercise limited or no discretion to increase formulaic incentive compensation awards.

 

 

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Excise tax “gross-ups” upon change in control.

 

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Use balanced performance metrics for annual incentive and performance share/unit awards that factor both the Company’s absolute performance and its relative performance versus peers

 

 

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Discounting, reloading or re-pricing of stock options without shareholder approval.

 

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Rigorous goal setting aligned to our externally disclosed annual and multi-year financial targets.

 

 

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“Single-trigger” vesting of equity-based awards upon change in control.

 

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90% or more of our NEOs’ total direct compensation is performance based.

 

 

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Multi-year guaranteed incentive awards for senior executives.

 

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Defer 30% of our NEOs’ annual incentive awards into the Book Value Performance Program.

 

 

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Employment agreements with executive officers.

 

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Impose stock ownership requirements, and retention of 50% of equity based awards.

 

 

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Employee hedging or pledging of Company securities.

 

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Maintain an enhanced clawback policy covering all executive officer incentive-based awards for material financial restatements and misconduct.

   

 

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Limit perquisites to items that serve a reasonable business purpose.

   

 

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Closely monitor risks associated with our executive compensation program and individual compensation decisions to ensure they do not encourage excessive risk taking.

   

 

Consideration of Most Recent “Say on Pay” Vote

 

Following our 2016 Annual Meeting of Shareholders, the Committee reviewed the results of the shareholder advisory vote on executive compensation (the “Say on Pay” Vote) that was held at the meeting with respect to the 2015 compensation actions and decisions for Mr. Strangfeld and the other NEOs. Approximately 95% of the votes cast on the proposal were voted in support of the compensation of our NEOs.

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95% of the votes cast on the proposal were voted in support of the compensation of our NEOs.

 

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Compensation Discussion and Analysis: Executive Summary

 

 

Based on the results of the “Say on Pay” vote, as well as our ongoing dialogue with our shareholders, the Committee and our Board concluded that, even though our overall executive compensation policies and practices enjoy favorable shareholder support, it was appropriate to make certain changes to our Annual Incentive Program and Long-Term Incentive Program to further balance the metrics utilized in those programs between the Company’s absolute performance and its performance relative to our peer companies. The Committee modified the Annual Incentive Program so that the primary driver in determining the amount of the annual incentive awards for our NEOs, the initial annual performance factor, is based on three equally weighted performance metrics:

 

  EPS, on an AOI basis, assessed relative to our EPS target range;

 

  EPS growth, on an AOI basis, from the prior year period; and

 

  Relative ROE as compared to the North American Life Insurance subset of our peer group.

The Committee also made other changes to the design of the Annual Incentive and Long-Term Incentive Programs, including:

 

  reducing the volatility of outcomes under the Annual Incentive Program and providing symmetry of outcomes with respect to EPS results above and below our publicly disclosed EPS target range;

 

  excluding earnings from specified classes of non-coupon investments outside of a range of -10% to +10% of the earnings on these investments that are included in the Company’s EPS guidance range; and

 

  strengthening the relative performance metric under our Performance Shares Program, by replacing the use of a relative performance modifier, which modified results by +/-10%, with the use of Relative ROE, weighted at 50%, which compares Prudential’s ROE performance to that of the North American Life Insurance subset of our peer group.

Opportunity for Shareholder Feedback

The Committee carefully considers feedback from our shareholders regarding our executive compensation program. Shareholders are invited to express their views to the Committee as described under “Communication with Directors” in this Proxy Statement. In addition, the advisory vote on the compensation of the NEOs provides shareholders with an opportunity to communicate their views on our executive compensation program.

You should read this CD&A in conjunction with the advisory vote that we are conducting on the compensation of the NEOs (see “Item 3—Advisory Vote to Approve Named Executive Officer Compensation”). This CD&A, as well as the accompanying compensation tables, contains information that is relevant to your voting decision.

 

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Compensation Discussion and Analysis

 

 

 

Philosophy and Objectives of Our Executive Compensation Program

The philosophy underlying our executive compensation program is to provide an attractive, flexible, and market-based total compensation program tied to performance and aligned with the interests of our shareholders. Our objective is to recruit and retain the caliber of executive officers and other key employees necessary to deliver sustained high performance to our shareholders, customers, and communities where we have a strong presence. Our executive compensation program is an important component of these overall human resources policies. Equally important, we view compensation practices as a means for communicating our goals and standards of conduct and performance and for motivating and rewarding employees in relation to their achievements.

Overall, the same principles that govern the compensation of all our salaried employees apply to the compensation of our executive officers. Within this framework, we observe the following principles:

 

  Retain and hire top-caliber executives: Executive officers should have base salaries and employee benefits that are market competitive and that permit us to hire and retain high-caliber individuals at all levels;

 

  Pay for performance: A significant portion of the annual compensation of our executive officers should vary with annual business performance and each individual’s contribution to that performance;

 

  Reward long-term growth and profitability: Executive officers should be rewarded for achieving long-term results;
  Tie compensation to business performance: A significant portion of our executive officers’ compensation should be tied to measures of performance of our businesses;

 

  Align compensation with shareholder interests: The interests of our executive officers should be linked with those of our shareholders through the risks and rewards of the ownership of our Common Stock; and

 

  Reinforce succession planning process: The overall compensation program for our executive officers should reinforce our robust succession planning process.
 

 

2016 Incentive Programs

To ensure a strong link between our incentive compensation opportunities and our short-term and longer term objectives, we use two specific programs: our Annual Incentive Program and our Long-Term Incentive Program.

 

  Annual Incentive Program. The Annual Incentive Program is designed to reward strong financial and operational performance that furthers our short-term strategic objectives. Financial performance is primarily determined based on three equally-weighted performance metrics: (i) EPS achievement relative to our externally disclosed EPS targets; (ii) year-over-year growth in EPS; and (iii) relative ROE as compared to a peer group.

 

  Long-Term Incentive Program. Our Long-Term Incentive Program consists of three parts that incent long-term value creation: performance shares and units that reward the achievement of our long-term ROE goals and increases in the market value of our Common Stock; book value units that reward increases in book value per share; and stock options that reward increases in the market value of our Common Stock.

 

ANNUAL COMPENSATION-RELATED RISK EVALUATION

We monitor the risks associated with our executive compensation program, as well as the components of our program and individual compensation decisions, on an ongoing basis. In January 2017, the Committee was presented with the results of a study reviewing our compensation programs, including our executive compensation program, to assess the risks arising from our compensation policies and practices. The Committee agreed with the study’s findings that these risks were within our ability to effectively monitor and manage and that these compensation programs do not encourage unnecessary or excessive risk-taking and do not create risks that are reasonably likely to have a material adverse effect on the Company.

 

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How We Make Compensation Decisions

Role of the Compensation Committee

The Committee is responsible to our Board for overseeing the development and administration of our compensation and benefits policies and programs. The Committee, which consists of three independent directors, is responsible for the review and approval of all aspects of our executive compensation program. Among its duties, the Committee is responsible for formulating the compensation recommendations for our CEO and approving all compensation recommendations for our officers at the senior vice president level and above, including:

 

  annual review and approval of incentive program design, goals and objectives for alignment with compensation and business strategies;

 

  evaluation of individual performance results in light of these goals and objectives;

 

  evaluation of the competitiveness of each executive officer’s total compensation package; and

 

  approval of any changes to the total compensation package, including, but not limited to, base salary, annual and long-term incentive award opportunities, payouts, and retention programs.

Following review and discussion, the Committee submits its recommendations for compensation for these executive officers to the independent members of our Board for approval.

The Committee is supported in its work by the head of the Human Resources Department, her staff, and the Committee’s executive Compensation Consultant, as described below.

The Committee’s charter, which sets out its duties and responsibilities and addresses other matters, can be found on our website at www.prudential.com/governance.

Role of the Chief Executive Officer

Within the framework of the compensation programs approved by the Committee and based on management’s review of market competitive positions, each year our CEO recommends the level of base salary increase (if any), the annual incentive award, and the long-term incentive award value for our officers at the senior vice president level and above, including the other NEOs. These recommendations are based upon his assessment of each executive officer’s performance, the performance of the individual’s respective business or function, and retention considerations. The Committee reviews our CEO’s recommendations and approves any compensation changes affecting our executive officers as it determines in its sole discretion.

Our CEO does not play any role with respect to any matter affecting his own compensation, and is not present when the Committee discusses and formulates his compensation recommendation.

Role of the Compensation Consultant

The Committee has retained Frederic W. Cook & Co., Inc. as its executive Compensation Consultant. The Compensation Consultant reports directly to the Committee and the Committee may replace the Compensation Consultant or hire additional consultants at any time. A representative of the Compensation Consultant attends meetings of the Committee, as requested, and communicates with the Committee Chair between meetings.

The Compensation Consultant provides various executive compensation services to the Committee pursuant to a written consulting agreement with the Committee. Generally, these services include advising the Committee on the principal aspects of our executive compensation program and evolving industry practices and providing market information and analysis regarding the competitiveness of our program design and our award values in relationship to their performance.

During 2016, the Compensation Consultant performed the following specific services:

 

  Provided a presentation on executive compensation trends and external developments.

 

  Provided an annual competitive evaluation of total compensation for the NEOs, as well as overall compensation program share usage, dilution, and fair value expense.
  Provided recommendations on CEO total direct compensation to the Committee at its February meeting, without prior review by our CEO.

 

  Reviewed with our CEO his compensation recommendations with respect to the other NEOs.
 

 

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  Reviewed Committee agendas and supporting materials in advance of each meeting, and raised questions/issues with management and the Committee Chair, as appropriate.

 

  Provided advice on changes to the performance metrics under the Annual Incentive Program and the Long-Term Incentive Program.
  Reviewed drafts and commented on the CD&A and related compensation tables for the Proxy Statement.

 

  Reviewed the peer group used for competitive analyses.

 

  Attended Committee meetings when requested by the Committee Chair.
 

 

The Compensation Consultant provided no services to management during 2016.

The Committee retains sole authority to hire the Compensation Consultant, approve its compensation, determine the nature and scope of its services, evaluate its performance, and terminate its engagement.

The total amount of fees paid to the Compensation Consultant for services to the Committee in 2016 was $175,723. The Compensation Consultant received no other fees or compensation from us, except for $3,400 to participate in a general industry survey of long-term compensation. The Compensation Committee has assessed the independence of the Compensation Consultant pursuant to the listing standards of The New York Stock Exchange and SEC rules and concluded that no conflict of interest exists that would prevent the Compensation Consultant from serving as an independent consultant to the Compensation Committee.

Compensation Peer Group

The Committee uses compensation data compiled from a group of peer companies in the insurance, asset management, and other diversified financial services industries generally selected from the Standard & Poor’s 500 Financials Index (the “Peer Group”). The Committee periodically reviews and updates the Peer Group, as necessary, upon recommendation of the Compensation Consultant. We believe the Peer Group represents the industries with which we currently compete for executive talent, and also includes our principal business competitors.

 

   

Although included within the broad financial services sector, we exclude from the Peer Group companies such as property and casualty insurers and investment banking firms that predominantly offer different products, have substantially different business models and with whom we have less direct competition for executive talent.

 

For 2016, the Peer Group consisted of the following 20 companies:

   
   

North American Life Insurance Companies

 

Consumer Finance Companies

 

Asset Management and Custody Banks

  

Diversified Banks

   
   

  AFLAC, Incorporated

 

  Lincoln National

 

  Manulife Financial Corporation

 

  MetLife, Inc.

 

  Principal Financial Group

 

  Sun Life Financial Inc.

 

  American Express Company

 

  Capital One Financial Corporation

 

  Ameriprise Financial, Inc.

 

  The Bank of New York Mellon Corporation

 

  BlackRock, Inc.

 

  Franklin Resources, Inc.

 

  Northern Trust
Corporation

 

  State Street Corporation

  

  Bank of America Corporation

 

  Citigroup Inc.

 

  JPMorgan Chase & Co.

 

  PNC Financial Services Group, Inc.

 

  U.S. Bancorp

 

  Wells Fargo & Company

   
                  

Use of Competitive Data

We compete in several different businesses, most of which are involved in helping individuals and institutions grow and protect their assets. These businesses draw their key employees from different segments of the marketplace. Our executive compensation program is designed with the flexibility to be competitive and motivational within the various marketplaces in which we compete for executive talent, while being subject to centralized design, approval, and control.

The Committee relies on various sources of compensation information to ascertain the competitive market for our executive officers, including the NEOs.

 

 

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To assess the competitiveness of our executive compensation program, we analyze Peer Group compensation data obtained from peer company proxy materials as well as compensation and benefits survey data provided by national compensation consulting firms, such as Willis Towers Watson, McLagan Partners, and Mercer. As part of this process, we measure actual pay levels within each compensation component and in the aggregate. We also review the mix of our compensation components with respect to fixed versus variable, short term versus long term, and cash versus equity-based pay. This information is then presented to the Committee for its review and use.

The Committee generally compares the compensation of each NEO in relation to both the 50th and the 75th percentiles of the Peer Group for similar positions, as we are significantly above the median of the Peer Group in terms of size. In addition, the Committee takes into account various factors such as our performance within the Peer Group, the unique characteristics of the individual’s position, and any succession and retention considerations. In general, compensation levels for an executive officer who is new to a position tend to be at the lower end of the competitive range, while seasoned executive officers with strong performance who are viewed as critical to retain would be positioned at the higher end of the competitive range.

Generally, differences in the levels of total direct compensation among the NEOs are primarily driven by the scope of their responsibilities, market data for similar positions, and considerations of internal equity.

Components of Our Executive Compensation Program

The principal components of our executive compensation program, purpose, key characteristic and type of performance measured (if applicable) are presented in the following table. We measure the program’s competitiveness both by comparing relevant market data with the target and actual amounts paid at each executive officer position as well as by salary grades, which are composed of many positions that we consider to have similar responsibilities.

Total Direct Compensation

 

Compensation Component   Purpose   Key Characteristic   Performance Measured
Base Salary  

•    Compensate executive officers fairly for the responsibility of the position held

  Fixed   Individual
Annual Incentive Awards  

•    Motivate and reward executive officers for achieving our short-term business objectives

 

•    Provide balance by rewarding performance relative to our peer group

  Variable   Corporate and Individual
Long-Term Incentive Awards  

•    Motivate executive officers by linking incentives to the achievement of our multi-year financial goals, our relative performance, and the performance of our Common Stock and book value over the long term

 

•    Reinforce the link between the interests of our executive officers and shareholders

  Variable   Corporate

Other Forms of Compensation

 

Compensation Component   Purpose   Key Characteristic
Health & Welfare, and Retirement Plans  

•    Provide benefits that promote employee health and support employees in attaining financial security

  Fixed
Perquisites and Other Personal Benefits  

•    Provide a business-related benefit to our Company, and to assist in attracting and retaining executives

  Fixed
Post-Employment Compensation  

•    Provide temporary income following an executive’s involuntary termination of employment, and in the case of a change of control, to also provide continuity of management

  Fixed

 

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The following discussion contains information regarding certain performance measures and goals. These measures and goals are disclosed in the limited context of our executive compensation program. Shareholders should not apply these performance measures and goals to other contexts.

 

FORMULAIC FRAMEWORK FOR INCENTIVE PROGRAMS

Awards under each of our incentive programs are funded at the level determined by our financial results relative to pre-established targets and performance relative to peer companies under formulas for each incentive program. The Board believes it generally should exercise limited or no discretion to increase our NEOs’ formula-based awards. For the annual incentive program, the formula uses three equally-weighted performance metrics: (i) EPS results relative to our externally disclosed EPS targets; (ii) year-over-year growth in EPS; and (iii) relative ROE as compared to the North American Life Insurance subset of our peer group. Similarly, under our performance shares program beginning with awards made in 2017, payments will be determined based on our average ROE results over the three-year performance period, as compared to both a performance scale set at the start of the period and the ROE results of the North American Life Insurance subset of our peer group over that period. The Book Value Performance Program tracks our adjusted book value per share, which excludes the impact on attributed equity of accumulated other comprehensive income and of foreign currency exchange rate remeasurement included in net income or loss, as described in Appendix A to this Proxy Statement.

To accurately reflect the operating performance of our business, the Committee has approved a pre-determined framework of adjustments to our reported financial results for incentive program purposes. Generally, these adjustments exclude one-time or unusual items and external factors that are inconsistent with the assumptions reflected in our financial plans. The standard adjustments to reported EPS under our formulaic framework may vary from year to year and may have either a favorable or unfavorable impact on the funding of the Annual Incentive Award Pool.

 

Standard adjustments to reported financial results are made:

 

    to exclude the impact of market unlockings in our individual annuities business (including, for 2016, adjustments to reflect updated estimates of profitability based on market performance in relation to our assumptions);

 

    to exclude the impact of changes in our assumptions for investment returns, actuarial experience, and customer behavioral expectations (mortality, morbidity, lapse, and similar factors and reserve refinements);

 

    to exclude integration costs associated with merger and acquisition activity (none in 2016);

 

    for accounting changes not included in our annual operating plan (none in 2016);  

 

    to exclude earnings from specified classes of non-coupon investments outside of a range of -10% to +10% of the earnings on these investments that are included in the Company’s EPS guidance range (for 2016, this did not result in an adjustment); and  

 

    for other items not considered representative of the results of operations for the period or not included in guidance, as approved by the Committee (for 2016, we excluded the benefit from a lower income tax rate in Japan, adopted subsequent to the issuance of 2016 guidance; we also excluded certain costs related to Company-wide initiative spending and the one-time cost of the early extinguishment of debt in 2016).  
 

 

 

Direct Compensation Components

 

Annually, the Compensation Committee reviews the competitive analysis of total direct compensation for the NEOs. Based on this evaluation, the Committee may selectively adjust the base salary, annual incentive target, and long-term target amounts of the NEOs. In determining any adjustments, the Committee takes into account the following factors: level of experience and impact in the role; changes in market data; and compensation positioning overall and by component. Executives new to their current roles are positioned towards the lower end of their competitive range while executives with more experience are generally positioned at the higher end of the range.

BASE SALARY

Base salary is the principal fixed component of the total direct compensation of our executive officers, including the NEOs, and is determined by considering the relative importance of the position, the competitive marketplace, and the individual’s performance and contributions. Base salaries are reviewed annually and, typically, are increased infrequently and then mostly at the time of a change in position or assumption of new responsibilities.

SALARY DECISIONS

None of the NEOs received an increase to base salary for the 2016 performance year.

 

 

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Annual Incentive Awards

At least once a year, the Committee reviews the Annual Incentive Program and makes changes as needed. The Committee approved the 2016 Annual Incentive Program for our most senior executives, including the NEOs, on the following terms and conditions.

TARGET AWARD OPPORTUNITIES

The Compensation Committee established target and maximum annual incentive award opportunities for each NEO in 2012. No adjustments had been made to these award opportunities for NEOs who have held the same role since 2012, namely our Chief Executive Officer and Vice Chairman. Consequently, the positioning of target total direct compensation (i.e., base salary, target annual incentive and target long-term incentive) relative to counterparts at companies in the compensation peer group had decreased since last calibrated in 2012. To address this decrease, the Committee increased Mr. Strangfeld’s annual incentive target from $5.6 million to $6 million and Mr. Grier’s target from $4.8 million to $5.1 million in 2016.

Considering their compensation positioning and greater level of experience and impact, the Committee also adjusted Mr. Falzon’s annual incentive target from $2.45 million to $3 million and Mr. Pelletier’s target from $3 million to $4 million in 2016.

The specific target and maximum annual incentive award opportunities for each NEO for 2016 were as follows:

 

Named Executive Officers  

Target Annual

Incentive Award
Opportunity

   

Maximum Annual

Incentive Award

Opportunity

 
John R. Strangfeld   $ 6,000,000     $ 12,000,000  
Robert M. Falzon   $ 3,000,000     $ 6,000,000  
Mark B. Grier   $ 5,100,000     $ 10,200,000  
Charles F. Lowrey   $ 4,000,000     $ 8,000,000  
Stephen Pelletier   $ 4,000,000     $ 8,000,000  

Each year, the Committee establishes an annual performance factor that is the primary driver in determining the amount of the annual incentive awards for our NEOs.

For 2016, we used the following process to determine this Performance Factor:

Step 1. Established Initial Performance Factor.

Consistent with the formulaic framework for our annual incentive award program, the Committee established an Initial Performance Factor based on the following three financial metrics, giving equal weight to each (i.e., each metric is weighted one-third):

 

  EPS for 2016, on an AOI basis, assessed relative to our EPS target range (the “EPS Target Factor”);

 

  Growth in EPS, on an AOI basis, for 2016 as compared to 2015 (the “EPS Growth Factor”); and

 

  ROE for 2016 as compared to the median ROE for 2016 achieved by the North American Life Insurance subset of the Peer Group (the “Relative ROE Factor”).

The Initial Performance Factor was applied to the target annual incentive award for each NEO to determine their annual incentive funding. For purposes of the 2016 Annual Incentive Program, EPS and ROE were calculated as follows:

 

  EPS is Earnings Per Share of Common Stock (diluted), based on after-tax adjusted operating income (“AOI”).

 

  ROE is determined using after-tax AOI divided by adjusted book value, and for our peer companies is determined based on the comparable financial metric from each peer company’s quarterly financial reports, in each case, based on a rolling quarterly average for the four quarters ended September 30, 2016.

For more information regarding our 2016 annual measures of EPS, AOI, ROE, and adjusted book value, see Appendix A to this Proxy Statement.

We applied our pre-set formulaic framework to our January 2017 estimate of our 2016 reported AOI, EPS, and ROE.

Standard Adjustments

We make standard adjustments to estimated AOI, EPS, and ROE under our formulaic framework that may vary from year to year and may have either a favorable or unfavorable impact on the funding of the Annual Incentive Award Pool. For 2016, these standard adjustments resulted in the following changes to EPS:

 

EPS (January Estimate)    $ 9.16  
Market Unlockings      -0.14  
Actuarial Assumptions      +0.64  
Other Items      +0.07  
EPS (Annual Incentive Program)    $ 9.73  

The market unlockings adjusted our reported results for our Individual Annuities business to exclude the impact of actual equity market performance relative to our plan assumption. The adjustment for 2016 market unlockings reduced EPS under the annual incentive program by approximately $0.14.

Annually, based on Company-specific data, industry data, and the current long-term economic outlook, we update our assumptions on long-term market returns (equity and fixed income) and customer behavioral expectations (e.g., mortality, morbidity, and lapses). These updates and related refinements result in a cumulative revaluation of our reserves and the carrying values of our deferred acquisition costs. While GAAP requires these updates to be reported in the current period, they are not representative of annual performance since they relate to outcomes in both prior and future years. For these reasons, they are excluded from EPS under the annual incentive program (regardless of whether they are positive or negative). In 2016, the adjustments to account for these updates had a positive EPS impact of approximately $0.64.

 

 

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Other items not considered representative of operating results or included in our 2016 EPS guidance range are also excluded from EPS under the program. In 2016, these excluded items included certain costs related to Company-wide initiative spending and the benefit from a lower income tax rate in Japan adopted subsequent to the issuance of 2016 guidance. These adjustments contributed approximately $0.07 in 2016 EPS under the program.

These standard adjustments under our pre-set formulaic framework had a net positive effect of $0.57 to EPS under the annual incentive program.

EPS Target Factor

The following table depicts the EPS scale target range for 2016. This target range is aligned to our publicly disclosed EPS guidance range. Our adjusted EPS for 2016 of $9.73 per share of Common Stock corresponded to an EPS Target Factor of 0.947.

 

     2016 EPS(1)     EPS Target Factor(2)  
      $7.00 or below       0.50  
    $9.75       0.95  
Target Range     $10.00       1.00  
      $10.25       1.05  
      $13.00 or above       1.50  
(1) Determined on an AOI basis, subject to certain adjustments.
(2) The EPS Target Factor is interpolated on a straight-line basis between the EPS data points.

EPS Growth Factor

Our adjusted EPS for 2016 was $9.73 per share of Common Stock, a decrease of $0.08 per share from our adjusted EPS of $9.81(1) for 2015. This corresponds to an EPS Growth Factor of 0.992.

 

(1) EPS for 2015 was increased by $0.06 to exclude earnings from specified classes of non-coupon investments outside of a range of -10% to +10% of the earnings on these investments that are included in the Company’s EPS guidance range.

Relative ROE Factor

Our adjusted ROE for 2016 was 12.5%, which is 0.6 percentage points higher than the median 2016 ROE for the North American Life Insurance subset of the Peer Group. This corresponds to a Relative ROE Factor of 1.05 based on the scale depicted below.

 

      ROE +/- Peer  Median(1)          Relative ROE Factor(2)      
     3%         1.25     
     2%         1.17     
     1%         1.08     
     0%         1.00     
     -1%         0.92     
     -2%         0.83     
     -3%         0.75     
(1) Determined on an AOI basis, subject to certain adjustments as discussed above.
(2) The Relative ROE Factor is interpolated on a straight-line basis between the ROE +/- Peer Median data points.

Step 2. Determined Final Performance Factor.

Weighting each of the EPS Target Factor (0.947), the EPS Growth Factor (0.992), and the Relative ROE Factor (1.05) by one-third, we arrived at an Initial Performance Factor of 0.996.

Once the Initial Performance Factor is determined, the Board believes it generally should not exercise meaningful discretion to increase the Performance Factor for strategic or other considerations. For the last three years, the Committee did not make any discretionary adjustments based on these considerations.

Based on the foregoing, the Final Performance Factor for 2016 was determined to be 0.996. This factor was then applied to the target award opportunities of each NEO to determine their annual incentive awards, with minor adjustments primarily due to rounding.

The following table summarizes the calculation of the Final Performance Factor.

Summary of 2016 Performance Factor Mechanics

 

Step 1: Establish EPS Target Factor        
2016 EPS (on AOI basis)     $ 9.16  
Standard adjustments     $ 0.57  
EPS under Annual Incentive Program     $ 9.73  
EPS of $9.73 translates to an EPS Target Factor of      0.947(1)  
Step 2: Establish EPS Growth Factor        
2016 EPS (on AOI basis)     $ 9.16  
Standard adjustments     $ 0.57  
EPS under Annual Incentive Program     $ 9.73  
2015 EPS under Annual Incentive Program     $ 9.81(2)  
EPS Growth under Annual Incentive Program    ($ 0.08)  
EPS Growth of ($0.08) translates to an EPS Growth Factor of      0.992  
Step 3 : Establish Relative ROE Factor        
2016 ROE Performance      12.5%  
2016 Peer Median ROE Performance      11.9%  
ROE performance as compared to median ROE performance for life insurer peers      0.6%(1)  
Favorable ROE of 0.6% translates to a Relative ROE Factor of      1.05  
Step 4: Determine Final Performance Factor        
EPS Target Factor times 1/3      0.316  
EPS Growth Factor times 1/3      0.330  
Relative ROE Factor times 1/3      0.350  
Initial Performance Factor      0.996  
        
Discretionary Adjustments made by Committee for 2016      None  
  Final Performance Factor    0.996  
(1) Based on interpolation on the scales above.
(2) EPS for 2015 was increased by $0.06 to exclude earnings from specified classes of non-coupon investments outside of a range of -10% to +10% of the earnings on these investments that are included in the Company’s EPS guidance range.
 

 

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Annual Incentive Award Decisions for 2016

The principal driver of the actual annual incentive awards for the NEOs is the Final Performance Factor. The Committee also considers individual performance and contributions in determining final awards.

At the beginning of 2016, our CEO met with each of the other NEOs to outline and discuss with them the key financial factors for determining awards under our annual incentive program and their expected contributions to that performance.

 

   

Mr. Strangfeld

           
           
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ANNUAL INCENTIVE AWARD DECISION

 

Based on the Final Performance Factor and the Committee’s evaluation of his performance, in February 2017, the Committee recommended, and the independent members of our Board approved, an annual incentive award of $5,976,000 for Mr. Strangfeld for 2016, or approximately 0.996 times his target award amount. This award compares to an annual incentive award of $5,915,000 for 2015, representing an increase of 1.0%. Of the $5,976,000, $1,792,800 was mandatorily deferred into the Book Value Performance Program.

 

 

   
           
   

 

KEY PERFORMANCE ACHIEVEMENTS

 

In assessing the individual performance of Mr. Strangfeld, our CEO, the Committee, and the independent members of our Board, considered the evaluation of his performance that was conducted by the Lead Independent Director of our Board and the Committee Chair. This evaluation identified and examined a broad range of corporate and individual performance factors, including:

   
   
   

•    After-tax AOI of $4.11 billion, and EPS, based on after-tax AOI, of $9.13 in 2016;

 

•    Operating return on average equity of 12% for 2016, with solid core performance from our businesses partly offset by the impact of a number of inherently variable and episodic items including our annual actuarial review;

 

•    Growth in adjusted book value per share of our Common Stock, to $78.95 at December 31, 2016 versus $73.59 per share at December 31, 2015, an increase of $5.36, or 7%, after payment of four quarterly dividends totaling $2.80 per share;

 

•    International Division’s 8% increase in constant dollar sales(1) in 2016 versus 2015;

 

•    Retirement account values of $386 billion at December 31, 2016, up 5% from a year earlier;

 

•    Asset Management’s assets under management of $1.04 trillion at December 31, 2016, up 8% from a year earlier;

 

•    Individual Life’s 7% increase in sales in 2016 versus 2015;

 

•    Group Insurance pre-tax adjusted operating income of $220 million for 2016, up 25% from 2015;

 

•    Completed the acquisition of a 40% stake in AFP Habitat, a leading provider of retirement services in Chile;

 

   

•    Took actions to restructure the Individual Annuities business to reduce capital volatility and improve earnings and cash flow prospects;

 

•    Returned $3.2 billion of capital to shareholders, including $2.0 billion through our share repurchase program and $1.2 billion in the form of Common Stock dividends, compared to a total of $2.1 billion of shareholder distributions in 2015. The Company has one of the highest dividend yields among its peers and targets the allocation of 60% of earnings over time towards capital distributions and accretive actions;

 

•    Meaningful progress in our short-term and long-term leadership, talent, and succession planning priorities;

 

•    Introduction of new products and rebalancing of product mix in order to adapt to changing market conditions, diversify risks and maintain appropriate returns;

 

•    The Company’s ongoing constructive engagement with the Federal Reserve, international regulators, and other supervisory bodies; and

 

•    Despite a challenging interest rate environment, the Company’s share price increased 28% and TSR is 33% over the last year versus a 10% increase in the Standard & Poor’s 500.

 

•   The Company’s one-year TSR placed it in the 84th percentile relative to the 20 companies in its compensation peer group.

   
   

(1)     As used throughout, sales are based on annualized new business premiums.

 

   
                 

 

 

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OTHER NEOS

In the case of the other NEOs, Mr. Strangfeld formulated recommendations for each individual based on the Final Performance Factor and his assessment of their performance, and presented these recommendations to the Committee for its consideration. Based on the Final Performance Factor, as well as these recommendations and its own evaluation of their performance, the Committee recommended, and the independent members of our Board approved, the following annual incentive awards for each of the other NEOs:

 

   

Mr. Falzon

           
           
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ANNUAL INCENTIVE AWARD DECISION

 

Consistent with the Final Performance Factor, Mr. Falzon’s annual incentive award was $2,990,000 or approximately 0.997 times his target award amount. This award compares to an annual incentive award of $2,600,000 for 2015, representing an increase of 15.0%. Of the $2,990,000, $897,000 was mandatorily deferred into the Book Value Performance Program.

   
           
     
   

KEY PERFORMANCE ACHIEVEMENTS

 

In assessing the individual performance of Mr. Falzon, the Committee identified and examined a broad range of corporate and individual performance factors, including:

   
   
   

•   After-tax AOI of $4.11 billion and EPS, based on after-tax AOI, of $9.13 in 2016;

 

•   Operating return on average equity of 12% for 2016, with solid core performance from our businesses partly offset by the impact of a number of inherently variable and episodic items including our annual actuarial review;

 

•   His acumen in capital management and cash flow planning, including the return of $3.2 billion to shareholders during 2016, through our share repurchase program and Common Stock dividends, representing over a 50% increase from 2015;

 

•   His leadership on initiatives to reduce the Company’s use of financial leverage, resulting in a reduction of total debt outstanding by $1.6 billion in 2016;

 

•   His effective oversight of our liquidity position, including the maintenance of $4.5 billion* of cash and highly liquid assets at the parent company level at December 31, 2016;

   

•   His instrumental role in restructuring our Individual Annuities business, which resulted in the initial distribution of approximately $1 billion to the parent company from the restructuring and a further distribution of approximately $1 billion driven by earnings and is expected to reduce capital volatility and improve earnings and cash flow prospects;

 

•   His key role in management of the statutory capital position of our insurance companies, resulting in a risk-based capital ratio of approximately 457% for Prudential Insurance, 867% for PALAC, and a composite risk-based capital ratio for our major U.S. insurance subsidiaries of 527%, as of December 31, 2016 and strong solvency margins at our international insurance subsidiaries as of that date;

 

•   His effective supervision of internal financial and accounting functions; and

 

•   His leadership in the Company’s ongoing engagement with the Federal Reserve, international regulators and other supervisory bodies.

 

   
   

*    Includes cash, short-term investments, and U.S. Treasury fixed maturities; excludes cash held in an intra-company liquidity account at Prudential Financial, Inc., and outstanding commercial paper.

 

   
                 

 

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Compensation Discussion and Analysis

 

 

 

 

   

Mr. Grier

            
            
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ANNUAL INCENTIVE AWARD DECISION

 

Consistent with the Final Performance Factor, Mr. Grier’s incentive award was $5,080,000 or approximately 0.996 times his target award amount. This award compares to an annual incentive award of $5,100,000 for 2015, representing a decrease of 0.4%. Of the $5,080,000, $1,524,000 was mandatorily deferred into the Book Value Performance Program.

   
            
   

 

KEY PERFORMANCE ACHIEVEMENTS

 

In assessing the individual performance of Mr. Grier, the Committee identified and examined a broad range of corporate and individual performance factors, including:

 

   
   

•   After-tax AOI of $4.11 billion and EPS, based on after-tax AOI, of $9.13 in 2016;

 

•   Operating return on average equity of 12% for 2016, with solid core performance from our businesses partly offset by the impact of a number of inherently variable and episodic items including our annual actuarial review;

 

•   His leadership in enhanced capital management, including the return of $3.2 billion to shareholders during 2016, through our share repurchase program and Common Stock dividends, representing over a 50% increase from 2015. The Company has one of the highest dividend yields among its peers and targets the allocation of 60% of earnings towards capital distributions and accretive actions over time;

 

•   His oversight of risk management, including oversight of the restructuring of our Individual Annuities business, including enhancements to the risk management strategies to reduce capital volatility and improve earnings and cash flow prospects;

 

 

    

•   His acumen in capital deployment and business development, including a key role in the completion of our acquisition of a 40% stake in AFP Habitat, a leading provider of retirement services in Chile; and

 

•   His successful service as our Company’s and an industry spokesperson regarding the evolving regulatory initiatives affecting the insurance and financial services industries, and his leadership in the Company’s ongoing engagement with the Federal Reserve, international regulators and other supervisory bodies.

   
                  

 

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Compensation Discussion and Analysis

 

 

 

 

   

Mr. Lowrey

            
            
    LOGO     

 

ANNUAL INCENTIVE AWARD DECISION

 

Consistent with the Final Performance Factor, Mr. Lowrey’s incentive award was $3,985,000 or approximately 0.996 times his target award amount. This award compares to an annual incentive award of $4,250,000 for 2015, representing a decrease of 6.2%. Of the $3,985,000, $1,195,500 was mandatorily deferred into the Book Value Performance Program.

   
            
   

 

KEY PERFORMANCE ACHIEVEMENTS

 

In assessing the individual performance of Mr. Lowrey, the Committee identified and examined a broad range of corporate and individual performance factors, including:

   
   

 

•    His efforts in leading our International Businesses to earn pre-tax AOI of $3.1 billion for 2016, a 3% increase from 2015 before the impact of changes in currency exchange rates;

 

•    His role in achieving an 8% increase in constant dollar sales in 2016 compared to 2015;

 

•    His oversight of our distribution through Life Planner operations, which achieved constant dollar sales of $1.3 billion in 2016, representing a 10% increase from 2015;

 

•    His leadership in the active management of proprietary and third party distribution at Gibraltar Life, which achieved constant dollar sales of $1.7 billion in 2016, representing a 7% increase from 2015;

 

    

•    His contributions to the successful adaptation to current market conditions of major product lines serving death protection and retirement needs in our key international markets through multiple distribution channels including a 53% increase in U.S. dollar product sales in Japan in 2016 compared to 2015;

 

•    His role in helping drive expansion into new markets outside of Japan, including a key role in our acquisition of a 40% stake in AFP Habitat, a leading provider of retirement services in Chile, and our step-up in ownership percentage from 26% to 49% in DHFL Pramerica, our joint venture in India; and

 

•    His overall leadership of the International Businesses including comprehensive succession planning.

 

 

   
                  

 

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Compensation Discussion and Analysis

 

 

 

 

   

Mr. Pelletier

            
            
    LOGO     

 

ANNUAL INCENTIVE AWARD DECISION

 

Consistent with the Final Performance Factor, Mr. Pelletier’s incentive award was $3,985,000 or approximately 0.996 times his target award amount. This award compares to an annual incentive award of $3,200,000 for 2015, representing an increase of 24.5%. Of the $3,985,000, $1,195,500 was mandatorily deferred into the Book Value Performance Program.

   
            
   

 

KEY PERFORMANCE ACHIEVEMENTS

 

In assessing the individual performance of Mr. Pelletier, the Committee identified and examined a broad range of corporate and individual performance factors, including:

 

   
   

•   His efforts in leading our Retirement business to achieve account values of $386 billion at December 31, 2016, a 5% increase from a year earlier;

 

•   His instrumental role in the expansion of our leading position in the pension risk transfer market, including the completion of approximately $5 billion of new funded cases in 2016;

 

•   His contributions to the success of our Asset Management business, which had $1.04 trillion of assets under management as of December 31, 2016, up 8% from a year earlier, marking the 14th consecutive year of net positive institutional flows;

 

•   His oversight of our Individual Life Insurance business, which produced a 7% increase in sales in 2016, as compared to a year earlier;

 

    

 

•   His oversight of our Individual Annuities business which recorded a 3% increase in account values as of December 31, 2016 compared to a year earlier, while successfully executing product diversification strategies and a restructuring that is expected to reduce capital volatility and improve earnings and cash flow prospects;

 

•   His role in the improved results of our Group Insurance business, which recorded pre-tax adjusted operating income of $220 million for 2016, an increase of 25% from 2015; and

 

•   His overall leadership of the U.S. Businesses including cross-business initiatives and comprehensive succession planning.

   
                  

Long-Term Incentive Program

We provide a long-term incentive opportunity to motivate and reward our executive officers for their contributions toward achieving our business objectives by tying these incentives to the performance of our Common Stock and book value over the long term, to further reinforce the link between the interests of our executive officers and our shareholders, and to motivate our executive officers to improve our multi-year financial performance. Our practice is to grant long-term incentive awards annually in the form of a balanced mix of performance shares and units, stock options, and book value units to our officers at the level of senior vice president and above, including the NEOs, in amounts that are consistent with competitive practice.

The mix of long-term incentives granted in 2016 to NEOs is shown in the table below:

 

Performance Shares and Units      60
Stock Options      20
Book Value Units      20

In determining the amount of individual long-term incentive awards, the Committee considers a senior executive’s individual performance during the immediately preceding year, potential future contributions, his or her prior year’s award value, and retention considerations, as well as market data for the executive officer’s position at the companies in the Peer Group.

 

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Compensation Discussion and Analysis

 

 

 

Long-term incentive awards may also be granted when an individual is promoted to a senior executive position to recognize the increase in the scope of his or her role and responsibilities. From time to time, we may make special awards in the form of restricted stock units, to recognize major milestones, or selective awards in situations involving a leadership transition.

In addition, for all long-term incentive awards granted in 2014 or earlier to any NEO who is subject to Section 162(m), the total payout amount for performance shares and units, restricted stock units, and book value units, as well as the 2016 annual incentive payment, may not exceed 0.6% of our pre-tax AOI for the prior year. For all such long-term awards granted in 2015 and subsequent years, the total payout amount to any NEO subject to Section 162(m) may not exceed 0.4% of the highest pre-tax AOI reported for any of the three fiscal years ended prior to the year of payment, provided that there is positive AOI in at least one fiscal year during which the award is outstanding for at least 276 days of that year. For annual incentive payments relating to 2017 and subsequent performance years, there is a separate limit for any NEO subject to Section 162(m) of 0.4% of our pre-tax AOI for the applicable performance year.

PERFORMANCE SHARES AND UNITS

Performance shares and units align the majority of our long-term incentive values to the achievement of our key ROE goals over a three-year performance period. Starting with the February 2014 awards with respect to the 2014 to 2016 performance period, award payouts generally range from 0% to 125% of the target number of shares and units. In past years, maximum awards ranged up to 150% of the target number of shares. Beginning with the February 2014 awards with respect to the 2014 to 2016 performance period and ending with the February 2016 awards with respect to the 2016 to 2018 performance period, the preliminary payout will be based on the average ROE achievement over the three-year performance period relative to the goals set at the start of the period as established by the Committee.

Also, for the February 2015 awards with respect to the 2015 to 2017 performance period and the February 2016 awards with respect to the 2016 to 2018 performance period, we used a relative performance modifier. The modifier provided a balance between absolute performance and performance relative to the North American Life Insurance subset of the Peer Group and is based on the Company’s three-year performance in ROE, book value per share growth and EPS growth. The modifier increases or decreases the award payment by up to 10% within the 0% to 125% range.

Beginning with the February 2017 awards with respect to the 2017 to 2019 performance period, the preliminary payout will be based on two equally-weighted financial metrics: (i) average ROE achievement over the three-year performance period relative to the goals set at the start of the period as established by the Committee and (ii) average ROE achievement over the three-year performance period relative to the median ROE results over this period of the North American Life Insurance subset of the Peer Group. This change to the performance shares and units program further solidifies the balance between absolute performance and performance relative to life insurer peers. Accordingly, the use of a relative performance modifier was eliminated starting with the February 2017 awards.

Performance unit awards are denominated in share equivalents and have the same value as the performance share awards on the award payment date. Dividend equivalents are paid retroactively on the final number of performance shares and units paid out, up to the target number of shares and units.

ROE is determined using after-tax AOI divided by adjusted book value. The ROE figures are also subject to standard adjustments as part of our pre-set established formulaic framework.

While the program allows the Committee to make a discretionary adjustment by up to 15% of the earned shares and units based on quantitative and qualitative factors, the Committee has rarely exercised discretion and did not exercise discretion for the 2014 awards that paid out in February 2017.

STOCK OPTIONS

Stock options provide value based solely on stock price appreciation. Stock options are granted with a maximum term of ten years. One-third of the option grants vest on each of the first three anniversaries of the date of grant. The exercise price is based on the closing market price of a share of our Common Stock on The New York Stock Exchange on the date of grant.

 

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Compensation Discussion and Analysis

 

 

 

BOOK VALUE PERFORMANCE PROGRAM

The Book Value Performance Program is intended to link the incentive payments to a measure of book value per share—a key metric in valuing insurance companies, banks, and investment firms that is closely followed by investors. We calculate adjusted book value per share by dividing our adjusted book value by the number of shares of our Common Stock outstanding. Our calculations of adjusted book value and adjusted book value per share, as described in Appendix A to this Proxy Statement, exclude certain balance sheet items that are not, and may never be, reflected in the income statement. Unlike the financial measures based on AOI that are used in other aspects of our executive compensation program, the adjusted book value per share metric takes into consideration realized gains and losses in our investment portfolio. The key features of the Book Value Performance Program for our NEOs are:

 

  Awards are granted and denominated in book value units that are funded from two sources:

 

    the allocation of 20% of a participant’s long-term incentive award value for the year as determined by the Committee; and

 

    a mandatory deferral of 30% of their annual incentive award.

 

  Once granted, the value of these book value units then tracks changes in book value per share for each participant.

 

  These units track the value of book value per share of Common Stock, excluding total accumulated other comprehensive income and the non-economic effects of foreign currency exchange rate remeasurement of non-yen liabilities and assets included in net income or loss.

 

  One-third of a participant’s annual award of book value units is distributed in cash in each of the three years following the year of grant.

 

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(1) Excluding total accumulated other comprehensive income and the cumulative impact of gains and losses resulting from foreign currency exchange rate remeasurement included in net income (loss).

 

(2) Does not include the impact of changes in share count or adjustments to earnings for purposes of calculating diluted earnings per share.

 

(3) Includes realized investment gains and losses and related charges and adjustments, and results from divested businesses.

 

(4) Includes the impact of the Company’s settlement of Class B shares, amounts related to foreign currency exchange rate remeasurement formerly recorded in accumulated other comprehensive income, and changes in share count other than as a result of share repurchases.

For a reconciliation of Adjusted Book Value to the most comparable GAAP measure, see Appendix A to this Proxy Statement.

 

 

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  The NEOs’ awards, distributions and accumulated holdings under the Book Value Performance Program are as follows:

 

     Number of Book
Value Units
Held at
January 1, 2016
(#)
    Value of Book
Value Units Held at
January 1, 2016(1)
($)
   

Value of Book

Value Units
Distributed in 2016(2)
($)

    Value of Book
Value Units
Awarded in 2016(3)
($)
    Number of Book
Value Units Held at
December 31, 2016
(#)
   

Value of Book
Value Units Held at
December 31,
2016(4)

($)

 
John R. Strangfeld     126,729     $ 9,325,987     $ 4,612,768     $ 3,774,578       115,339     $ 9,106,014  
Robert M. Falzon     39,789     $ 2,928,073     $ 1,266,410     $ 1,580,124       44,052     $ 3,477,905  
Mark B. Grier     105,300     $ 7,749,027     $ 3,840,736     $ 3,130,077       95,643     $ 7,551,015  
Charles F. Lowrey     79,723     $ 5,866,816     $ 2,902,390     $ 2,225,067       70,519     $ 5,567,475  
Stephen Pelletier     44,059     $ 3,242,302     $ 1,356,705     $ 1,860,061       50,899     $ 4,018,476  

 

1 Represents the aggregate market value of the number of book value units held at January 1, 2016 obtained by multiplying the book value per share of $73.59 as of December 31, 2015 by the number of book value units outstanding.

 

2 Represents the aggregate market value distributed on February 19, 2016 for all NEOs and also for Mr. Pelletier on April 12, 2016.

 

3 Represents the aggregate market value awarded on February 9, 2016 for all NEOs.

 

4 Represents the aggregate market value of the number of book value units held at December 31, 2016 obtained by multiplying the book value per share of $78.95 as of December 31, 2016 by the number of book value units outstanding.

LONG-TERM INCENTIVE AWARD DECISIONS FOR 2016

In February 2017, the Committee granted long-term incentive awards to the NEOs based on updated market data and its assessment of their individual performance during 2016. These awards were granted in the form of performance shares (30%), performance units (30%), stock options (20%), and book value units (20%) under the Book Value Performance Program (in addition to the mandatory deferral of 30% of each NEO’s annual incentive award). The Committee determined that this long-term incentive mix would appropriately reward the NEOs for their 2016 performance, motivate them to work towards achieving our long-term objectives, further reinforce the link between their interests and the interests of our shareholders, and provide a balanced portfolio composed of performance shares and units (which provide value based upon attainment of specific performance goals and performance relative to peers), stock options (which provide value based solely on stock price appreciation) and book value units (which provide value based on changes in our book value per share).

The following table presents the long-term incentive awards granted to each NEO in February 2017, including our Book Value Performance Program, and includes the mandatory deferrals of 30% of their annual incentive award. Awards are expressed as dollar compensation values in the table. These awards generally will not be reported in the Summary Compensation Table until 2018. For discussion of the long-term incentive awards granted in February 2016 for 2015 performance and included in this year’s Summary Compensation Table, see the CD&A in our 2016 Proxy Statement.

 

Named Executive Officer    
Compensation Value of
Book Value Units(1)
 
 
   
Compensation Value of
Stock Options
 
 
   
Compensation Value of
Performance Shares
 
 
   
Compensation Value of
Performance Units
 
 
       Total  
John R. Strangfeld   $ 3,792,800     $ 2,000,000     $ 3,000,000     $ 3,000,000        $ 11,792,800  
Robert M. Falzon   $ 1,697,000     $ 800,000     $ 1,200,000     $ 1,200,000        $ 4,897,000  
Mark B. Grier   $ 3,124,000     $ 1,600,000     $ 2,400,000     $ 2,400,000        $ 9,524,000  
Charles F. Lowrey   $ 2,195,500     $ 1,000,000     $ 1,500,000     $ 1,500,000        $ 6,195,500  
Stephen Pelletier   $ 2,095,500     $ 900,000     $ 1,350,000     $ 1,350,000        $ 5,695,500  

 

1 Includes amounts that were mandatorily deferred from the Annual Incentive Program (30%) that total $1,792,800 for Mr. Strangfeld; $897,000 for Mr. Falzon; $1,524,000 for Mr. Grier; $1,195,500 for Mr. Lowrey, and $1,195,500 for Mr. Pelletier.

 

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Compensation Discussion and Analysis

 

 

 

PERFORMANCE SHARE AND PERFORMANCE UNIT AWARDS

The NEOs currently have three performance share and unit awards outstanding. In February 2017, the Committee granted the performance share and unit awards for the 2017 to 2019 performance period. The key features of these three awards are as follows:

 

Performance

Period

 

Performance

Measures

 

Performance Measure

Target Levels

 

Target Number of Shares/

Units to be Awarded

  Actual Number of Shares/Units
2015–2017  

- ROE

- Relative Performance:

     ROE

     Book value per share growth

     EPS growth

  Average ROE of 13.5% for the 2015 through 2017 performance period. Weighted average relative performance ranking of 4 on relative ROE, book value per share growth and EPS growth.  

100% at target level and

125% if average ROE is 14% or more, in each case, assuming a relative performance modifier of zero.

  To be determined between 0% and 125% of the target number by the Committee in February 2018 based on average ROE over the 2015-2017 performance period compared to the Company’s ROE targets, as modified by the relative performance modifier.
2016–2018  

- ROE

- Relative Performance:

     ROE

     Book value per share growth

     EPS growth

  Average ROE of 13% for the 2016 through 2018 performance period. Weighted average relative performance ranking of 4 on relative ROE, book value per share growth and EPS growth.  

100% at target level and

125% if average ROE is 14% or more, in each case, assuming a relative performance modifier of zero.

  To be determined between 0% and 125% of the target number by the Committee in February 2019 based on average ROE over the 2016-2018 performance period compared to the Company’s ROE targets, as modified by the relative performance modifier.
2017–2019  

- ROE

- Relative ROE versus life insurer peer group

  Average ROE of 12% and ROE performance equal to the median performance of the North American Life Insurance subset of the Peer Group for the 2017 through 2019 performance period.   100% at target level and 125% if average ROE is 13.5% or more and ROE performance exceeds the median performance of the North American Life Insurance subset of the Peer Group by 3% or more.   To be determined between 0% and 125% of the target number by the Committee in February 2020 based on average ROE over the 2017-2019 performance period compared to the Company’s ROE targets and ROE performance as compared to the median performance of the North American Life Insurance subset of the Peer Group.

In February 2016, for the 2016 awards, the Committee aligned the target award opportunity to 13% average ROE during the performance period, recognizing that 13% ROE represents second quartile performance relative to the North American Life Insurance subset of the Peer Group.

In February 2017, for the 2017 awards, the Committee aligned the target award opportunity to 12% average ROE during the performance period, recognizing that the Company has changed its near-to-intermediate term ROE target from 13% to 14% to 12% to 13%, reflecting a sustained low interest rate environment, and that 12% ROE exceeds the estimated ROEs of its closest comparable peers within the North American Life Insurance subset of the Peer Group.

In February 2017, the NEOs received payouts with respect to the performance share and unit awards that were granted in February 2014 for the three-year performance period ended December 31, 2016. These awards were paid at 1.25 times the target number of shares and units initially awarded based on our average ROE relative to our ROE targets for the three-year performance period.

 

       

Average ROE over

the 2014-2016

Performance Period

 

Goal:

       13.5%  

Actual(1):

       14.3%  

Earnout Factor:

       1.25  
(1) Actual figures adjusted for one-time items and Standard & Poor’s 500 performance as under the Annual Incentive Program for each year.
 

 

The final award payments to the NEOs in February 2017 for the 2014 to 2016 performance period were:

 

Named Executive Officers   

Target Number of

Shares/Units Awarded(1)

    

Actual Number of

Shares/Units Awarded(1)

 

John R. Strangfeld

     57,726        72,158  

Robert M. Falzon

     17,658        22,074  

Mark B. Grier

     47,540        59,426  

Charles F. Lowrey

     30,562        38,204  

Stephen Pelletier

     20,674        25,844  

 

1 Target and actual number of awards are 50% shares and 50% units.

 

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Supplemental Compensation Analysis

 

 

 

Supplemental Compensation Analysis

TOTAL DIRECT COMPENSATION

The following table illustrates the Committee’s perspective on the total direct compensation (base salary, annual incentive award, and long-term incentives) of the NEOs for the 2015 and 2016 performance years. This table is not a substitute for the compensation tables required by the SEC and included under “Compensation of Named Executive Officers” contained in this Proxy Statement. However, we believe it provides a more accurate picture of how the Committee viewed its compensation actions for the NEOs based on our performance for each of these two years:

 

Named

Executive Officer

  

2015

Compensation

   

2016

Compensation

   

Percentage

Change

 

John R. Strangfeld

      

Base Salary

   $ 1,400,000     $ 1,400,000       0.00%  

Annual Incentive

   $ 5,915,000 (1)    $ 5,976,000 (2)      1.03%  

Long-Term Incentive(3)

   $ 10,000,000     $ 10,000,000       0.00%  

Total

   $ 17,315,000     $ 17,376,000       0.35%  

Robert M. Falzon

      

Base Salary

   $ 700,000 (4)    $ 770,000       10.00%  

Annual Incentive

   $ 2,600,000 (1)    $ 2,990,000 (2)      15.00%  

Long-Term Incentive(3)

   $ 4,000,000     $ 4,000,000       0.00%  

Total

   $ 7,300,000     $ 7,760,000       6.30%  

Mark B. Grier

      

Base Salary

   $ 1,190,000     $ 1,190,000       0.00%  

Annual Incentive

   $ 5,100,000 (1)    $ 5,080,000 (2)      -0.39%  

Long-Term Incentive(3)

   $ 8,000,000     $ 8,000,000       0.00%  

Total

   $ 14,290,000     $ 14,270,000       -0.14%  

Charles F. Lowrey

      

Base Salary

   $ 770,000     $ 770,000       0.00%  

Annual Incentive

   $ 4,250,000 (1)    $ 3,985,000 (2)      -6.24%  

Long-Term Incentive(3)

   $ 4,750,000     $ 5,000,000       5.26%  

Total

   $ 9,770,000     $ 9,755,000       -0.15%  

Stephen Pelletier

      

Base Salary

   $ 770,000     $ 770,000       0.00%  

Annual Incentive

   $ 3,200,000 (1)    $ 3,985,000 (2)      24.53%  

Long-Term Incentive(3)

   $ 4,500,000     $ 4,500,000       0.00%  

Total

   $ 8,470,000     $ 9,255,000       9.27%  

 

  (1) Thirty percent of this amount was mandatorily deferred into the Book Value Performance Program, which is part of the Long-Term Incentive Program. These amounts total $1,774,500 for Mr. Strangfeld, $780,000 for Mr. Falzon, $1,530,000 for Mr. Grier, $1,275,000 for Mr. Lowrey, and $960,000 for Mr. Pelletier.  

 

  (2) Thirty percent of this amount was mandatorily deferred into the Book Value Performance Program, which is part of the Long-Term Incentive Program. These amounts total $1,792,800 for Mr. Strangfeld, $897,000 for Mr. Falzon, $1,524,000 for Mr. Grier, $1,195,500 for Mr. Lowrey, and $1,195,500 for Mr. Pelletier.  

 

  (3) Represents the compensation value of long-term awards for each performance year. For example, the long-term values under the “2016 Compensation” column represent awards made in February 2017 for the 2016 performance year, excluding amounts mandatorily deferred from the annual incentive awards.  

 

  (4) Reflects annualized salary as of December 31, 2015. Effective February 22, 2016, Mr. Falzon received a salary increase of $70,000, resulting in an annualized salary of $770,000.  

REPORTED CHANGES IN PENSION VALUES

As part of its compensation review, the Compensation Committee considered the dollar amount change in pension value for Mr. Strangfeld and the other NEOs. The change in the present value of Mr. Strangfeld’s pension for 2016 reflects a number of factors, including his 39 years of service, his age, his average earnings, changes in interest rates and life expectancy assumptions used to calculate the pension plan obligations. These factors, as well as our plan design that updates average earnings every other year, resulted in an increase in Mr. Strangfeld’s pension accrual for 2016. Pension values may fluctuate significantly from year to year and it is expected that in 2017, should interest rates remain unchanged, the change in Mr. Strangfeld’s pension accrual will be substantially lower. Alternatively, if the discount rate were to rise, it is possible that Mr. Strangfeld’s change in pension value in future years could be a negative amount, as it was for the years 2015 and 2013. Given this inherent volatility, the Compensation Committee will continue to monitor future accruals for Mr. Strangfeld and the other NEOs. The Traditional Pension Formula that applies to Mr. Strangfeld was closed to employees hired on or after January 1, 2001.

 

è

 

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Supplemental Compensation Analysis

 

 

 

 

 

TOTAL SHAREHOLDER RETURN

The chart below shows our absolute Total Shareholder Return (“TSR”) and percentile ranking relative to the 20 companies in our Peer Group over the three time periods indicated.

 

      Total Shareholder Return  
   1-Year      3-Year      5-Year  
Cumulative TSR      33%        24%        135%  
Annualized TSR      33%        7%        19%  
Percentile Rank      84%        49%        56%  

 

With respect to our three-year TSR, and to a lesser extent our five-year TSR, Prudential is the only life insurer among our Peer Group that is subject to Federal regulation as a non-bank systemically important financial institution (“SIFI”).

The discussion of our SIFI status and our subsequent designation began in 2012 with our designation occurring in 2013. We believe this occurrence, as well as the questions on the additional regulatory requirements that might accompany this designation, among other factors, may have negatively impacted our three-year and five-year TSR.

CEO REALIZED AND REALIZABLE PAY ANALYSIS

The total compensation of our NEOs as reported in the 2016 Summary Compensation Table is calculated in accordance with SEC rules. Under these rules, we are required to show the grant date fair value of equity and equity-based awards, even though the ability of our executive officers to realize value from such awards is contingent on the achievement of certain performance conditions (including, in the case of stock options, the sustained increase in our stock price). The accompanying chart compares our CEO’s total compensation, as measured based on actual compensation received (or, with regard to pending awards, realizable pay based on the applicable performance elements and stock value at a relatively current time), to the amounts reported for him in the Summary Compensation Table for the periods shown.

The chart illustrates that our executive compensation program is designed so that the amount of compensation that our CEO actually receives, or is expected to receive, may be higher or lower than the amount we are required to report in the Summary Compensation Table, depending on the performance of our Common Stock and our performance relative to our key financial objectives. It demonstrates the strong alignment of the interests of our executive officers with those of our shareholders.

 

 

CEO TOTAL COMPENSATION

Grant Date Fair Value vs. Realized and Realizable Gains (in thousands)

 

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•    Total compensation based on grant date fair value is the sum of base salary; actual annual incentive payout for the performance year (excluding the portion mandatorily deferred into the long-term Book Value Performance Program); the grant date fair values of the performance shares and units, book value units and stock options awarded each year.

 

•    Total compensation based on realized and realizable pay is the sum of: base salary; actual annual incentive payout for the performance year (excluding the portion mandatorily deferred into the long-term Book Value Performance Program);

     

 

•    Total compensation based on grant date fair value is the sum of base salary; actual annual incentive payout for the performance year (excluding the portion mandatorily deferred into the long-term Book Value Performance Program); the grant date fair values of the performance shares and units, book value units and stock options awarded each year.

 

•    Total compensation based on realized and realizable pay is the sum of: base salary; actual annual incentive payout for the performance year (excluding the portion mandatorily deferred into the long-term Book Value Performance Program); performance

 

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        performance shares and units awarded in 2013 and paid in February 2016 based on an earnout factor of 1.5 times target valued at the December 31, 2015 share price of $81.41; performance shares and units awarded in 2014 and 2015 valued at target based on the $81.41 share price; the actual book value units awarded each year but paid in three annual tranches including unpaid portions valued as of December 31, 2015 at $73.59 per unit; and the intrinsic value of stock options awarded in each year based on the $81.41 share price as of December 31, 2015.

 

•      For 2013,a key reason why grant date and realized/realizable pay differ is that the intrinsic value of the stock options and the value of the performance shares and units awarded in each year are significantly higher when valued as of December 31, 2015. Another contributing factor to the higher realized/realizable pay for 2013 is that the 2013 performance shares program payment is 1.5 times target reflecting the achievement of our sustainable ROE objective of 13% to 14%. There is little difference between the grant date and realized/realizable pay amounts in either 2014 or 2015, consistent with the relatively small change in our share price over that period.

     

        shares and units awarded in 2014 and paid in February 2017 based on an earnout factor of 1.25 times target valued at the December 31, 2016 share price of $104.06; performance shares and units awarded in 2015 and 2016 valued at target based on the $104.06 share price; the actual book value units awarded each year but paid in three annual tranches including unpaid portions valued as of December 31, 2016 at $78.95 per unit; and the intrinsic value of stock options awarded in each year based on the $104.06 share price as of December 31, 2016.

 

•      For 2016,a key reason why grant date and realized/realizable pay differ is that the intrinsic value of the stock options and the value of the performance shares and units awarded are significantly higher when valued as of December 31, 2016. The primary reason the difference between the grant date and realized value for years 2014 and 2015 is that the grant date stock price was significantly higher in 2014 and 2015 than it was in 2016.

 

WHY WE USE ADJUSTED OPERATING INCOME (“AOI”) INSTEAD OF GAAP NET INCOME(1)

Why don’t we use GAAP net income as our compensation performance measure?

We seek to compensate our senior executive officers based on their success in building shareholder value through the operation of the Company’s businesses. The Committee and the investment community do not believe GAAP net income optimally measures the creation of shareholder value because it may be significantly affected by items with limited economic impact, or that are otherwise not indicative of ongoing trends.

 

Why do we use AOI as our compensation performance measure?

The Committee believes AOI is superior to GAAP net income as a measure of our performance because AOI includes only our results of operations from ongoing operations and the related underlying profitability factors, and excludes items that are not indicative of ongoing trends. Among other things, AOI excludes items where the timing of the impact is subject to management discretion, items with limited economic impact, items that we expect to reverse over time, and items that are otherwise not indicative of our ongoing performance.

 

 

What are some examples of items included in GAAP net income, but excluded from AOI, and why are they excluded?

 

    Realized investment gains/losses. Sales of general account invested assets may result in a gain or loss that is recognized in GAAP net income. However, the timing of these sales that would result in gains or losses (such as gains or losses related to changes in interest rates) is largely subject to our discretion and influenced by market opportunities as well as our tax and capital profile. Accordingly, we believe gains or losses on these sales are not indicative of business performance trends.

 

    Foreign currency exchange rate liability remeasurement. GAAP requires us to recognize on our income statement gains and losses on certain insurance liabilities due to changes in foreign currency exchange rates. However, these liabilities are supported by assets for which corresponding changes in value due to changes in foreign exchange rates are recognized in
 

accumulated other comprehensive income (loss) on our balance sheet under GAAP. Given that the gains and losses on the income statement for these insurance liabilities are offset by changes to accumulated other comprehensive income (loss) on our balance sheet, the impact on the Company is non-economic and therefore not a reflection of shareholder value created or lost. The Company has taken steps to mitigate the impact of foreign currency exchange rate liability remeasurement on GAAP net income or loss, commencing in 2015.

 

    Divested businesses. The contribution to GAAP net income or loss of divested businesses that have been or will be sold or exited or are in wind-down status are excluded from AOI since the results of divested businesses are not relevant to an understanding of the Company’s ongoing operations.  
 

 

  (1)  For more information, see Appendix A to this Proxy Statement.

 

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Post-Employment Compensation

Retirement Plans

We view retirement benefits as a key component of our executive compensation program because they encourage long-term service. Accordingly, we offer our employees, including the NEOs, a comprehensive benefits program that provides the opportunity to accumulate adequate retirement income. This program includes both defined benefit and defined contribution plans, as well as two supplemental retirement plans which allow highly compensated employees (that is employees whose compensation exceeds the limits established by the Internal Revenue Code for covered compensation and benefit levels) to receive the same benefits they would have earned but for these limitations. Further, we sponsor three supplemental executive retirement plans (“SERPs”) for certain eligible executive officers, including the NEOs, to offset the potential loss or forfeiture of retirement benefits under certain limited circumstances or to provide additional benefits to certain key executives. For descriptions of these plans, including their titles, see “Pension Benefits.”

We also maintain the Prudential Insurance Company of America Deferred Compensation Plan (the “Deferred Compensation Plan”). We offer this plan to our executive officers, including the NEOs, as a competitive practice. For a description of this plan, see “Nonqualified Deferred Compensation.”

Periodically, we compare the competitiveness of our benefits programs for our employees, including retirement benefits, against other employers with whom we broadly compete for talent. It is our objective to provide our employees with a benefits package that is at or around the median of the competitive market when compared to other employers.

Severance and Change in Control Arrangements

Our Board has adopted a policy prohibiting us from entering into any severance or change in control agreement with any of our executive officers, including the NEOs, that provides for payments and benefits that exceed 2.99 times the sum of the executive officer’s base salary and most recently earned cash bonus, without shareholder approval or ratification. We do not provide excise tax payments, reimbursements, or “gross-ups” to any of our executive officers.

While our other executive officers are eligible for severance payments in the event of an involuntary termination of employment without “cause,” our CEO is not a participant in the severance program providing this benefit.

To enable us to offer competitive total compensation packages to our executive officers, as well as to ensure the ongoing retention of these individuals when considering potential transactions that may create uncertainty as to their future employment with us, we offer certain post-employment payments and benefits to our executive officers, including the NEOs, upon the occurrence of several specified events. These payments and benefits are provided under two separate programs:

 

  the Prudential Severance Plan for Senior Executives (the “Severance Plan”); and

 

  the Prudential Financial Executive Change in Control Severance Program.

We have not entered into individual employment agreements with our executive officers. Instead, the rights of our executive officers with respect to post-employment compensation upon specific events, including death, disability, severance or retirement, or a change in control of the Company, are covered by these two programs.

We use plans, rather than individually negotiated agreements, to provide severance and change in control payments and benefits for several reasons. First, a “plan” approach provides us with the flexibility to change the terms of these arrangements from time to time. An employment agreement would require that the affected executive officer consent to any changes. Second, this approach is more transparent, both internally and externally. Internal transparency eliminates the need to negotiate severance or other employment separation payments and benefits on a case-by-case basis. In addition, it assures each of our executive officers that his or her severance payments and benefits are comparable to those of other executive officers with similar levels of responsibility and tenure.

As previously noted, our executive officers, including the NEOs, except for our CEO, are eligible for severance payments and benefits in the event of an involuntary termination of employment without “cause.” These executive officers and our CEO are also eligible for “double trigger” severance payments and benefits in the event of an involuntary termination of employment without “cause” or a termination of employment with “good reason” in connection with a change in control of the Company. Our equity awards are also designed to be “double trigger,” so long as such awards are allowed to continue in effect following any change in control transaction on substantially equivalent terms and conditions to those applicable prior to such transaction.

 

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The payment of these awards at target achievement rewards the executive officer for his or her expected performance prior to the change in control transaction.

For detailed information on the estimated potential payments and benefits payable to the NEOs in the event of their termination of employment, including following a change in control of the Company, see “Potential Payments Upon Termination or Change in Control.”

Perquisites and Other Personal Benefits

We do not provide our executive officers, including the NEOs, with perquisites or other personal benefits, except for the use of Company aircraft, Company-provided vehicles and drivers, and, in the case of our CEO and Vice Chairman, security services. These items are provided because we believe that they serve a necessary business purpose and represent an immaterial element of our executive compensation program. The cost allocated to the personal use of Company-provided vehicles and drivers, including commuting expenses, and the incremental cost associated with the security services, to the extent not reimbursed to us, are reported in the Summary Compensation Table. Our executive officers, including the NEOs, are required to reimburse us for the incremental cost of any personal use of Company aircraft.

We do not provide tax reimbursements or any other tax payments, including excise tax “gross-ups”, to any of our executive officers.

 

Perquisites and other personal benefits represent an immaterial element of our executive compensation program.

Other Compensation Related Policies

In addition to the other components of our executive compensation program, we maintain the policies described below. These policies are consistent with evolving best practices and help ensure that our executive compensation program does not encourage our executive officers to engage in behaviors that are beyond our ability to effectively identify and manage risk.

Clawback Policy

In 2015, we strengthened our clawback policy to cover all incentive compensation and to address material financial restatements and improper conduct (including failure to report).

The revised clawback policy covers all executive officers (including the NEOs) and applies to all incentive-based compensation (including stock options and other equity awards) paid to or in respect of an executive officer. The policy provides that if (i) the Company is required to undertake a material restatement of any financial statements filed with the SEC or (ii) an executive officer engages in improper conduct that either has had, or could reasonably be expected to have, a significant adverse reputational or economic impact on the Company or any of its affiliates or divisions, then the Board may, in its sole discretion, after evaluating the associated costs and benefits, seek to recover all or any portion of the incentive-based compensation paid to any such executive officer during the three-year period preceding the restatement, or the occurrence of the improper conduct, as the case may be.

The policy also requires us to disclose to our shareholders, not later than the filing of the next proxy statement the action taken by the Board, or the Board’s decision not to take action, with regard to compensation recovery following the occurrence of a material restatement or improper conduct, so long as such event has been previously disclosed in our SEC filings.

For purposes of the policy a “restatement” means any material restatement (occurring after the effective date of this policy) of any of the Company’s financial statements that have been filed with the SEC under the Exchange Act or the Securities Act of 1933, as amended. “Improper conduct” means willful misconduct (including, but not limited to, fraud, bribery or other illegal acts) or gross negligence, which, in either case, includes any failure to report properly, or to take appropriate remedial action with respect to, such misconduct or gross negligence by another person.

Other Long-Term Compensation Recovery Policies

In 2015, we adopted a “resignation notice period” requirement as part of the terms and conditions of all long-term incentive awards granted to certain designated grades of executives, including the NEOs. The requirement is applicable to awards granted

 

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in 2015 and subsequent years. The requirement is intended to reduce the adverse and disruptive effect of a sudden voluntary departure of an executive subject to the requirement, and requires him or her to provide notice for a specified period prior to the effective date of a voluntary resignation, or otherwise risk forfeiting his or her outstanding long-term incentive awards.

The terms and conditions of long-term incentive awards also provide for forfeiture in the event a recipient violates applicable non-solicitation or non-competition agreements.

Process for Approving Long-Term Incentive Awards

The Committee approves long-term incentive awards (including stock options, book value units, performance shares, performance units and, restricted stock units) on an annual basis at its regularly scheduled February meeting.

The Committee has delegated authority to management to approve long-term incentive awards for new hires, promotions, and retention purposes within specified limits to employees below the level of senior vice president. The Committee approves any long-term incentive awards to newly hired or promoted senior executives.

Under the terms of our 2016 Omnibus Plan, which was approved by shareholders in 2016, stock options are required to be priced at the fair market value of our Common Stock on the date of grant, which is based on the closing market price of our Common Stock on the date of grant. The number of shares of our Common Stock subject to a stock option grant to an individual is determined by dividing the compensation value of the grant by the fair value of each stock option based on the average closing market price of our Common Stock on the NYSE for the final 20-day trading period in the month prior to the grant date.

The number of performance shares and units or restricted stock units awarded to an individual is determined by a formula that divides the compensation value of the award by the average closing market price of our Common Stock on the NYSE for the final 20-day trading period in the month prior to the grant date.

Stock Ownership Guidelines

We have adopted stock ownership guidelines for our executive officers to encourage them to build their ownership position in our Common Stock over time by direct market purchases, making investments available through the PESP and the Deferred Compensation Plan, and retaining shares they earn under long-term incentive awards. In 2015, we revised the guidelines to increase the CEO stock ownership level from 500% to 700% of base salary. The guidelines are framed in terms of stock value as a percentage of base salary as follows:

 

Position  

Stock Value as a

Percentage of Base Salary

 

Chief Executive Officer

    700%  

Vice Chairman and Executive Vice Presidents

    300%  

Senior Vice Presidents

    200%  

Each of the NEOs meets his individual stock ownership level. Under the current stock ownership guidelines, once an executive officer attains his or her individual ownership level, he or she will remain in compliance with the guidelines despite future changes in stock price and base salary, as long as his or her holdings do not decline below the number of shares at the time the stock ownership guidelines were met.

Stock Retention Requirements

We have adopted stock retention requirements for our executive officers. Each executive officer is required to retain 50% of the net shares (after payment of the applicable exercise price (if any), fees, and taxes) acquired upon the exercise of stock options or the payment or vesting of any performance shares and restricted stock units. The executive officer is required to hold such shares until the later of one year following the date of acquisition of such shares (even if this one-year holding period extends beyond termination of employment) or the date that he or she satisfies our stock ownership guidelines.

Prohibition of Derivatives Trading, and Hedging and Pledging of Our Securities

Our Board has adopted a policy prohibiting all employees, including the NEOs, and members of the Board from engaging in any hedging transactions with respect to any of our equity securities held by them, which includes the purchase of any financial instrument (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) designed to hedge or offset any decrease in the market value of such equity securities.

 

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Our Board has also adopted a policy prohibiting our Section 16 officers and members of the Board from pledging, or using as collateral, our securities to secure personal loans or other obligations, which includes holding shares of our Common Stock in a margin account.

 

POLICY ON RULE 10b5-1 TRADING PLANS

We have a policy governing the use by executive officers of pre-established trading plans for sales of our Common Stock and exercises of stock options for shares of our Common Stock. We believe our Rule 10b5-1 policy reflects best practices and is effective in ensuring compliance with legal requirements. Under the policy:

 

    All Rule 10b5-1 trading plans must be pre-cleared by law and compliance.  

 

    A trading plan may be entered into, modified or terminated only during an open trading window and while not in possession of material non-public information.  

 

    No trade may occur for the first 30 days after the trading plan is established. No modification or termination of a plan may affect any trade scheduled to occur within 30 days.  

DEDUCTIBILITY OF EXECUTIVE COMPENSATION

It is our policy to structure and administer our annual and long-term incentive compensation plans and stock option grants for our CEO and the other NEOs to maximize the tax deductibility of the payments as “performance-based compensation” for purposes of Section 162(m) to the extent practicable. In 2016, all such performance-based compensation was deductible. The Committee may provide compensation that is not tax deductible if it determines that such action is appropriate and in the best interests of the Company. Further, the rules and regulations promulgated under Section 162(m) are complicated, and may change from time to time, sometimes with retroactive effect. As such, there can be no guarantee that any compensation intended to qualify as “performance-based compensation” will so qualify.

The 2016 Omnibus Plan contains an overall limit on compensation paid to covered executives to comply with the conditions for determining “performance-based compensation” under Section 162(m). Under the terms of the 2016 Omnibus Plan, payment on annual incentive awards to an NEO who is subject to Section 162(m) in a taxable year may not exceed 0.4% of our pre-tax AOI for the year ended prior to the year in which payment is due. Awards of restricted stock units, performance shares, performance units and book value units and associated dividend equivalents have a performance condition that our pre-tax AOI must be positive in at least one fiscal year during which the award is outstanding for at least 276 days of that year, and a maximum limitation that the amount payable in any year may not exceed 0.4% of the highest amount of our pre-tax AOI for any of the three years ended prior to the year payment on those awards is due. For awards granted prior to May 2016 under the Omnibus Incentive Plan, the total payout on awards of annual incentives, restricted stock units, performance shares, performance units and book value units and associated dividend equivalents for an NEO who is subject to Section 162(m) in a taxable year cannot exceed 0.6% of pre-tax AOI for the prior year.

 

COMPENSATION COMMITTEE REPORT

The Compensation Committee of our Board of Directors has reviewed and discussed with management the Compensation Discussion and Analysis contained in this Proxy Statement. Based on its review and these discussions, the Compensation Committee has recommended to our Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference into our Annual Report on Form 10-K for the year ended December 31, 2016.

 

THE COMPENSATION COMMITTEE

Karl J. Krapek, Chair

Thomas J. Baltimore

Michael A. Todman

 

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Executive Compensation

2016 Summary Compensation Table

The following table presents, for the years ended December 31, 2016, 2015, and 2014, the compensation of Mr. Strangfeld, our principal executive officer, Mr. Falzon, our principal financial officer, and Messrs. Grier, Lowrey and Pelletier, our three most highly compensated executive officers (other than the principal executive officer and principal financial officer) who were serving as executive officers as of December 31, 2016.

For information on the role of each compensation component within the total compensation packages of the NEOs, please see the relevant description in the “Compensation Discussion and Analysis (“CD&A”).” The compensation data in this table is presented in accordance with the SEC disclosure rules. For the Compensation Committee’s view of 2016 performance year compensation, see the “Supplemental Compensation Analysis — Total Direct Compensation” in the CD&A.

 

 

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(1)  The amounts reported in the Salary column for 2016 include elective contributions of a portion of their base salary to the SESP by Messrs. Strangfeld, Falzon, Grier, Lowrey, and Pelletier in the amounts of $45,400, $19,769, $37,000, $20,200, and $20,200, respectively.

 

(2) The amounts reported in the Stock Awards column represent the aggregate grant date fair value for performance shares and performance units at target in each respective year. The maximum number of performance shares and performance units payable for 2016, 2015, and 2014 are 1.25 times the target amounts.

 

     For 2016, the maximum performance shares and units payable and valued at the grant date price of $63.59 to Messrs. Strangfeld, Falzon, Grier, Lowrey, and Pelletier are 103,896 or $6,606,747; 41,558 or $2,642,673; 83,116 or $5,285,346; 49,350 or $3,138,167; and 46,754 or $2,973,087, respectively.

 

     For 2015, the maximum performance shares and units payable and valued at the grant date price of $78.08 to Messrs. Strangfeld, Falzon, Grier, Lowrey, and Pelletier are 77,556 or $6,055,572; 27,374 or $2,137,362; 63,870 or $4,986,970; 41,060 or $3,205,965; and 36,498 or $2,849,764, respectively.

 

     For 2014, the maximum performance shares and units payable and valued at the grant date price of $84.53 to Messrs. Strangfeld, Falzon, Grier, Lowrey, and Pelletier are 72,158 or $6,099,516; 22,073 or $1,865,831; 59,425 or $5,023,195; 38,203 or $3,229,300; and 12,735 or $1,076,490, respectively. Mr. Pelletier received an additional grant upon his promotion to Executive Vice President in April 2014 that has a maximum number of performance shares and performance units payable and valued at the grant date price of $81.17 of 13,108 or $1,063,976.

 

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(3)  The amounts reported in the Options Awards column represent the aggregate grant date fair value for stock options granted in each respective year for the prior year’s performance as calculated under ASC Topic 718. The assumptions made in calculating the grant date fair value amounts for these stock options are incorporated herein by reference to the discussion of those assumptions and found below in the Grants of Plan-Based Awards Table. Note that the amounts reported in this column do not necessarily correspond to the actual economic value that will be received by the Named Executive Officers from the options.

 

(4)  The aggregate amounts reported in the Non-Equity Incentive Plan Compensation column for 2016 represent annual incentives paid in February 2017 for performance in 2016, excluding 30% of the total annual incentive carved out to the Book Value Performance Program; and the value of the book value units paid in February 2017, and additionally in April 2016 for Mr. Pelletier; for 2015 represent annual incentives paid in February 2016 for performance in 2015, excluding 30% of the total annual incentive carved out to the Book Value Performance Program; and the value of the book value units paid in February 2016, and additionally in April 2015 for Mr. Pelletier; for 2014 represent annual incentives paid in February 2015 for performance in 2014, excluding 30% of the total annual incentive carved out to the Book Value Performance Program; and the value of the book value units paid in February 2015:

 

     2016      2015      2014  
Name    Annual Incentive
Award
     Book Value Units
Value Paid
     Annual Incentive
Award
     Book Value Units
Value Paid
     Annual Incentive
Award
     Book Value Units
Value Paid
 
Strangfeld    $ 4,183,200      $ 4,764,238      $ 4,140,500      $ 4,612,768      $ 5,460,000      $ 3,813,192  
Falzon    $ 2,093,000      $ 1,701,452      $ 1,820,000      $ 1,266,410      $ 2,310,000      $ 658,637  
Grier    $ 3,556,000      $ 3,950,580      $ 3,570,000      $ 3,840,736      $ 4,550,000      $ 3,151,901  
Lowrey    $ 2,789,500      $ 2,951,704      $ 2,975,000      $ 2,902,390      $ 3,780,000      $ 2,346,216  
Pelletier    $ 2,789,500      $ 1,866,128      $ 2,240,000      $ 1,341,969      $ 2,800,000      $ 614,542  

 

     For Mr. Falzon, 2015, and 2014 also include the value of carried interest payments of $4,747 and $15,600, respectively.

 

     For Mr. Lowrey, 2016, 2015, and 2014 also include the value of carried interest payments of $64,393, $197,029, and $237,147, respectively.

 

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     The carried interest payments relate to carried interest programs in which Mr. Falzon and Mr. Lowrey participate as a result of previous positions held within the Company’s Asset Management Business. While Mr. Falzon and Mr. Lowrey are no longer entitled to invest in or be granted new carried interests in these programs, they will continue to receive distributions if and when they are earned.

 

(5) The amounts reported in the Change in Pension Value column represent the change in the actuarial present value of each NEO’s accumulated benefit under the Merged Retirement Plan, the Supplemental Retirement Plan, and the SERPs, as applicable, determined using interest rate and mortality rate assumptions consistent with those used for our consolidated financial statements on December 31, 2013, December 31, 2014, December 31, 2015, and December 31, 2016, as applicable; namely, the RP 2000 generational mortality table with white collar adjustments for 2013, and the RP 2014 generational mortality table with white collar adjustments, and an adjustment to reflect recent Prudential-specific experience for 2014, 2015, and 2016, an interest discount rate of 4.95% for 2013, 4.10% for 2014, 4.50% for 2015, and 4.15% for 2016, a Cash Balance Formula interest crediting rate of 4.25% for 2013, 2014, 2015 and 2016, and a PSI Cash Balance Formula interest crediting rate of 5.00% for 2013, 2014, 2015 and 2016. The amounts represented above may fluctuate significantly in a given year depending on a number of factors that affect the formula to determine pension benefits, including age, years of service, and the measurement of average annual earnings.

 

     Messrs. Strangfeld and Pelletier accrue pension benefits under the Traditional Pension Formula and Messrs. Falzon, Grier, and Lowrey accrue pension benefits under the Cash Balance Formula (both formulas are described in the “Pension Benefits” section of this Proxy Statement). In accordance with the provisions of the Traditional Pension Formula, the years of earnings used for determining Average Eligible Earnings change every two years (most recently on January 1, 2016).

 

     The amounts reported in this column include payments from the Supplemental Retirement Plan of $2,524 for Mr. Falzon, $21,367 for Mr. Grier and $13,899 for Mr. Lowrey in 2014; $5,549 for Mr. Falzon, $29,589 for Mr. Grier and $20,597 for Mr. Lowrey in 2015; and $10,643 for Mr. Falzon, $31,095 for Mr. Grier and $20,990 for Mr. Lowrey in 2016; and above-market interest on the SESP of $82 for Mr. Strangfeld, $6 for Mr. Falzon, $56 for Mr. Grier, $24 for Mr. Lowrey and $17 for Mr. Pelletier in 2014; $4,229 for Mr. Strangfeld, $359 for Mr. Falzon, $2,905 for Mr. Grier, $1,235 for Mr. Lowrey and $917 for Mr. Pelletier in 2015; and $10,388 for Mr. Strangfeld, $1,138 for Mr. Falzon, $7,239 for Mr. Grier, $3,158 for Mr. Lowrey, and $2,433 for Mr. Pelletier in 2016.

 

     The actual change in pension value for Mr. Strangfeld in 2015 was $(382,375). In accordance with SEC instructions, the amount included in this column for the change in pension value for 2015 is $0.

 

(6)  The amounts reported in the All Other Compensation column are itemized in the supplemental “All Other Compensation” table below.

 

(7)  Mr. Pelletier was appointed an executive officer in April 2014.

All Other Compensation

 

        Year        Perquisites(1)        PESP Contributions(2)        SESP Contributions(2)        Total  
John R. Strangfeld        2016        $ 47,964        $ 8,615        $ 45,400        $ 101,979  
       2015        $ 32,371        $ 8,615        $ 45,400        $ 86,386  
         2014        $ 32,437        $ 8,615        $ 45,800        $ 86,852  
Robert M. Falzon        2016        $ 17,478        $ 8,173        $ 19,769        $ 45,420  
       2015        $ 14,800        $ 8,308        $ 17,092        $ 40,200  
         2014        $ 15,047        $ 8,000        $ 15,600        $ 38,647  
Mark B. Grier        2016        $ 33,041        $ 10,600        $ 37,000        $ 80,641  
       2015        $ 30,175        $ 10,600        $ 37,000        $ 77,775  
         2014        $ 39,243        $ 10,400        $ 37,200        $ 86,843  
Charles F. Lowrey        2016        $ 17,330        $ 10,600        $ 20,200        $ 48,130  
       2015        $ 14,395        $ 10,600        $ 20,200        $ 45,195  
         2014        $ 15,470        $ 10,392        $ 20,400        $ 46,262  
Stephen Pelletier        2016        $ 35,806        $ 8,292        $ 20,200        $ 64,298  
       2015        $ 29,849        $ 8,173        $ 19,769        $ 57,791  
         2014        $ 20,661        $ 8,077        $ 14,908        $ 43,646  

 

(1)  For Messrs. Strangfeld and Grier, the amounts reported in the Perquisites column for 2016 represent the incremental cost for security services of $25,658 and $7,029 respectively, and the costs associated with Company-provided vehicles for personal and commuting purposes of $22,306 and $26,012, respectively. For Messrs, Falzon, Lowrey and Pelletier, the amounts reported represent the costs of commuting and limited personal use of Company-provided vehicles. The amounts reported in the table for commuting and personal use of vehicles reflect our determination of the costs allocable to the actual commuting and personal use of each individual and are based on a formula that takes into account various expenses, including costs associated with the driver and fuel.

 

(2)  The amounts reported in the PESP and SESP Contributions columns represent our contributions to the account of each NEO under (a) The Prudential Employee Savings Plan (the “PESP”), a defined contribution plan which provides employees with the opportunity to contribute up to 50% of eligible earnings in any combination of before-tax, Roth 401(k) and/or after-tax contributions (subject to Internal Revenue Code limits) and (b) the Prudential Supplemental Employee Savings Plan, a non-qualified plan which provides employees who exceed the Internal Revenue Code earnings limit ($265,000 in 2016) with the opportunity to defer up to 4% of eligible earnings in excess of the earnings limit. We match 100% of the first 4% of an employee’s before-tax or Roth 401(k) deferrals under the PESP (after one year of service) and 100% of an employee’s deferrals under the SESP.

 

66     |   Notice of Annual Meeting of Shareholders and 2017 Proxy Statement


Table of Contents
LOGO  

Executive Compensation

 

 

 

Grants of Plan-Based Awards

The following table presents, for each of the NEOs, information concerning awards under our Long-Term Incentive Program (including our Book Value Performance Program) and grants of equity awards made during 2016 for 2015 performance.

2016 Grants of Plan-Based Awards Table

 

         

Grant Date

    Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards ($)(1)
    Estimated Future Payouts
Under Equity Incentive
Plan Awards(2)
    All Other
Option
Awards;
Number of
Securities
Underlying
Options (#)(3)
   

Exercise
or Base
Price of
Option
Awards
($/Sh)

   

Grant Date
Fair Value of
Stock and
Option
Awards ($)(4)

 
      Number
of Book
Value
Units (#)
    Target
($)
    Maximum
($)
    Target
(#)
    Maximum
(#)
       

John R. Strangfeld,

Chairman and

Chief Executive Officer

   
Annual
Incentive
 
 
    n/a               6,000,000       12,000,000                                          
    PS       2/9/2016             41,558       51,948           2,642,673  
    PU       2/9/2016             41,558       51,948           2,642,673  
    Option       2/9/2016                 126,183     $ 63.59       1,864,985  
      BVU       2/9/2016       51,292       3,774,578                                                  

Robert M. Falzon,

Executive Vice President

and Chief Financial Officer

   
Annual
Incentive
 
 
    n/a         3,000,000       6,000,000            
    PS       2/9/2016             16,623       20,779           1,057,057  
    PU       2/9/2016             16,623       20,779           1,057,057  
    Option       2/9/2016                 50,474     $ 63.59       746,006  
      BVU       2/9/2016       21,472       1,580,124                                                  

Mark B. Grier,

Vice Chairman

   
Annual
Incentive
 
 
    n/a         5,100,000       10,200,000            
    PS       2/9/2016             33,246       41,558           2,114,113  
    PU       2/9/2016             33,246       41,558           2,114,113  
    Option       2/9/2016                 100,947     $ 63.59       1,491,997  
      BVU       2/9/2016       42,534       3,130,077                                                  

Charles F. Lowrey,

Executive Vice President

and Chief Operating Officer,

International Businesses

   
Annual
Incentive
 
 
    n/a         4,000,000       8,000,000            
    PS       2/9/2016             19,740       24,675           1,255,267  
    PU       2/9/2016             19,740       24,675           1,255,267  
    Option       2/9/2016                 59,937     $ 63.59       885,869  
      BVU       2/9/2016       30,236       2,225,067                                                  

Stephen Pelletier,

Executive Vice

President and Chief

Operating Officer, U.S.

   
Annual
Incentive
 
 
    n/a         4,000,000       8,000,000            
    PS       2/9/2016             18,701       23,377           1,189,197  
    PU       2/9/2016             18,701       23,377           1,189,197  
    Option       2/9/2016                 56,783     $ 63.59       839,253  
      BVU       2/9/2016       25,276       1,860,061                                                  

 

(1) The amounts reported in the Estimated Future Payouts Under Non-Equity Incentive Plan Awards column represent the potential amounts for annual incentives for the 2016 performance year. Actual amounts earned by the NEOs are reflected in the Summary Compensation Table. In addition, individual amounts are reported by grant date to represent the value of the book value units awarded to the NEOs under the Omnibus Plan on February 9, 2016, and reflected in the Number of Book Value Units column, based on the book value per share of the company of $73.59 as originally reported as of December 31, 2015.

 

(2) The amounts reported in the Estimated Future Payouts Under Equity Incentive Plan Awards columns represent performance shares and performance units awarded to the NEOs under the Omnibus Plan in 2016. Performance share and performance unit awards are granted for a three-year performance period with payout determined at the end of the period based on our performance against our ROE goals. The ROE goals for the 2016 grant are within a range of 10% to 14%.

 

(3) The amounts reported in the All Other Option Awards column represent the number of stock options granted to each Named Executive Officer under the Omnibus Plan in 2016. These stock options vest one-third each year on the anniversary of the grant date. These stock options expire 10 years from their respective grant date. The exercise price for the February 9, 2016 grant of stock options is the closing price of our Common Stock on the grant date of February 9, 2016 ($63.59 per share).

 

(4) The amounts in the Grant Date Fair Value column have been calculated in the case of performance shares and performance units as the target number of performance shares and performance units multiplied by the closing price of our Common Stock on the grant date of February 9, 2016 ($63.59 per share).

For stock options, the grant date fair values are hypothetical values developed under a binomial option pricing model, which is a complex, mathematical formula to determine fair value of stock options on the date of grant. The binomial option pricing model is a flexible, lattice-based valuation model that takes into consideration transferability, fixed estimate of volatility, and expected life of the options. As such, the amounts reported in the table are hypothetical values and may not reflect the actual economic value a Named Executive Officer would realize upon exercise.

We made the following assumptions when calculating the grant date fair value of the stock option grants: exercise price is equal to our share price on the grant date, and for the grants of February 9, 2016, 5.61 year life expected for each option, expected dividend yield is 3.92%, risk-free rate of return of 1.25%, and expected price volatility of 38.36%.

 

Notice of Annual Meeting of Shareholders and 2017 Proxy Statement   |       67  


Table of Contents
LOGO  

Executive Compensation

 

 

 

Outstanding Equity Awards

The following table provides information on the NEOs’ outstanding equity awards as of December 31, 2016. The equity awards reported in the Stock Awards columns consist of performance share and performance unit awards. The equity awards reported in the Option Awards columns consist of non-qualified stock options.

2016 Outstanding Equity Awards at Fiscal Year-End Table

 

 

            Option Awards(1)      Stock Awards  
Name    Grant Date      Number of
Securities
Underlying
Unexercised
Options
(# Exercisable)
     Number of
Securities
Underlying
Unexercised
Options
(# Unexercisable)
    

Option
Exercise
Price

($)

    

Option
Expiration

Date

     Equity Incentive
Plan Awards:
Number of Unearned
Shares, Units or
Rights That Have
Not Vested (#)(2)
     Equity Incentive
Plan Awards:
Market or Payout
Value of Unearned
Shares, Units or
Rights That Have
Not Vested ($)(2)
 
John R. Strangfeld      2/9/2016               126,183        63.59        2/9/2026        103,896        10,811,418  
     2/10/2015        28,634        57,268        78.08        2/10/2025        77,556        8,070,478  
     2/11/2014        49,062        24,532        84.53        2/11/2024        72,158        7,508,762  
     2/12/2013        247,094               57.00        2/12/2023        
     2/14/2012        223,685               59.41        2/14/2022        
       2/8/2011        170,667               64.01        2/8/2021                    
Robert M. Falzon      2/9/2016               50,474        63.59        2/9/2026        41,558        4,324,526  
     2/10/2015               20,213        78.08        2/10/2025        27,374        2,848,539  
       2/11/2014               7,504        84.53        2/11/2024        22,074        2,297,021  
Mark B. Grier      2/9/2016               100,947        63.59        2/9/2026        83,116        8,649,051  
     2/10/2015        23,581        47,162        78.08        2/10/2025        63,870        6,646,313  
     2/11/2014        40,404        20,202        84.53        2/11/2024        59,426        6,183,870  
     2/12/2013        135,660               57.00        2/12/2023        
       2/14/2012        57,895               59.41        2/14/2022                    
Charles F. Lowrey      2/9/2016               59,937        63.59        2/9/2026        49,350        5,135,361  
     2/10/2015        15,159        30,319        78.08        2/10/2025        41,060        4,272,704  
     2/11/2014        25,974        12,988        84.53        2/11/2024        38,204        3,975,509  
     2/12/2013        130,814               57.00        2/12/2023        
       2/14/2012        105,264               59.41        2/14/2022                    
Stephen Pelletier      2/9/2016               56,783        63.59        2/9/2026        46,754        4,865,222  
     2/10/2015        13,475        26,950        78.08        2/10/2025        36,498        3,797,982  
     4/7/2014        8,909        4,455        81.17        4/7/2024        13,108        1,364,019  
     2/11/2014        8,658        4,330        84.53        2/11/2024        12,736        1,325,309  
     2/14/2012        17,105               59.41        2/14/2022        
     2/8/2011        11,733               64.01        2/8/2021        
       2/9/2010        2,599               48.36        2/9/2020                    

 

(1) The options reported in the Option Awards column vest at the rate of one-third per year on the anniversary of the date of grant.

 

(2) The Equity Incentive Plan Awards columns reflect the number of outstanding performance shares and performance units that would be received by each Named Executive Officer at the maximum payout level for the 2016, 2015 and 2014 grants. The dollar values reported represent the estimated value of the outstanding performance shares and performance units at the maximum payout level for the 2016, 2015 and 2014 grants, based on the closing market price for our Common Stock on December 31, 2016 ($104.06 per share). Performance shares and performance units are subject to a three-year performance period with payout determined at the end of the period based on our performance against our ROE goals.

Grants were made for three-year performance cycles with the 2014 grant as the 2014-2016 performance cycle, the 2015 grant as the 2015-2017 performance cycle, and the 2016 grant as the 2016-2018 performance cycle.

 

68     |   Notice of Annual Meeting of Shareholders and 2017 Proxy Statement


Table of Contents
LOGO  

Executive Compensation

 

 

 

Option Exercises and Stock Vested

The following table provides information on the value realized by each of the NEOs as a result of the exercise of options and stock awards that vested from January 1, 2016 through December 31, 2016.

2016 Option Exercises and Stock Vested Table

 

       Option Awards        Stock Awards  
Name      Number of Shares
Acquired on Exercise
(#)