DEF 14A 1 d663078ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

(Amendment No. )

 

 

Filed by the Registrant  x                             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))
x   Definitive Proxy Statement
¨   Definitive Additional Materials
¨   Soliciting Material under § 240.14a-12

Phillips 66

(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):

x   No fee required.
¨   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
  (1)  

Title of each class of securities to which transaction applies:

 

 

     

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Aggregate number of securities to which transaction applies:

 

 

     

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

     

  (4)  

Proposed maximum aggregate value of transaction:

 

 

     

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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.
  (1)  

Amount Previously Paid:

 

 

     

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Form, Schedule or Registration Statement No.:

 

 

     

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Date Filed:

 

 

     

 

 

 


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LOGO

NOTICE OF 2014 ANNUAL STOCKHOLDERS MEETING

AND PROXY STATEMENT

March 26, 2014

Dear Phillips 66 Stockholder:

On behalf of your Board of Directors and management, you are cordially invited to attend the Annual Meeting of Stockholders to be held at the Westin Houston, Memorial City, 945 Gessner Road, Houston, Texas 77024, on Wednesday, May 7, 2014, at 9:00 a.m. Central Daylight Time.

Your vote is important. Whether or not you plan to attend in person, and no matter how many shares you own, please vote by telephone or on the Internet or mark your vote on the enclosed proxy card, sign it, date it, and return it by mail. By voting before the meeting, you will help us ensure that there are enough stockholders voting to hold a meeting and avoid added proxy solicitation costs. If you attend the meeting, you may vote in person, even if you have previously submitted a proxy, in which case your prior proxy will be disregarded. You may revoke your proxy by delivering a written revocation or a later dated proxy to the Corporate Secretary prior to the meeting, in which case your prior proxy also will be disregarded. Please see the instructions in the attached proxy statement under “About the Annual Meeting—How do I vote?

You will find information regarding the matters to be voted on at the meeting in the proxy statement. In addition to the formal items of business to be brought before the meeting, there will be a report on the operations of Phillips 66 during 2013 followed by a question and answer period.

We look forward to seeing you on May 7.

Sincerely,

 

LOGO

Greg C. Garland

Chairman of the Board and

Chief Executive Officer


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TABLE OF CONTENTS

 

Notice of 2014 Annual Meeting of Stockholders

     1   

About the Annual Meeting

     2   

Corporate Governance Matters and Communications with the Board

     7   

Board Leadership Structure

     8   

Board Risk Oversight

     10   

Code of Business Ethics and Conduct

     10   

Related Party Transactions

     10   

Nominating Processes of the Nominating and Governance Committee

     11   

Election of Directors and Director Biographies (Proposal 1)

     12   

Audit and Finance Committee Report

     18   

Proposal to Ratify the Appointment of Ernst & Young LLP (Proposal 2)

     19   

Executive Compensation

     21   

Role of the Human Resources and Compensation Committee

     21   

Human Resources and Compensation Committee Report

     22   

Compensation Discussion and Analysis

     24   

Executive Compensation Tables

     45   

Advisory Approval of Executive Compensation (Proposal 3)

     62   

Non-Employee Director Compensation

     63   

Equity Compensation Plan Information

     67   

Stock Ownership

     68   

Holdings of Major Stockholders

     68   

Section 16(a) Beneficial Ownership Reporting Compliance

     68   

Securities Ownership of Officers and Directors

     69   

Stockholder Proposal (Proposal 4)

     70   

Submission of Future Stockholder Proposals

     73   

Available Information

     73   

Appendix A – Financial Information

     A-1   

Appendix B – Non-GAAP Financial Measures

     B-1   


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NOTICE OF 2014 ANNUAL MEETING OF STOCKHOLDERS

 

Time

9:00 a.m. Central Daylight Time on Wednesday, May 7, 2014

 

Place

Westin Houston, Memorial City

945 Gessner Road

Houston, Texas 77024

 

Items of Business

To elect the three Directors named in this proxy statement (page 12)

To ratify the appointment of Ernst & Young LLP as independent registered public accounting firm for the Company for fiscal year 2014 (page 19)

To provide an advisory (non-binding) approval of the compensation of our Named Executive Officers (page 62)

To consider and vote on a stockholder proposal (page 70)

To transact other business properly coming before the meeting

 

Who Can Vote

You can vote if you were a stockholder of record as of March 14, 2014

 

Voting by Proxy

Please submit a proxy as soon as possible so that your shares can be voted at the meeting in accordance with your instructions. You may submit your proxy by any of the following methods:

-    Internet

-    telephone

-    mail

 

Date of Mailing

This notice and the proxy statement are first being mailed to stockholders on or about March 26, 2014.

By Order of the Board of Directors

 

LOGO

Paula A. Johnson

Corporate Secretary

 

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ABOUT THE ANNUAL MEETING

Who is soliciting my vote?

The Board of Directors of Phillips 66, which we may refer to as the Board, is soliciting proxies to be voted at the 2014 Annual Meeting of Stockholders of Phillips 66, which we refer to as the Annual Meeting.

How does the Board of Directors recommend that I vote my shares?

The recommendation of the Board of Directors can be found with the description of each proposal in this proxy statement. In summary, the Board of Directors recommends a vote:

 

   

FOR the Board’s proposal to elect nominated Directors

 

   

FOR the Board’s proposal to ratify the appointment of Ernst & Young LLP as independent registered public accounting firm for Phillips 66 for fiscal year 2014

 

   

FOR the advisory (non-binding) approval of the compensation of the Company’s Named Executive Officers

 

   

AGAINST the stockholder proposal

Unless you give other instructions on the proxy card you return, the persons named as proxy holders on the proxy card will vote in accordance with the recommendations of the Board of Directors.

Who is entitled to vote?

You may vote if you were the record owner of Phillips 66 common stock as of the close of business on March 14, 2014, the record date established by the Board of Directors. Each share of common stock is entitled to one vote. As of March 14, 2014, we had 567,198,289 shares of common stock outstanding and entitled to vote. There is no cumulative voting.

How many shares must be present to hold the meeting?

In order for us to hold our meeting, holders of a majority of our outstanding shares of common stock as of March 14, 2014, must be present in person or by proxy at the meeting. This is referred to as a quorum. Your shares are counted as present at the Annual Meeting if you attend the meeting and vote in person or if you properly return a proxy by Internet, telephone or mail. Abstentions and broker non-votes will also be counted for purposes of establishing a quorum at the meeting.

What is a broker non-vote?

Applicable rules permit brokers to vote shares held for the benefit of their clients on routine matters when the brokers have not received voting instructions from the beneficial owner on how to vote those shares. The ratification of an independent auditor is an example of a routine matter on which brokers may vote in this manner. Brokers may not vote shares held for the benefit of

 

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their clients on non-routine matters, such as the election of directors, proposals relating to executive compensation and proposals to amend certificates of incorporation and certain other corporate governance changes, unless they have received voting instructions from the beneficial owner on how to vote those shares. Shares that are not voted by brokers on non-routine matters are called broker non-votes.

How many votes are needed to approve each of the proposals?

Each of the director nominees requires the affirmative “FOR” vote of the majority of the votes cast in person or by proxy at the meeting. All other proposals submitted require the affirmative “FOR” vote of a majority of those shares present in person or represented by proxy at the meeting and entitled to vote.

How do I vote?

You can vote either in person at the meeting or by proxy.

This proxy statement, the accompanying proxy card and the Company’s 2013 Summary Annual Report to Stockholders are being made available to the Company’s stockholders on the Internet at www.proxyvote.com through the notice and access process. The Company’s 2013 consolidated financial statements and report of independent registered public accounting firm, management’s discussion and analysis of financial condition and results of operations, information concerning the quarterly financial data for the past two fiscal years, and other information are provided in Appendix A to this proxy statement.

To vote by proxy, you must do one of the following:

 

   

Vote over the Internet (instructions are on the proxy card)

 

   

Vote by telephone (instructions are on the proxy card)

 

   

If you elected to receive a hard copy of your proxy materials, fill out the enclosed proxy card, date and sign it, and return it in the enclosed postage-paid envelope

If you hold your Phillips 66 stock in a brokerage account (that is, in “street name”), your ability to vote by telephone or over the Internet depends on your broker’s voting process. Please follow the directions on your proxy card or voter instruction form carefully.

Even if you plan to attend the Annual Meeting, we encourage you to vote your shares by proxy. If you plan to vote in person at the Annual Meeting and you hold your Phillips 66 stock in street name, you must obtain a proxy from your broker and bring that proxy to the meeting.

How do I vote if I hold my stock through a Phillips 66 employee benefit plan?

If you hold your stock through a Phillips 66 employee benefit plan, you must either:

 

   

Vote over the Internet (instructions are in the email sent to you or on the notice and access form)

 

   

Vote by telephone (instructions are on the notice and access form)

 

   

If you elected to receive a hard copy of your proxy materials, fill out the enclosed voting instruction form, date and sign it, and return it in the enclosed postage-paid envelope

 

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You will receive a separate voting instruction form for each employee benefit plan in which you hold Phillips 66 stock. Please pay close attention to the deadline for returning your voting instruction form to the plan trustee. The voting deadline for each plan is set forth on the voting instruction form. Please note that different plans may have different deadlines.

How can I revoke my proxy?

You can revoke your proxy by sending written notice of revocation of your proxy to our Corporate Secretary so that it is received prior to the close of business on May 6, 2014.

Can I change my vote?

Yes. You can change your vote at any time before the polls close at the Annual Meeting, which will void any earlier vote. You can change your vote by:

 

   

Voting again by telephone or over the Internet prior to 11:59 p.m. Eastern Daylight Time on May 6, 2014

 

   

Signing another proxy card with a later date and returning it to us prior to the meeting

 

   

Voting again at the meeting

If you hold your Phillips 66 stock in street name, you must contact your broker to obtain information regarding changing your voting instructions.

Who counts the votes?

We have hired Broadridge Financial Solutions, Inc. to count the votes represented by proxies and cast by ballot, and Jim Gaughan of Carl T. Hagberg and Associates has been appointed to act as Inspector of Election.

Will my shares be voted if I don’t provide my proxy and don’t attend the Annual Meeting?

For shares held in your name, if you do not provide a proxy or vote your shares at the Annual Meeting, those shares will not be voted.

If you hold shares in street name, your broker may be able to vote those shares for certain “routine” matters even if you do not provide the broker with voting instructions. Only the ratification of Ernst & Young LLP as our independent registered public accounting firm for 2014 is considered to be a routine matter.

If you do not give your broker instructions on how to vote your shares, the broker will return the proxy card without voting on proposals not considered “routine.” This is a broker non-vote. Without instructions from you, the broker may not vote on any proposals other than the ratification of Ernst & Young LLP as our independent registered public accounting firm for 2014.

How are votes counted?

For all proposals, you may vote “FOR,” “AGAINST,” or “ABSTAIN.” If you vote to “ABSTAIN” on the election of directors, it is not considered as a vote cast and, therefore, your vote will reduce the number, but not the percentage, of affirmative votes needed to elect the nominees. If you vote to “ABSTAIN” on the other proposals, your shares are still considered as present and entitled to vote and, therefore, your abstention has the same effect as a vote “AGAINST.”

 

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What if I return my proxy but don’t vote for some of the matters listed on my proxy card?

If you return a signed proxy card without indicating your vote, your shares will be voted “FOR” the director nominees listed on the card, “FOR” the ratification of Ernst & Young LLP as the independent registered public accounting firm for Phillips 66 for fiscal year 2014, “FOR” the approval of the compensation of our Named Executive Officers, and “AGAINST” the stockholder proposal.

Could other matters be decided at the Annual Meeting?

We are not aware of any other matters to be presented at the Annual Meeting. If any other matters are properly brought before the Annual Meeting, the persons named in your proxies will vote in accordance with their best judgment. Discretionary authority to vote on other matters is included in the proxy.

Who can attend the Annual Meeting?

The Annual Meeting is open to all holders of Phillips 66 common stock. Each stockholder is permitted to bring one guest. No cameras, recording equipment, large bags, briefcases or packages will be permitted in the Annual Meeting, and security measures will be in effect to provide for the safety of attendees.

Do I need a ticket to attend the Annual Meeting?

Yes, you will need an admission ticket or proof of ownership of Phillips 66 stock to enter the meeting. If your shares are registered in your name, you will find an admission ticket attached to the proxy card sent to you. If your shares are held in the name of your broker or bank or you received your materials electronically, you will need to bring evidence of your stock ownership, such as your most recent brokerage statement. All stockholders will be required to present valid picture identification. IF YOU DO NOT HAVE VALID PICTURE IDENTIFICATION AND EITHER AN ADMISSION TICKET OR PROOF THAT YOU OWN PHILLIPS 66 STOCK, YOU MAY NOT BE ADMITTED INTO THE MEETING.

How can I access the Phillips 66 proxy materials and annual report electronically?

This proxy statement, the accompanying proxy card and the Company’s 2013 Summary Annual Report are being made available to the Company’s stockholders on the Internet at www.proxyvote.com through the notice and access process. Most stockholders can elect to view future proxy statements and annual reports over the Internet instead of receiving paper copies in the mail.

If you own Phillips 66 stock in your name, you can choose this option, and help conserve resources and save the cost of producing and mailing these documents, by checking the box for electronic delivery on your proxy card or by following the instructions provided when you vote by telephone or over the Internet. If you hold your Phillips 66 stock through a bank, broker or other holder of record, please refer to the information provided by that entity for instructions on how to elect to view future proxy statements and annual reports over the Internet.

If you choose to view future proxy statements and annual reports over the Internet, you will receive a Notice of Internet Availability next year containing the Internet address to use to access our proxy statement and annual report. Your choice will remain in effect unless you change your

 

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election following the receipt of a Notice of Internet Availability. You do not have to elect Internet access each year. If you later change your mind and would like to receive paper copies of our proxy statements and annual reports, you can request both by phone at 800-579-1639, by email at sendmaterial@proxyvote.com, through the Internet at www.proxyvote.com or by writing to Phillips 66, c/o Broadridge Financial Solutions, Inc., 51 Mercedes Way, Edgewood, NY 11717. You will need your 12-digit control number located on your Notice of Internet Availability to request a package. You will also be provided with the opportunity to receive a copy of the proxy statement and annual report in future mailings.

Will my vote be kept confidential?

The Board of Directors has a policy that stockholder proxies, ballots, and tabulations that identify stockholders are to be maintained in confidence. No such document will be available for examination, and the identity and vote of any stockholder will not be disclosed, except as necessary to meet legal requirements and allow the inspectors of election to certify the results of the stockholder vote. The policy also provides that inspectors of election must be independent and cannot be employees of the Company. Occasionally, stockholders provide written comments on their proxy card that may be forwarded to management.

What is the cost of this proxy solicitation?

The Board of Directors has sent you this proxy statement. Our directors, officers and employees may solicit proxies by mail, by email, by telephone or in person. Those persons will receive no additional compensation for any solicitation activities. We will request banking institutions, brokerage firms, custodians, trustees, nominees and fiduciaries to forward solicitation materials to the beneficial owners of common stock held of record by those entities, and we will, upon the request of those record holders, reimburse reasonable forwarding expenses. We will pay the costs of preparing, printing, assembling and mailing the proxy materials used in the solicitation of proxies. In addition, we have hired Alliance Advisors, LLC to assist us in soliciting proxies, which it may do by telephone or in person. We anticipate paying Alliance Advisors, LLC a fee of $15,000, plus expenses.

Why did my household receive a single set of proxy materials?

Securities and Exchange Commission (SEC) rules permit us to deliver a single copy of an annual report and proxy statement to any household not participating in electronic proxy material delivery at which two or more stockholders reside, if we believe the stockholders are members of the same family. This benefits both you and the Company, as it eliminates duplicate mailings that stockholders living at the same address receive and conserves resources and reduces printing and mailing costs. This rule applies to any annual reports, proxy statements, proxy statements combined with a prospectus or information statements. Each stockholder will continue to receive a separate proxy card or voting instruction card. Your household may have received a single set of proxy materials this year. If you prefer to receive your own copy now or in future years, please request a duplicate set by phone at 800-579-1639, through the Internet at www.proxyvote.com, by email at sendmaterial@proxyvote.com, or by writing to Phillips 66, c/o Broadridge Financial Solutions, Inc., 51 Mercedes Way, Edgewood, NY 11717. Stockholders sharing the same address can request delivery of a single copy of these materials using the same methods described in the preceding sentence. If a broker or other nominee holds your shares, you may continue to receive some duplicate mailings. Certain brokers will eliminate duplicate account mailings by allowing stockholders to consent to such elimination, or through implied consent if a stockholder does not request continuation of duplicate mailings. Because not all brokers and nominees may offer stockholders the opportunity to request eliminating duplicate mailings, you may need to contact your broker or nominee directly to discontinue duplicate mailings to your household.

 

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CORPORATE GOVERNANCE MATTERS AND

COMMUNICATIONS WITH THE BOARD

The Nominating and Governance Committee and the Board of Directors annually review the Company’s governance structure to take into account changes in SEC and New York Stock Exchange (NYSE) rules, as well as current best practices. Our Corporate Governance Guidelines, posted on the “Investors” section of the Company’s website under the “Governance” caption and available in print upon request (see “Available Information” on page 73), address the following matters, among others: director qualifications; director responsibilities; committees of the board; director access to officers, employees and independent advisors; director compensation; performance evaluations of the board; director orientation and continuing education; and Chief Executive Officer (CEO) evaluation and succession planning.

Independence Determinations

The Corporate Governance Guidelines also contain director independence standards, which are consistent with the standards set forth in the NYSE listing standards, to assist the Board of Directors in determining the independence of the Company’s Directors. The Board of Directors has determined that each Director, except Messrs. Garland and Lowe, meets the standards regarding independence set forth in the Corporate Governance Guidelines and is free of any material relationship with the Company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company). Mr. Garland is not considered independent because he is an executive officer of the Company. Mr. Lowe is not considered independent because of his affiliation with ConocoPhillips prior to our 2012 spin-off from ConocoPhillips. In making independence determinations, the Board of Directors specifically considered the fact that many of our Directors are directors, retired officers or stockholders of companies with which we conduct business. In addition, some of our Directors serve as employees of, or consultants to, companies that do business with Phillips 66 and its affiliates (as further described in “Related Party Transactions” on page 10). Finally, some of our Directors may purchase retail products (such as gasoline, fuel additives or lubricants) from the Company. In all cases, it was determined that the nature of the business conducted and the interest of the Director by virtue of such position were immaterial both to the Company and to such Director.

Communications with the Board

The Board of Directors maintains a process for stockholders and interested parties to communicate with the Board of Directors. Stockholders and interested parties may communicate with the Board of Directors by contacting our Corporate Secretary, Paula A. Johnson, as provided below:

 

Mailing Address:

 

Corporate Secretary

Phillips 66

P.O. Box 4428

Houston, TX 77210

Phone Number:

  (281) 293-6600

Internet:

  Investors” section of the Company’s website under the “Governance” caption

Relevant communications are distributed to the Board of Directors or to any individual Director or Directors, as appropriate, depending on the facts and circumstances outlined in the communication. In that regard, the Board has requested that certain items that are unrelated to its duties and responsibilities be excluded, such as: business solicitations or advertisements; junk mail and mass

 

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mailings; new product suggestions; product complaints; product inquiries; resumes and other forms of job inquiries; spam; and surveys. In addition, material that is considered hostile, threatening, illegal or similarly unsuitable will be excluded. Any communication that is filtered out is made available to any non-employee Director upon request.

Annual Meeting Attendance

Recognizing that director attendance at the Company’s Annual Meeting can provide the Company’s stockholders with an opportunity to communicate with the Directors about issues affecting the Company, the Company actively encourages our Directors to attend the Annual Meeting of Stockholders. All of our Directors attended the 2013 Annual Meeting of Stockholders.

 

BOARD LEADERSHIP STRUCTURE

Chairman and CEO Roles

Although the Board of Directors retains the authority to separate the positions of Chairman and CEO if it deems appropriate in the future, the Board currently believes it is in the best interest of the Company’s stockholders to combine them. Doing so enables one person to guide the Board in setting priorities for the Company and in addressing the risks and challenges the Company faces. The Board of Directors currently believes that, while its non-employee Directors bring a diversity of skills and perspectives to the Board, the Company’s CEO, by virtue of his day-to-day involvement in managing the Company, is best suited at this time to serve as Chairman and perform this unified role.

The Board of Directors believes there is no single organizational model that is the best and most effective in all circumstances. As a consequence, the Board of Directors periodically considers whether the offices of Chairman and CEO should continue to be combined and who should serve in such capacities. In determining the best organizational structure following our spin-off from ConocoPhillips, combining the offices of Chairman and CEO was decided to be in the best interests of the Company and its stockholders. The Board of Directors will periodically reexamine its corporate governance policies and leadership structures to ensure that they continue to meet the Company’s needs.

Independent Director Leadership

The Board of Directors has adopted strong governance principles to ensure that an appropriate balance of power exists between the non-employee Directors and management, including:

 

   

appointing a Lead Director

 

   

requiring a substantial majority of independent directors

 

   

having only independent directors serve on the Audit and Finance Committee, the Human Resources and Compensation Committee, and the Nominating and Governance Committee

 

   

holding executive sessions of the non-employee Directors at each Board meeting

 

   

having only independent directors evaluate the CEO’s performance annually and approve the CEO’s pay

 

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Mr. McGraw currently serves as our Lead Director. In appointing him, the Board of Directors considered it to be useful and appropriate to designate an independent Director to serve in a lead capacity to coordinate the activities of the non-employee Directors and to perform such other duties and responsibilities as the Board of Directors may determine. Specifically, those duties include:

 

   

advising the Chairman as to an appropriate schedule of Board meetings, seeking to ensure that the non-employee Directors can perform their duties responsibly while not interfering with operations

 

   

providing the Chairman with input as to the preparation of the agendas for the Board and committee meetings and assuring that there is sufficient time for discussion of all agenda items

 

   

advising the Chairman as to the quality, quantity and timeliness of the flow of information from management that is necessary for the non-employee Directors to perform their duties effectively and responsibly, including specifically requesting certain materials be provided to the Board

 

   

recommending to the Chairman the retention of consultants who report directly to the Board of Directors

 

   

interviewing all board candidates and making nomination recommendations to the Nominating and Governance Committee and the Board of Directors

 

   

assisting the Board of Directors and Company officers in assuring compliance with and implementation of the Corporate Governance Guidelines

 

   

having the authority to call meetings of the non-employee Directors, as well as to develop the agenda for and moderate any such meetings and executive sessions of the non-employee Directors

 

   

acting as principal liaison between the non-employee Directors and the Chairman on sensitive issues

 

   

participating in the periodic discussion of CEO performance with the Human Resources and Compensation Committee

 

   

ensuring the Board of Directors conducts an annual self-assessment and meeting with the CEO to discuss the results of the annual self-assessment

 

   

working with the Nominating and Governance Committee to recommend the membership of the various Board committees, as well as selection of the committee chairs

The Board of Directors believes that its current structure and processes encourage its non-employee Directors to be actively involved in guiding the work of the Board. The chairs of the Board’s committees review their agendas and committee materials in advance, communicating directly with other Directors and members of management as each deems appropriate. Moreover, each Director is free to suggest agenda items and to raise matters at Board and committee meetings that are not on the agenda.

Our Corporate Governance Guidelines require that the non-employee Directors meet in executive session at every meeting and that the independent Directors meet in executive session at least annually. As Lead Director, Mr. McGraw presides at such executive sessions. Each executive session

 

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may include discussions of, among other things, (1) the performance of the Chairman and the Chief Executive Officer, (2) matters concerning the relationship of the Board of Directors with the members of senior management, and (3) such other matters as the non-employee Directors deem appropriate. No formal action of the Board of Directors is taken at these meetings, although the non-employee Directors may subsequently recommend matters for consideration by the full Board. The Board of Directors may invite guest attendees for the purpose of making presentations, responding to questions, or providing counsel on specific matters within their areas of expertise.

 

BOARD RISK OVERSIGHT

Although the Company’s management is responsible for the day-to-day management of risks to the Company, the Board of Directors has broad oversight responsibility for the Company’s risk management programs. In this oversight role, the Board of Directors is responsible for satisfying itself that the risk management processes designed and implemented by the Company’s management are functioning as intended and that necessary steps are taken to foster a culture of risk-adjusted decision making throughout the organization. In carrying out its oversight responsibility, the Board of Directors has delegated to individual committees certain elements of its oversight function. In this context, the Board of Directors delegated authority to the Audit and Finance Committee to facilitate coordination among the Board’s committees with respect to oversight of the Company’s risk management programs. As part of this authority, the Audit and Finance Committee regularly discusses the Company’s risk assessment and risk management policies to ensure that our risk management programs are functioning properly. The Board of Directors receives regular updates from its committees on individual areas of risk, such as updates on financial and control risks from the Audit and Finance Committee; health, safety, environmental and reputational risks from the Public Policy Committee; and compensation program risks from the Human Resources and Compensation Committee. The Board of Directors exercises its oversight function with respect to all material risks to the Company, which are identified and discussed in the Company’s public filings with the SEC.

 

CODE OF BUSINESS ETHICS AND CONDUCT

Phillips 66 has adopted a Code of Business Ethics and Conduct for Directors and Employees designed to help directors and employees resolve ethical issues in an increasingly complex global business environment. Our Code of Business Ethics and Conduct applies to all directors and employees, including the CEO and the Chief Financial Officer. Our Code of Business Ethics and Conduct covers topics including, but not limited to, conflicts of interest, insider trading, competition and fair dealing, discrimination and harassment, confidentiality, payments to government personnel, anti-boycott laws, U.S. embargoes and sanctions, compliance procedures and employee complaint procedures. Our Code of Business Ethics and Conduct is posted on the “Investors” section of our website under the “Governance” caption. Stockholders may also request printed copies of our Code of Business Ethics and Conduct by following the instructions located under the caption “Available Information” on page 73.

 

RELATED PARTY TRANSACTIONS

Our Code of Business Ethics and Conduct requires that all directors and executive officers promptly bring to the attention of the General Counsel and, in the case of Directors, the Chair of the Nominating and Governance Committee or, in the case of executive officers, the Chair of the Audit and Finance Committee, any transaction or relationship that arises and of which she or he becomes aware that reasonably could be expected to constitute a related party transaction. Any such transaction or relationship is reviewed by the Company’s management and the appropriate Board Committee to ensure that it does not constitute a conflict of interest and is reported appropriately. Additionally, the

 

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Nominating and Governance Committee conducts an annual review of related party transactions between each of our directors and the Company (and its subsidiaries) and makes recommendations to the Board regarding the continued independence of each Board member. In 2013, there were no related party transactions in which the Company (or a subsidiary) was a participant and in which any director or executive officer (or their immediate family members) had a direct or indirect material interest. The Nominating and Governance Committee also considered relationships that, while not constituting related party transactions where a director had a direct or indirect material interest, nonetheless involved transactions between the Company and an organization with which a director is affiliated, whether through employment status or by virtue of serving as director. Included in its review were ordinary course of business transactions with companies employing a director, such as ordinary course of business transactions with McGraw Hill Financial, of which Mr. McGraw serves as Chairman of the Board, and JPMorgan Chase & Co., of which Mr. Tilton serves as Chairman of the Midwest. The Nominating and Governance Committee determined that there were no transactions impairing the independence of any member of the Board.

 

NOMINATING PROCESSES OF

THE NOMINATING AND GOVERNANCE COMMITTEE

The Nominating and Governance Committee, which we refer to as the Nominating Committee, consists of three non-employee Directors, all of whom are independent under NYSE listing standards and our Corporate Governance Guidelines. The Nominating Committee identifies, investigates and recommends director candidates to the Board of Directors with the goal of creating a balance of knowledge, experience and diversity. Generally, the Nominating Committee identifies candidates through the use of a search firm or the business and organizational contacts of the directors and management. Our By-Laws permit stockholders to nominate candidates for director election at a stockholders meeting whether or not such nominee is submitted to and evaluated by the Nominating Committee. Stockholders who wish to submit nominees for election at an annual or special meeting of stockholders should follow the procedures described under “Submission of Future Stockholder Proposals” on page 73. The Nominating Committee will consider director candidates recommended by stockholders. If a stockholder wishes to recommend a candidate for nomination by the Nominating Committee, he or she should follow the same procedures referred to above for nominations to be made directly by the stockholder. In addition, the stockholder should provide such other information deemed relevant to the Nominating Committee’s evaluation. Candidates recommended by the Company’s stockholders are evaluated on the same basis as candidates recommended by the Company’s directors, CEO, other executive officers, third-party search firms or other sources.

 

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 ELECTION OF DIRECTORS AND DIRECTOR BIOGRAPHIES

(Proposal 1 on the Proxy Card)

What am I voting on?

You are voting on a proposal to elect nominees to a three-year term as Directors of the Company.

What is the makeup of the Board of Directors and how often are the members elected?

Our By-Laws provide that the Directors are divided into three classes, which are to be as nearly as possible equal in size, with one class being elected each year. The Board of Directors has set the current number of Directors at eight, with two classes of three Directors each and one class of two Directors. Any director vacancies created between annual stockholder meetings (such as by a current director’s death, resignation or removal for cause or an increase in the number of directors) may be filled by a majority vote of the remaining directors then in office. Any director appointed in this manner would hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which he or she has been appointed expires. If a vacancy resulted from an action of our stockholders, only our stockholders would be entitled to elect a successor.

What if a nominee is unable or unwilling to serve?

That is not expected to occur. If it does and the Board of Directors does not elect to reduce the size of the Board, shares represented by proxies will be voted for a substitute nominated by the Board of Directors.

How are Directors compensated?

Please see our discussion of non-employee Director compensation beginning on page 63.

How often did the Board meet in 2013?

The Board of Directors met six times in 2013. Each Director attended at least 75 percent of the aggregate of:

 

   

the total number of meetings of the Board in 2013 (held during the period for which she or he was a Director), and

 

   

the total number of full-committee meetings held in 2013 by all committees of the Board on which she or he served (during the periods that she or he served)

Do the Board Committees have written charters?

Yes. The charters for our Audit and Finance Committee, Executive Committee, Human Resources and Compensation Committee, Nominating and Governance Committee and Public Policy Committee can be found in the “Investors” section on the Phillips 66 website under the “Governance” caption. Stockholders may also request printed copies of these charters by following the instructions located under the caption “Available Information” on page 73.

 

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What are the Committees of the Board?

 

Committee   Members        Principal Functions   Number of
Meetings
in 2013
 
Audit and Finance  

William R. Loomis, Jr.*

Victoria J. Tschinkel

Marna C. Whittington

    Discusses, with management, the independent auditors and the internal auditors, the integrity of the Company’s accounting policies, internal controls, financial statements, financial reporting practices, and select financial matters, covering the Company’s capital structure, complex financial transactions, financial risk management, retirement plans and tax planning.     13   
        Reviews significant corporate risk exposures and steps management has taken to monitor, control and report such exposures.    
        Monitors the qualifications, independence and performance of our independent auditors and internal auditors.    
        Monitors our compliance with legal and regulatory requirements and corporate governance guidelines, including our Code of Business Ethics and Conduct.    
            Maintains open and direct lines of communication with the Board and our management, internal auditors and independent auditors.        

Executive

 

Greg C. Garland*

J. Brian Ferguson

William R. Loomis, Jr.

Harold W. McGraw III

Victoria J. Tschinkel

      Exercises the authority of the full Board between Board meetings on all matters other than (1) those matters expressly delegated to another committee of the Board, (2) the adoption, amendment or repeal of any of our By-Laws and (3) matters that cannot be delegated to a committee under statute or our Certificate of Incorporation or By-Laws.     1   
Human Resources and Compensation  

J. Brian Ferguson*

Harold W. McGraw III

Glenn F. Tilton

    Oversees our executive compensation policies, plans, programs and practices.     7   
      Assists the Board in discharging its responsibilities relating to the fair and competitive compensation of our executives and other key employees.    
            Reviews at least annually the performance (together with the Lead Director) and sets the compensation of the CEO.        
Nominating and Governance  

Harold W. McGraw III*

J. Brian Ferguson

Glenn F. Tilton

    Selects and recommends director candidates to the Board to be submitted for election at Annual Meetings and to fill any vacancies on the Board.     6   
      Recommends committee assignments to the Board.    
        Reviews and recommends to the Board compensation and benefits policies for our non-employee Directors.    
        Reviews and recommends to the Board appropriate corporate governance policies and procedures for our Company.    
        Conducts an annual assessment of the qualifications and performance of the Board.    
            Reviews and reports to the Board annually on succession planning for the CEO.        
Public Policy  

Victoria J. Tschinkel*

William R. Loomis, Jr.

John E. Lowe

Marna C. Whittington

    Advises the Board on current and emerging domestic and international public policy issues.     6   
      Assists the Board on the development, review and approval of policies and budgets for charitable and political contributions.    
            Advises the Board on compliance with policies, programs and practices regarding health, safety and environmental protection.        

 

* Committee Chairperson

 

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What criteria were considered by the Nominating and Governance Committee in selecting the nominees?

In selecting the 2014 nominees for Director, the Nominating Committee sought candidates who possess the highest personal and professional ethics, integrity and values, and are committed to representing the long-term interests of the Company’s stockholders. In addition to reviewing a candidate’s background and accomplishments, the Nominating Committee reviewed candidates in the context of the current composition of the Board and the evolving needs of the Company’s businesses. The Nominating Committee also considered the number of boards on which the candidate already serves. It is the Board’s policy that at all times at least a substantial majority of its members meets the standards of independence promulgated by the NYSE and the SEC, and as set forth in the Company’s Corporate Governance Guidelines. The Nominating Committee also seeks to ensure that the Board reflects a range of talents, ages, skills, experiences, diversity, and expertise, particularly in the areas of accounting and finance, management, domestic and international markets, leadership, and energy related industries, sufficient to provide sound and prudent guidance with respect to the Company’s operations and interests. The Board seeks to maintain a diverse membership, but does not have a separate policy on diversity. The Board also requires that its members be able to dedicate the time and resources necessary to ensure the diligent performance of their duties on the Company’s behalf, including attending Board and applicable committee meetings.

The following are some of the key qualifications and skills the Nominating Committee considered in evaluating the director nominees. The individual biographies below provide additional information about each nominee’s specific experiences, qualifications and skills.

 

   

CEO experience. Directors with experience as CEO of public corporations provide the Company with valuable insights. These individuals have a demonstrated record of leadership qualities and a practical understanding of organizations, processes, strategy, risk and risk management and the methods to drive change and growth. Through their service as top leaders at other organizations, they also bring valuable perspective on common issues affecting other companies and Phillips 66.

 

   

Financial reporting experience. An understanding of finance and financial reporting processes is important. The Company measures its operating and strategic performance by reference to financial targets. In addition, accurate financial reporting and robust auditing are critical to the Company’s success. We seek to have a number of directors who qualify as audit committee financial experts, and we expect all of our directors to be financially knowledgeable.

 

   

Industry experience. Directors with experience as executives or directors or in other leadership positions in the energy industry bring pertinent experiences to the Board. These directors have valuable perspective on issues specific to the Company’s business.

 

   

Global experience. As a global company, directors with global business or international experience provide valued perspective on our operations.

 

   

Environmental experience. The perspective of directors who have experience within the environmental regulatory field is valued as we implement policies and conduct operations in order to ensure that our actions today will not only provide the energy needed to drive economic growth and social well-being, but also secure a stable and healthy environment for tomorrow.

 

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Who are this year’s nominees?

The following Directors are standing for election this year to hold office until the 2017 Annual Meeting of Stockholders. Included below is a listing of each nominee’s name, age, tenure and qualifications.

 

LOGO   

William R. Loomis, Jr., 65

Director since April 2012

 

Mr. Loomis has been an independent financial advisor since 2009. He was a general partner and managing director of Lazard Freres & Co. from 1984 to 2002, the CEO of Lazard LLC from 2000 to 2001 and a limited managing director of Lazard LLC from 2002 to 2004. He currently serves on the board of L Brands, Inc., and is also a senior advisor to Lazard LLC.

 

Skills and qualifications: Mr. Loomis has extensive executive experience, financial expertise and substantial history as a senior strategic advisor to complex businesses and multiple executives.

LOGO   

Glenn F. Tilton, 65

Director since April 2012

 

Mr. Tilton has served as Chairman of the Midwest of JPMorgan Chase & Co. since 2011. From September 2002 to October 2010, he served as Chairman, President and CEO of UAL Corporation, a holding company, and United Air Lines, Inc., an air transportation company and wholly-owned subsidiary of UAL Corporation. UAL Corporation filed a voluntary bankruptcy petition under the federal bankruptcy laws in December 2002 and exited bankruptcy in February 2006. Mr. Tilton previously spent more than 30 years in increasingly senior roles with Texaco Inc., including Chairman and CEO in 2001. He currently serves on the boards of Abbott Laboratories and AbbVie Inc. (as lead director).

 

Skills and qualifications: Mr. Tilton has strong management experience overseeing complex multinational businesses operating in highly regulated industries, as well as 30-years experience in the energy industry and expertise in finance and capital markets matters.

LOGO   

Marna C. Whittington, 66

Director since May 2012

 

Dr. Whittington was CEO of Allianz Global Investors Capital, a diversified global investment firm, from 2002 until her retirement in January 2012. She was Chief Operating Officer of Allianz Global Investors, the parent company of Allianz Global Investors Capital, from 2001 to 2011. Prior to that, she was Managing Director and Chief Operating Officer of Morgan Stanley Asset Management. Dr. Whittington started in the investment management industry in 1992, joining Philadelphia-based Miller Anderson & Sherrerd. Previously, she was Executive Vice President and CFO of the University of Pennsylvania, from 1984 to 1992. Earlier, she served as Budget Director and, subsequently, Secretary of Finance for the State of Delaware. Dr. Whittington served on the board of Rohm & Haas Company from 1989 to 2009 and currently serves on the boards of Macy’s, Inc. and Oaktree Capital Group, LLC.

 

Skills and qualifications: Dr. Whittington has extensive knowledge of and substantial experience in financial, investment, and banking matters. She also provides valuable insight from her previous experience serving on the board of a chemicals company and as a statewide cabinet officer.

What vote is required to approve this proposal?

Each nominee requires the affirmative vote of a majority of the votes cast in person or by proxy at the meeting.

What if a director nominee does not receive a majority of votes cast?

Our By-Laws require directors to be elected by the majority of the votes cast with respect to such director (i.e., the number of votes cast “for” a director must exceed the number of votes cast

 

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“against” that director). If a nominee who is serving as a Director is not elected at the Annual Meeting and no one else is elected in place of that Director, then, under Delaware law, the Director would continue to serve on the Board of Directors as a “holdover director.” However, under our By-Laws, the holdover director is required to tender his or her resignation to the Board. The Nominating Committee then would consider and recommend to the Board whether to accept or reject the tendered resignation, or whether some other action should be taken. The Board of Directors would then make a decision whether to accept the resignation taking into account the recommendation of the Nominating Committee. The Director who tenders his or her resignation would not participate in the Board’s decision. The Board is required to publicly disclose (by a press release, a filing with the SEC or other broadly disseminated means of communication) its decision regarding the tendered resignation and the rationale behind the decision within 90 days from the date of the certification of the election results. In a contested election (a situation in which the number of nominees exceeds the number of directors to be elected), the standard for election of directors will be a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors.

What does the Board recommend?

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” EACH NOMINEE STANDING FOR ELECTION FOR DIRECTOR.

Who are the continuing Directors?

The following Directors will continue in office until the end of their respective terms. Included below is a listing of each continuing Director’s name, age, tenure and qualifications.

Directors whose terms expire at the 2015 Annual Meeting

 

LOGO   

J. Brian Ferguson, 59

Director since April 2012

 

Mr. Ferguson retired as Chairman of Eastman Chemical Company (Eastman) in 2010 and as CEO of Eastman in 2009. He became the Chairman and CEO of Eastman in 2002. He currently serves on the board of Owens Corning, as well as on the Board of Trustees for The University of Tennessee.

 

Skills and qualifications: Mr. Ferguson has over 30 years of leadership experience in international business, industrial operations, strategic planning and capital raising strategies, as well as in executive compensation.

LOGO   

Harold W. McGraw III, 65

Director since April 2012

 

Mr. McGraw has been Chairman of the Board of McGraw Hill Financial since 1999. He also served as Chief Executive Officer from 1998 to November 2013 and as President and Chief Operating Officer from 1993 to November 2013. Mr. McGraw became the Chairman of the International Chamber of Commerce in July 2013. In addition to the board of McGraw Hill Financial, he currently serves on the board of United Technologies Corporation.

 

Skills and qualifications: As a former CEO and current Chairman of the Board of a large, global public company with a significant role in the financial reporting industry, Mr. McGraw’s experience allows him to provide Phillips 66 with valuable global financial, corporate governance and operational expertise.

 

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LOGO   

Victoria J. Tschinkel, 66

Director since April 2012

 

Ms. Tschinkel currently serves on the Executive Committee of 1000 Friends of Florida and previously was its Chairwoman. In addition, Ms. Tschinkel is a director of the National Fish and Wildlife Foundation, serving on the Gulf Benefits Committee. She served as State Director of the Florida Nature Conservancy from 2003 to 2006, was senior environmental consultant to Landers & Parsons, a Tallahassee, Florida law firm, from 1987 to 2002, and was the Secretary of the Florida Department of Environmental Regulation from 1981 to 1987.

 

Skills and qualifications: Ms. Tschinkel’s extensive environmental regulatory experience makes her well qualified to serve as a member of the Board. In addition, her relationships and experience working within the environmental community position her to advise the Board on the impact of our operations in sensitive areas.

Directors whose terms expire at the 2016 Annual Meeting

 

LOGO   

Greg C. Garland, 56

Director since April 2012

 

Mr. Garland serves as Chairman and CEO of Phillips 66. He was appointed Senior Vice President, Exploration and Production-Americas for ConocoPhillips in 2010. He was previously President and CEO of Chevron Phillips Chemical Company LLC (CPChem) from 2008 to 2010, having served as Senior Vice President, Planning and Specialty Products, CPChem, from 2000 to 2008. Mr. Garland also serves on the boards of Amgen Inc. and Phillips 66 Partners GP LLC, the general partner of Phillips 66 Partners LP.

 

Skills and qualifications: Mr. Garland’s more than 30-year career with Phillips Petroleum Company, CPChem and ConocoPhillips, and as CEO of Phillips 66, makes him well qualified to serve both as a Director and as Chairman of the Board. Mr. Garland’s extensive experience in the energy industry makes his service as a Director invaluable to the Company. In addition to his other skills and qualifications, Mr. Garland’s role as both Chairman and CEO of Phillips 66 serves as a vital link between management and the Board of Directors, allowing the Board to perform its oversight role with the benefit of management’s perspective on business and strategy.

LOGO   

John E. Lowe, 55

Director since April 2012

 

Mr. Lowe served as assistant to the CEO of ConocoPhillips, a position he held from 2008 until May 2012. He previously held a series of executive positions with ConocoPhillips, including Executive Vice President, Exploration and Production, from 2007 to 2008, and Executive Vice President, Commercial, from 2006 to 2007. Mr. Lowe is a Special Executive Advisor to Tudor, Pickering, Holt & Co. and serves on the boards of Agrium Inc. and Apache Corporation.

 

Skills and qualifications: Mr. Lowe has served on the boards of DCP Midstream, LLC and CPChem, two of the Company’s significant joint ventures. He has extensive experience and knowledge of our industry through his service on these boards and his 30-year career with Phillips Petroleum Company and ConocoPhillips.

 

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AUDIT AND FINANCE COMMITTEE REPORT

The Audit and Finance Committee, which we refer to as the Audit Committee, assists the Board of Directors in fulfilling its responsibility to provide independent, objective oversight of the financial reporting functions and internal control systems of Phillips 66. The Audit Committee currently consists of three non-employee Directors. The Board has determined that each member of the Audit Committee satisfies the requirements of the NYSE as to independence, financial literacy and expertise. The Board has determined that at least one member, William R. Loomis, Jr., is an audit committee financial expert as defined by the SEC. The responsibilities of the Audit Committee are set forth in the written charter adopted by the Board of Directors, which is available in the “Investors” section of the Company’s website under the caption “Governance.” One of the Audit Committee’s primary responsibilities is to assist the Board in its oversight of the integrity of the Company’s financial statements. The following report summarizes certain of the Audit Committee’s activities in this regard for 2013.

Review with Management. The Audit Committee has reviewed and discussed with management the audited consolidated financial statements of Phillips 66 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, and management’s assessment of the effectiveness of the Company’s internal control over financial reporting, as of December 31, 2013, included therein.

Discussions with Independent Registered Public Accounting Firm. The Audit Committee has discussed with Ernst & Young LLP, independent registered public accounting firm for Phillips 66, the matters required to be discussed by standards of the Public Company Accounting Oversight Board. The Audit Committee has received the written disclosures and the letter from Ernst & Young required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence, and has discussed with that firm its independence from Phillips 66.

Recommendation to the Phillips 66 Board of Directors. Based on its review and discussions noted above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements of Phillips 66 be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

THE PHILLIPS 66 AUDIT AND FINANCE COMMITTEE

William R. Loomis, Jr., Chairman

Victoria J. Tschinkel

Marna C. Whittington

 

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 PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP 

(Proposal 2 on the Proxy Card)

What am I voting on?

You are voting on a proposal to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for fiscal year 2014. The Audit Committee has appointed Ernst & Young to serve as the Company’s independent registered public accounting firm.

What services does the independent registered public accounting firm provide?

Audit services of Ernst & Young for fiscal year 2013 included an audit of our consolidated financial statements, an audit of the effectiveness of the Company’s internal control over financial reporting, and services related to periodic filings made with the SEC. Additionally, Ernst & Young provided certain other services as described in the response to the next question. In connection with the audit of the 2013 consolidated financial statements, we entered into an engagement agreement with Ernst & Young that sets forth the terms by which Ernst & Young will perform audit services for us.

How much was the independent registered public accounting firm paid for 2013 and 2012?

Ernst & Young’s fees for professional services totaled $12.1 million for 2013 and $12.0 million for 2012, which consisted of the following:

 

Fees (in millions)

   2013      2012  

Audit Fees 1

   $ 11.0       $ 10.9   

Audit-Related Fees 2

     0.7         0.9   

Tax Fees 3

     0.4         0.2   

Other Fees

               
  

 

 

    

 

 

 

Total

   $ 12.1       $ 12.0   

 

  1 Fees for audit services related to the fiscal year consolidated audit, the audit of the effectiveness of internal controls, quarterly reviews, registration statements, comfort letters, statutory and regulatory audits and accounting consultations.

 

  2 Fees for audit-related services related to audits in connection with proposed or consummated dispositions, benefit plan audits, other subsidiary audits, special reports, and accounting consultations.

 

  3 Fees for tax services related to tax compliance services and tax planning and advisory services.

The Audit Committee has considered whether the non-audit services provided to Phillips 66 by Ernst & Young impaired the independence of Ernst & Young and concluded they did not.

The Audit Committee has adopted a pre-approval policy that provides guidelines for the audit, audit-related, tax and other non-audit services that may be provided by Ernst & Young to the Company. All of the fees in the table above were approved in accordance with this policy. The policy (a) identifies the guiding principles that must be considered by the Audit Committee in approving services to ensure that Ernst & Young’s independence is not impaired; (b) describes the audit, audit-related, tax and other services that may be provided and the non-audit services that are prohibited; and (c) sets forth pre-approval requirements for all permitted services. Under the policy, all services to be provided by Ernst & Young must be pre-approved by the Audit Committee. The Audit Committee has delegated authority to approve permitted services to the Audit Committee’s Chair. Such approval must be reported to the entire Audit Committee at the next scheduled Audit Committee meeting.

 

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Will a representative of Ernst & Young be present at the Annual Meeting?

Yes, one or more representatives of Ernst & Young will be present at the meeting. The representatives will have an opportunity to make a statement if they desire and will be available to respond to appropriate questions from the stockholders.

What vote is required to approve this proposal?

Approval of this proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the proposal. If the appointment of Ernst & Young is not ratified, the Audit Committee will reconsider the appointment.

What does the Board recommend?

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR 2014.

 

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EXECUTIVE COMPENSATION

Role of the Human Resources and Compensation Committee

Authority and Responsibilities

The Human Resources and Compensation Committee, which we refer to as the Compensation Committee, is responsible for providing independent, objective oversight of our executive compensation programs and determining the compensation for our CEO and anyone who meets our definition of a Senior Officer. Currently, our internal guidelines define a Senior Officer as an officer of the Company who reports directly to the CEO or any other officer of the Company who is either a Senior Vice President or above or a reporting officer under Section 16(b) of the Securities Exchange Act of 1934. As of December 31, 2013, we had 10 Senior Officers. The compensation tables that follow provide information about our CEO and certain of our Senior Officers. In addition, the Compensation Committee acts as plan administrator of the compensation programs and benefit plans for our CEO and Senior Officers and as an avenue of appeal for current and former Senior Officers regarding disputes over compensation and benefits.

The Compensation Committee oversees the Company’s executive compensation philosophy, policies, plans and programs for our CEO and Senior Officers to ensure:

 

   

Alignment of our executive compensation programs with the long-term economic interests of stockholders

 

   

Competitiveness of compensation within the markets in which Phillips 66 competes for talent

 

   

Retention of top talent and CEO and Senior Officer succession planning

One of the Compensation Committee’s responsibilities is to assist the Board in its oversight of the integrity of the Company’s “Compensation Discussion and Analysis” beginning on page 24. The report on page 22 summarizes certain of the Compensation Committee’s activities concerning compensation earned during 2013 by our Named Executive Officers who are identified on page 24.

A complete listing of the authority and responsibilities of the Compensation Committee is set forth in the written charter adopted by the Board of Directors, which is available in the “Investors” section of our website under the caption “Governance.”

Members

The Compensation Committee consists of three members who meet all requirements for “non-employee,” “independent” and “outside” director status under the Securities Exchange Act of 1934, NYSE listing standards, and the Internal Revenue Code, respectively. The members of the Compensation Committee and the member to be designated as Chair, like the members and Chairs of all the Board committees, are reviewed annually by the Nominating Committee, which recommends committee appointments to the full Board. The Board of Directors has final approval of the committee structure of the Board.

Meetings

The Compensation Committee holds regularly scheduled meetings in association with each regular Board meeting and meets by teleconference between such meetings as necessary to discharge its duties. The Compensation Committee reserves time at each regularly scheduled meeting

 

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to review matters in executive session without management present except as specifically requested by the Compensation Committee. Additionally, the Committee meets jointly with the Lead Director, who is currently a member of the Compensation Committee, at least annually to evaluate the performance of the CEO. In 2013, the Compensation Committee had seven regularly scheduled meetings. More information regarding the Compensation Committee’s activities at such meetings can be found in the “Compensation Discussion and Analysis” beginning on page 24.

Continuous Improvement

The Compensation Committee is committed to a process of continuous improvement in exercising its responsibilities. To that end, the Compensation Committee:

 

   

Receives ongoing training regarding best practices for executive compensation

 

   

Regularly reviews its responsibilities and governance practices in light of ongoing changes in the legal and regulatory arena and trends in corporate governance, which review is aided by the Company’s management and consultants, independent compensation consultants, and, when deemed appropriate, independent legal counsel

 

   

Annually reviews its charter and proposes any desired changes to the Board of Directors

 

   

Annually conducts a self-assessment of its performance that evaluates the effectiveness of the Committee’s actions and seeks ideas to improve its processes and oversight

 

   

Regularly reviews and assesses whether the Company’s executive compensation programs are having the desired effects and do not encourage an inappropriate level of risk

 

   

Regularly reviews all activities of the Committee, including self-assessment and compensation risk assessment, with the full Board of Directors

Human Resources and Compensation Committee Interlocks and Insider Participation

During the year ended December 31, 2013, none of our executive officers served as (1) a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board) of another entity, one of whose executive officers served on the Compensation Committee, (2) a director of another entity, one of whose executive officers served on the Compensation Committee or (3) a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board) of another entity, one of whose executive officers served as one of our directors. In addition, none of the members of the Compensation Committee (1) was an officer or employee of the Company or any of our subsidiaries during the year ended December 31, 2013, (2) was formerly an officer or employee of the Company or any of our subsidiaries, or (3) had any other relationship requiring disclosure under applicable rules.

Human Resources and Compensation Committee Report

Review with Management. The Compensation Committee has reviewed and discussed with management the “Compensation Discussion and Analysis” presented in this proxy statement beginning on page 24.

Discussions with Independent Executive Compensation Consultant. The Compensation Committee has discussed with Meridian Compensation Partners, LLC (Meridian), an independent executive compensation consulting firm, the executive compensation programs of the Company, as well as

 

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specific compensation decisions made by the Compensation Committee. Meridian was retained directly by the Compensation Committee, independent of the management of the Company. The Compensation Committee has received written disclosures from Meridian confirming no other work has been performed for the Company by Meridian, has discussed with Meridian its independence from Phillips 66, and believes Meridian to have been independent of management.

Recommendation to the Phillips 66 Board of Directors. Based on its review and discussions noted above, the Compensation Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” be included in the Phillips 66 proxy statement on Schedule 14A and the Phillips 66 Annual Report on Form 10-K for the year ended December 31, 2013.

THE PHILLIPS 66 HUMAN RESOURCES

AND COMPENSATION COMMITTEE

J. Brian Ferguson, Chairman

Harold W. McGraw III

Glenn F. Tilton

 

 

 

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Compensation Discussion and Analysis

The following compensation discussion and analysis, which we sometimes refer to as CD&A, provides an overview of the executive compensation programs and actions relating to the compensation of the CEO and the other Named Executive Officers, which we refer to as NEOs, for 2013. The NEOs are:

 

   

Greg C. Garland, Chairman of the Board and Chief Executive Officer

 

   

Paula A. Johnson, Executive Vice President, Legal, General Counsel and Corporate Secretary

 

   

Greg G. Maxwell, Executive Vice President, Finance and Chief Financial Officer

 

   

Tim G. Taylor, Executive Vice President, Commercial, Marketing, Transportation and Business Development

 

   

Lawrence M. Ziemba, Executive Vice President, Refining, Projects and Procurement

The Compensation Discussion and Analysis and Executive Compensation Tables are organized as follows:

 

                  Page             

Overview and Executive Summary

   25

Our Business

   25

Our Approach to Executive Compensation

   25

2013 Company Performance

   26

2013 Corporate Governance Highlights

   27

2013 “Say-on-Pay” Vote Result and Engagement

   27

Summary of Best Practices

   29

Elements of Compensation

   30

Target Mix

   31

Significant Pay at Risk

   31

Targets and Payouts for Compensation Elements

   31

Peer Group

   31

Base Salary

   33

Variable Cash Incentive Program

   33

Long-Term Incentive Programs

   36

Other Benefits and Perquisites

   41

Executive Compensation Governance

   43

Clawback Provisions

   43

Stock Ownership

   43

Tax Considerations—Internal Revenue Code (IRC) Section 162(m)

   43

Trading Policies

   43

Independent Consultant

   44

Compensation Risk Assessment

   44

Executive Compensation Tables

   45

Summary Compensation Table

   45

Grants of Plan-Based Awards

   48

Outstanding Equity Awards at Fiscal Year End

   50

Option Exercises and Stock Vested for 2013

   52

Pension Benefits as of December 31, 2013

   53

Nonqualified Deferred Compensation

   55

Potential Payments upon Termination or Change in Control

   57

 

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Overview and Executive Summary

Our Business—A Unique Brand

Phillips 66 is a growing energy manufacturing and logistics company and the only downstream company to combine high-performing Midstream, Chemicals, Refining, and Marketing and Specialties businesses. This integrated portfolio enables Phillips 66 to capture opportunities in the changing energy landscape. We have approximately 13,500 employees worldwide who are committed to safety and operating excellence.

 

   

Our Midstream segment comprises Phillips 66’s transportation business, including operations of Phillips 66 Partners LP, our master limited partnership that completed its initial public offering in July 2013; a 50 percent interest in DCP Midstream, LLC, which we refer to as DCP Midstream; and natural gas liquids, which are sometimes referred to as NGL, operations. DCP Midstream is one of the largest NGL producers and natural gas gatherers and processors in the United States, with 67,000 miles of pipeline, 64 plants and 12 NGL fractionators.

 

   

We conduct our Chemicals business through a 50 percent interest in Chevron Phillips Chemical Company LLC, which we refer to as CPChem, one of the world’s top producers of olefins and polyolefins with more than 33 billion pounds of net annual chemicals processing capacity across its product lines.

 

   

Our Refining operations include 15 refineries with a net crude oil capacity of 2.2 million barrels per day.

 

   

Our Marketing and Specialties segment includes 10,000 owned or supplied outlets, lubricants marketing in more than 65 countries, and other specialty products including petroleum coke, waxes, solvents, polypropylene, and, for the periods covered in the CD&A, flow improvers.

Our Approach to Executive Compensation—Driving Performance

Our compensation programs support our corporate vision of providing energy and improving lives. Our programs are aligned with key elements of our corporate strategy. Important tenets of our approach include:

 

   

We ensure executive compensation drives behaviors and actions consistent with stockholder interests, prudent risk-taking and long-term perspective.

 

   

We believe our compensation programs play an important role in our employee value proposition. They provide a competitive advantage to help the Company attract, retain, motivate, and reward high-performing executive talent, as well as support succession planning.

 

   

We pay for performance. Executives have a significant portion of compensation tied to the achievement of annual and long-term goals that promote stockholder value creation.

 

   

We target and award reasonable and competitive compensation levels, generally aligned with market median levels but allow for differentiation based on performance.

 

   

We emphasize stock ownership. Executives are required to maintain a multiple of their annual base salary in Company stock.

 

   

We provide executives the same group benefit programs as we provide other employees, on substantially the same terms.

 

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We limit executive perquisites to items that serve a reasonable business purpose.

2013 Company Performance—A Year of Growth

Our corporate strategic priorities to achieving our vision are:

 

   

Continuously improve operating excellence

 

   

Enhance returns on capital

 

   

Deliver profitable growth

 

   

Grow stockholder distributions

 

   

Build a high-performing organization

In 2013, we focused our goals on these strategies and accomplished the following results:

 

2013 Performance Highlights
Continuously Improve Operating Excellence(1)   

   Controllable costs per barrel 23 percent below downstream peer company average

   Refining capacity utilization of 93 percent; 22 percent reduction in lost profit opportunities

   Combined Total Recordable Rate (TRR) of 0.22; 57 percent better than industry average

   Combined Lost Workday Case Rate (LWCR) of 0.05; 76 percent better than industry average

   Process Safety Event (PSE) Rate of 0.05; 69 percent better than industry average

Enhance Returns on Capital   

   Return on Capital Employed (ROCE) of 14 percent

   Refining, CPChem and DCP Midstream led their respective peer groups in ROCE

   Expanded access to advantaged feedstocks and optimized crude slates / completed receipt of 2,000 railcars to transport advantaged crudes

   Portfolio rationalization (ICHP, E-GasTM)

Deliver Profitable Growth   

   Successfully completed Phillips 66 Partners LP initial public offering

   Implementing organic midstream growth program of $3 billion, including Sweeny fractionator and Freeport LPG export facility

   DCP Midstream—$6 to $8 billion capital program targeted to deliver 4 to 6 percent annual earnings growth

   CPChem—$7 to $8 billion capital program targeted to deliver 30 percent earnings growth by 2017

Grow Stockholder Distributions   

   Total Stockholder Return(2) (TSR) of 48 percent in 2013 / TSR of 143 percent since spin-off

   Phillips 66 Partners LP TSR of 66 percent

   Dividend increase of 56 percent in 2013

   Total stock repurchase program of $5 billion authorized: 37 million shares purchased in 2013

   Debt repayments of $1 billion in 2013

Build a High-Performing Organization   

   Drove performance-based culture through strong accountability and compensation programs aligned with corporate strategy

   Enhanced leadership development and strategic workforce planning to broaden leadership and organizational capabilities and deepen critical skills

   Invested in diverse talent bench capable of delivering superior results consistent with stockholder interests

   Continued execution of robust and rigorous succession plan in support of Company growth strategy

 

(1) 

Safety statistics are based on latest available industry data

(2)

TSR is calculated using closing stock price on the first and last day of the performance period and assumes dividend reinvestment

 

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The Compensation Committee considered these safety, financial, and operational results in determining the corporate payout levels for our performance-based compensation programs. Based on these levels of performance, the Compensation Committee approved a 175 percent of target payout level for the Variable Cash Incentive Program, which we refer to as VCIP.

Likewise, the Compensation Committee considered the Company’s Return on Capital Employed and Total Stockholder Return for the period from May 1, 2012 to December 31, 2013 when determining the 170 percent of target payout for the remaining 20 months of the Performance Share Program 2011-2013. We refer to a Performance Share Program as a PSP.

Further details on the rationale for payout decisions are included under “Targets and Payouts for Compensation Elements” beginning on page 31.

2013 Corporate Governance Highlights

The following summarizes significant actions taken in 2013:

 

   

We changed the composition of the Long-Term Incentive compensation program to include Restricted Stock Units, which we refer to as RSUs, in addition to Stock Options and the PSP. The Compensation Committee believes this mix is aligned with our compensation philosophy, appropriate given the cyclical nature of our business and supports executive retention.

 

   

We amended the Key Employee Change in Control Severance Plan (CICSP) to include a “double trigger” vesting requirement for equity awards. This aligns our program with best practices and the long-term interests of our stockholders by requiring a change in control and a qualified termination before equity awards vest.

 

   

Stockholders approved the 2013 Omnibus Stock and Performance Incentive Plan of Phillips 66. This provided stockholders an opportunity to understand and vote on how the Company uses equity and cash-based awards to differentiate for performance, retain top talent and drive behaviors and actions.

 

   

We updated all programs to include robust clawback provisions.

 

   

We removed Total Stockholder Return from the list of formulaic metrics in the VCIP, for program years beginning 2014 and forward. Eliminating this metric from the annual incentive while maintaining it as a metric for long-term incentives is in line with good governance practices and market trends. It focuses the short-term corporate program and payouts on operational metrics, provides a greater line of sight for employees and drives employee ownership of the results.

 

   

The Compensation Committee reviewed and confirmed our primary and broad industry peer groups to ensure we are measuring Phillips 66 against the appropriate mix of companies: those with similar scope and scale of operations, in similar industries, and with which we compete for talent and capital.

 

   

The Compensation Committee reviewed the risk assessment of our compensation programs and practices to ensure that appropriate risk mitigation controls were in place.

2013 “Say-on-Pay” Vote Result and Engagement

Our Compensation Committee carefully considered the results of our first Say-on-Pay vote on NEO compensation in May 2013, in which more than 87 percent of votes cast affirmed support for the compensation of our NEOs as described in our 2013 proxy statement. The Compensation Committee

 

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interpreted this level of support as affirmation by stockholders of the design and overall execution of our programs. The voting process also provided valuable feedback on certain features the Committee continued to evaluate in 2013.

We maintain open communications with our investor community on many matters, including executive compensation. While these avenues of communication yielded no major concerns regarding our executive compensation philosophy or design, the Committee approved the following changes, in addition to the ones outlined on page 27, in response to stockholders’ feedback.

 

   

This proxy statement includes additional disclosures regarding executive performance and the targets and criteria driving 2013 VCIP and long-term incentive payout decisions. This information confirms our philosophy to align payouts with stockholder interests and demonstrates the close link between pay and performance for our compensation programs.

 

   

Individual performance adjustments will be considered at the beginning of the performance period for the PSP starting with the 2014 - 2016 program. Starting with that program, the Committee will no longer make any individual adjustments at the end of the performance period. This enhancement strengthens the link between pay and performance while maintaining a critical retention element for top talent.

We will continue to engage our stockholders and monitor Say-on-Pay results to facilitate continuous program enhancement. We will continue to offer compensation programs that drive the right behaviors and actions and deliver long-term value to our stockholders. Consistent with the preference expressed by our stockholders at last year’s annual meeting, we will hold annual Say-on-Pay votes.

 

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Summary of Best Practices

In conjunction with our corporate strategy, executive compensation philosophy, program design and stockholder feedback, Phillips 66 includes the following best practices in our executive compensation programs:

 

     WE DO ...        WE DO NOT ...
ü   Target the majority of NEO compensation to be performance based   û   Pay or accrue dividends during the performance period on PSP targets
ü   Comprise our Compensation Committee solely of independent directors and empower the Committee to retain an independent consultant   û   Provide tax gross-ups under the CICSP to our NEOs
ü   Apply multiple performance metrics aligned with our corporate strategy to measure our performance   û   Reprice Stock Options without stockholder approval
ü   Include absolute and relative metrics in our Long-Term Incentive programs   û   Price Stock Options below grant date fair market value
ü   Link NEO compensation to stockholder value creation by having a significant portion of compensation at risk   û   Allow share recycling for Stock Options
ü   Cap maximum payouts (number of shares) under our equity programs   û   Have evergreen provisions in our active equity plans
ü   Employ a “double trigger” for severance benefits and equity awards under our CICSP   û   Allow hedging or pledging of shares of Phillips 66 stock and we limit executive trading of Company stock
ü   Require a minimum one-year vesting period for Stock Option awards   û   Allow transfer of equity awards (except in the case of death)
ü   Have a minimum one-year vesting period for stock awards  

û

  Provide separate supplemental executive retirement benefits for individual NEOs
ü   Maintain stock ownership guidelines for executives   û   Have excessive perquisites
ü   Balance, monitor and manage compensation risk through regular assessments and robust clawback provisions   û   Maintain individual change in control agreements
ü   Intend to qualify payments under our VCIP, RSU and PSP programs for deductions under IRC Section 162(m)   û   Have an employment agreement with the CEO
ü   Have a Say-on-Pay vote annually    

 

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Elements of Compensation

The principal elements of our executive compensation programs are presented in summary format below and explained further in the sections that follow.

 

Type    Program    Description / Purpose
Annual Cash Compensation    Base Salary   

•   Provides base level of cash compensation

•   Based on scope and responsibility of the position, peer compensation data, and individual experience, expertise and performance

•   Reviewed regularly and adjusted, if and when appropriate

  

Variable Cash Incentive Program

(VCIP)

  

•   Performance-based award tied to corporate and individual performance

•   Aligns behaviors and actions with stockholder interests and rewards achievement of annual performance goals

Long-Term Incentives (LTI)    Performance Share Program (PSP)   

•   75% of target LTI incentives granted on an annual basis are performance-based (25% Stock Options and 50% Performance Share Units)

•   Value realized subject to stock price performance

   Stock Options*   
  

Restricted Stock Units

(RSUs)

  

•   Full-value award tied to stock price performance

•   Supports executive retention

 

* The Compensation Committee believes that Stock Options are inherently performance-based, as options have no initial value and grantees only realize benefits if the value of our stock increases following the date of grant. This practice aligns our CEO and Senior Officer compensation with stockholder interests.

In 2013 the Compensation Committee changed the composition of the Long-Term Incentive compensation targets. We refer to Long-Term Incentives as LTI. Beginning in 2013, the components of target LTI compensation are:

 

   

50% Performance Share Units

 

   

25% Stock Options

 

   

25% Restricted Stock Units

The Committee believes this mix is aligned with our compensation philosophy, reflects the cyclical nature of our business and supports executive retention.

 

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Target Mix

The target mix of the compensation program elements for the CEO and other NEOs is shown below. The charts outline the relative size, in percentage terms, of each element of targeted compensation.

 

LOGO

Significant Pay at Risk

Consistent with our compensation philosophy that executive compensation should be tied to Company performance and directly linked with stockholder value creation, a significant portion of NEO compensation is at risk and based on performance metrics tied to our corporate strategy. “At risk” means there is no guarantee that the value of the awards at the time of grant will be realized. The Compensation Committee has complete authority to limit and even award zero percent for the performance-based payouts and individual performance adjustments under the VCIP and PSP based on the Committee’s evaluation of performance. Stock Options can expire with zero value if the Company stock price does not appreciate above the grant date price over the 10-year life of the options. RSUs may lose value depending on stock price performance. Therefore, for NEOs to earn and sustain competitive compensation, the Company must meet its stated goals, perform well relative to peers and deliver market-competitive returns to stockholders.

Targets and Payouts for Compensation Elements

Peer Group

When determining how to benchmark our executive compensation program, the Compensation Committee took into consideration that Phillips 66 has no direct peers to use for reference in evaluating whether our executive compensation program offers competitive total compensation opportunities and reflects best practices in plan design. As a result, the Compensation Committee established three peer groups reflecting our diverse businesses.

The primary peer group consists of integrated oil companies with significant downstream operations, independent downstream companies with similar scope and scale (mainly in refining) and a chemical company. We will continue to evaluate potential peers regularly in light of changes in market

 

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conditions, business restructuring within the industry and changes in our business portfolio—resulting, for example, in the growth of our Midstream and Chemicals segments. Our primary peer group consists of the following companies:

 

Primary Peer Group
  BP plc    Marathon Petroleum Corporation
  Chevron Corporation    Tesoro Corporation
  Dow Chemical Company    Valero Energy Corporation

The primary peer group is supplemented by a broad industry group representing large industrial companies with significant capital investments and international operations and against which we compete for talent. At the time this supplemental peer group was last reviewed, we were, in comparison to this group, in the 51st percentile in terms of assets, the 43rd percentile in terms of market value and the 100th percentile in terms of revenue.

The broad industry peer group consists of the following twenty companies:

 

Broad Industry Peer Group
  3M Company    Johnson & Johnson
  Archer Daniels Midland    Johnson Controls, Inc.
  The Boeing Company    Northrop Grumman Corporation
  Caterpillar Inc    Procter & Gamble Company
  Deere & Company    Sprint Nextel Corporation
  E.I. du Pont de Nemours and Company    Sysco Corporation
  FedEx Corporation    Tyson Foods, Inc.
  Ford Motor Company    United Parcel Service, Inc.
  General Dynamics Corporation    United Technologies Corp.
  Honeywell International Inc    Verizon Communications Inc.

In addition to these groups, we also benchmark our TSR against the companies included in the S&P 100 index, as these are the companies with which we compete for capital in the broader market.

The Compensation Committee considers the median levels of compensation among these peer groups for reference in developing targeted levels of compensation for the NEOs. The following chart summarizes how we used each of these three groups for benchmarking our compensation programs in 2013:

 

Compensation

Programs

   Peer Group Types
       Primary            Broad Industry            S&P 100    

Variable Cash

Incentive Program (VCIP)

   ü       ü(TSR only)

Performance Share

Program (PSP)

   ü       ü (TSR only)

Total Target

Compensation

   ü    ü     

 

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For VCIP programs beginning in 2014 and forward, the Committee has removed TSR from the formulaic corporate metrics. The elimination of TSR is consistent with leading governance practices, focuses the VCIP program on internal metrics, increases the line of sight between executives’ responsibilities and performance goals and drives employee ownership of performance results. TSR remains a corporate metric in our PSP.

Base Salary

Base salary is designed to provide a competitive and set rate of pay recognizing employees’ different levels of responsibility and performance. As the majority of our NEO compensation is performance-based and tied to long-term programs, base salary represents a less significant component of such compensation. In setting each NEO’s base salary, the Compensation Committee considers factors including, but not limited to, the responsibility level for the position held, market data from the relevant peer group for comparable roles, experience and expertise, individual performance and business results.

Below is a summary of the annualized base salary for each NEO for 2013. Because these amounts reflect each NEO’s annualized salary as of the dates indicated, this information may vary from the information provided in the “Summary Compensation Table” on page 45, which reflects actual base salary earnings in 2013, including the effect of salary changes during the year.

 

Name   Position  

Base Salary effective

March 1, 2013 ($)(1)

    Base Salary effective
May 1, 2013 ($)
 

Mr. Garland

  Chairman of the Board and Chief Executive Officer     1,450,000        1,450,000   

Ms. Johnson

  Executive Vice President, Legal, General Counsel and Corporate Secretary     450,912        530,016   

Mr. Maxwell

  Executive Vice President, Finance and Chief Financial Officer     612,384        650,016   

Mr. Taylor

  Executive Vice President, Commercial, Marketing, Transportation and Business Development     695,232        735,000   

Mr. Ziemba

  Executive Vice President, Refining, Projects and Procurement     590,256        650,016   

 

(1)

Base salary on March 1, 2013 reflects the effects of the merit adjustment made on that date under a broad-based program for Phillips 66 employees. The salaries on January 1, 2013 for Mr. Garland, Ms. Johnson and Messrs. Maxwell, Taylor and Ziemba were $1,400,000, $435,651, $588,825, $668,479 and $570,286, respectively.

Mr. Garland, Ms. Johnson and Messrs. Maxwell, Taylor and Ziemba received base salary increases effective March 1, 2013, as part of the annual merit increase cycle for all employees. Ms. Johnson and Messrs Maxwell, Taylor and Ziemba received grade promotions, effective May 1, 2013, related to their established performance in new roles since our spin-off. The promotions prompted several actions, including additional salary adjustments, target VCIP increases and supplemental performance plan awards. The Compensation Committee determined these additional adjustments were appropriate to maintain competitiveness in the market and recognize the level of commitment demonstrated during our first full year as an independent company.

Variable Cash Incentive Program

The VCIP, which is our annual incentive program, is designed to:

 

   

Reward annual performance achievements

 

   

Align corporate, business and individual goals with stockholder interests and Company strategy

 

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Drive behaviors and actions consistent with stockholder interests

 

   

Provide variability and differentiation based on corporate, business and individual performance

Each NEO’s base VCIP award is tied solely to corporate performance. We believe this is in the best interests of stockholders as it promotes collaboration across the organization.

The annual payout for NEOs is delivered as a cash bonus and is calculated as follows:

 

 

Eligible Earnings

 

  x  

 

Target Percentage

 

  x  

 

Corporate Payout Percentage

 

  +  

 

Individual Adjustments

 

 

LOGO

For 2013, the Compensation Committee used the following metrics, aligned with our Company strategy, to evaluate corporate performance under the VCIP. This mix of financial and operational metrics ensures a balanced view of Company performance.

 

Metric   

  Corporate  

  Weighting  

  Rationale
Safety, Process Safety and Operating Excellence    20%   Aligns payout with strategic focus on operating excellence
Cost Management    20%   Measures effective cost management versus internal targets
Adjusted Earnings    20%   Evaluates the Company’s performance relative to target, including response to market changes
Return on Capital Employed (ROCE)    20%   Measures capital responsibility and discipline against internal targets and compared to industry benchmarks
Total Stockholder Return (TSR) (1)    20%   Maintains strategic focus on profitable growth and stockholder distributions

 

(1) 

For VCIP programs beginning in 2014 and forward, the Committee has removed TSR from the formulaic corporate metrics and adjusted the weighting (25% each) of the remaining metrics.

 

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For 2013, the Compensation Committee considered the following corporate performance against stated targets in determining VCIP payments to the NEOs. The results of each metric are outlined in the charts below and a payout factor is applied to the relative weighting.

Generally, target performance results in 100 percent payout of target bonus opportunity. Less-than-target performance will normally result in a payout between zero and 99 percent of target. Greater-than-target performance generally results in a payout between 100 percent of target and the maximum 200 percent, before individual adjustment.

 

What We
Measure
  How We
Measure It
(1)
  How We
Did
  Results   Payout
%
    Weight
%
    Corporate
Payout %
 
Safety, Process Safety and Operating Excellence (2)  

Combined TRR

 

0.51                 0.22      

 

Combined LWCR

 

0.21                 0.05      

 

PSE Rate

 

0.16                 0.05      

 

Capacity Utilization (3)

 

88%                93%      

 

•   57 percent better than industry average

•   Lowest number of injuries in Company history

•   76 percent better than industry average

•   17 percent reduction from 2012

•   69 percent better than industry average

•   20 percent reduction from 2012

•   Expanded access to advantaged crude slates

•   5 percent higher than industry average

    190     20     38

Cost Management

(millions)

  $5,682   $5,547  

•   VCIP Costs per Barrel—23 percent below downstream peer average—1st in peer group

•   VCIP Controllable Costs*- 2.4 percent below target

    200     20     40

Adjusted Earnings

(millions)

  $3,862   $3,908  

•   Strong earnings in challenging margin environment—VCIP Earnings* of $3,908

•   Generated $6 billion in cash from operations

    125     20     25
ROCE   WACC

9.8%

Stretch Target

14.3%

  15.4%  

•   1st in peer group in VCIP ROCE*

•   5.6 percentage points above Weighted Average Cost of Capital (WACC)

    200     20     40
TSR (4)   Relative to

Peer Group

  60th

percentile

 

•   TSR of 42.2 percent

•   $3.1 billion returned to stockholders through dividends and share repurchases

•   Increased dividend 56 percent

    160     20     32
Total Corporate Payout       100     175

 

*

These terms are non-GAAP financial measures that we believe facilitate comparisons of Company performance across periods. Please see Appendix B for rationales for the use of these measures, reconciliations to the nearest GAAP financial measures and explanations of how we calculate them.

(1)

Target is generally defined as industry average for Safety, Process Safety and Operating Excellence metrics, budget for Cost Management and Adjusted Earnings metrics and WACC for ROCE.

(2)

Safety statistics are based on latest available industry data.

(3) 

Capacity utilization rates for industry are based on latest available industry data through November 2013.

(4)

TSR is calculated based on 20-day average of stock closing prices and assumes dividend reinvestment.

 

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The Compensation Committee also considered the totality of each NEO’s individual contribution to achieving these results in determining individual adjustments to corporate performance outcomes for both VCIP and PSP 2011—2013. Below is a summary of the 2013 individual performance highlights for each NEO.

 

2013 NEO Performance Highlights
Mr. Garland   

•  Best in class safety performance, process safety and operational excellence negatively impacted by a serious incident

•  Implementation of value creation strategies that drove significant stockholder value creation

•  Enhanced returns through disciplined cost management and strategic capital spend

Ms. Johnson   

•  Strategic legal support for acquisitions, dispositions and MLP IPO

•  Outstanding management of litigation matters

Mr. Maxwell   

•  Excellent cash and balance sheet management, as reflected by peer-leading ROCE

•  Strong Enterprise Risk Management

•  Strategic support of MLP IPO

Mr. Taylor   

•  Designed, developed and executed MLP IPO

•  Effective portfolio management (ICHP / E-Gas)

•  Implementation of strategic capital projects to capture future growth opportunities

Mr. Ziemba   

•  Best in class safety performance, process safety and operational excellence negatively impacted by a serious incident

•  Enhanced returns by expanding access to advantaged feedstocks and optimizing crude slates

•  Implementation of strategic initiatives to increase export capacity

Based on Company and individual results, the Compensation Committee approved individual performance adjustments of between 15 percent and 40 percent for each of our NEOs as noted in the table below.

 

Name   Target VCIP
Percentage
    Corporate
Payout Percentage
    Individual Performance
Adjustment Percentage
(2)
    Total Payout
($)
 

Mr. Garland

    150     175     15     4,108,750   

Ms. Johnson1

    75     175     20     732,865   

Mr. Maxwell1

    82     175     20     1,013,039   

Mr. Taylor1

    82     175     40     1,264,574   

Mr. Ziemba1

    82     175     20     1,002,202   

 

(1) 

Target percentages are weighted to reflect promotions and / or merit increases during 2013.

 

(2)

Individual performance adjustments are attributable to the Compensation Committee’s assessment of NEO individual performance described above.

Long-Term Incentive Programs

Our long-term incentive programs are designed to:

 

   

Align corporate, business and individual goals with stockholder interests and Company strategy and vision

 

   

Drive behaviors and actions consistent with stockholder interests

 

   

Encourage prudent risk taking and long-term perspective

 

   

Support retention of high-performing talent and succession planning

 

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In 2013 we adjusted our long-term incentive program to include RSUs. Our programs deliver 50 percent of long-term target value in the form of Performance Share Units through the PSP, 25 percent in the form of Stock Options and 25 percent in the form of RSUs. We believe this mix of awards is aligned with our compensation philosophy, reflects the cyclical nature of our business, promotes retention of our high-performing talent and supports succession planning.

Long-Term Incentive (LTI) Targets

The table below summarizes the annualized LTI targets for the NEOs for 2013. The Company benchmarks compensation across the peer groups described earlier and establishes multiples of base salary tied to the median LTI opportunities for similar roles at peer organizations. The values in the table below are based on these multiples applied to the executives’ salaries as of December 31, 2012, prior to the February 2013 LTI grants. The amounts shown do not reflect any promotional, individual or merit adjustments during the year and may not match the accounting values presented in the “Grants of Plan Based Awards” table on page 48:

 

Name   Performance
Share Program
Target ($)
    Stock Option
Target ($)
    Restricted Stock
Unit Target ($)
    Total Long-
Term Incentive
Target ($)
 

Mr. Garland

    4,620,000        2,310,000        2,310,000        9,240,000   

Ms. Johnson

    400,799        200,399        200,399        801,597   

Mr. Maxwell

    824,355        412,178        412,178        1,648,711   

Mr. Taylor

    935,871        467,935        467,935        1,871,741   

Mr. Ziemba

    798,400        399,200        399,200        1,596,800   

Performance Share Program (PSP)

Through the PSP, a significant portion of NEO compensation is tied to Company and individual performance over a three-year period, which is evaluated by the Compensation Committee when determining payouts. Each year, the Compensation Committee establishes metrics that will be used to evaluate Company performance relative to internal performance goals as well as appropriate peer groups for the following three years. There are three PSP programs in progress at any point in time.

The Compensation Committee uses corporate performance in relation to performance goals and benchmarks when determining award payouts. Payouts can range from 0-200 percent of target opportunity. Generally target or peer median performance results in a payout equal to 100 percent of target opportunity. Performance below target or peer median performance normally results in a payout between 0 and 99 percent of target opportunity. Performance greater than target or peer median performance generally results in a payout between 100 percent and the maximum 200 percent of target opportunity.

In addition, the Compensation Committee can apply performance adjustments of +/- 50 percent based on individual performance. The maximum payout inclusive of Company and individual performance adjustments is capped at 200 percent of target. Targets are prorated for changes in salary grade level during the relevant performance period. The CEO provides input on individual adjustments for all NEOs (other than himself).

For PSP programs with performance periods beginning in 2014, the program has been changed to apply individual performance adjustments to targets at the beginning of the period. The Committee believes this change to the program further strengthens the link between executive pay and Company performance, drives the right behaviors and actions and promotes stockholder value creation by putting the corporate and individual performance target for NEOs “at risk” during the three-year performance period.

 

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The number of target units is determined based on the fair market value of Company stock on the last trading day of the year prior to the beginning of the performance period. This stock price is discounted for dividend equivalents that will not be paid or accrued during the performance period.

In 2013 the Compensation Committee approved the PSP program for the performance period 2013—2015. The table below summarizes the PSP programs in effect during 2013:

 

Program    Metrics    Program Terms
PSP 2011—2013
(20 months)
  

50% ROCE

50% TSR

   Payouts restricted for 5 years
following performance period
per established terms and
conditions
PSP 2012—2014      

PSP 2013—2015

      Paid in cash at the end of the
performance period

The Committee believes that maintaining a balance between internal and relative metrics in the long-term incentive programs drives the right behaviors. Return on Capital Employed, which we refer to as ROCE, measures the efficiency of our capital program and TSR measures stockholder value creation during the performance period.

PSP 2011—2013 Payout (20 months)

For 2013, the Compensation Committee considered the following results when approving the payout for PSP 2011—2013.

 

LOGO    LOGO

 

* 2012—2013 period

 

** Beginning May 1, 2012, the first day of regular way trading. TSR is calculated based on the 20-day average of stock closing prices and assumes dividend reinvestment.

 

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When determining payouts under PSP programs, the Compensation Committee evaluates TSR performance by comparing the performance of our stock price to the performance of our primary peers (excluding BP and Chevron) as well as the performance of the S&P 100 index. BP and Chevron are not included in the TSR analysis because of the effect of their upstream operations on their stock price. The Compensation Committee evaluates the quality of the results as well as our proximity to peers’ TSR and exercises judgment generally within the parameters outlined below:

 

TSR

Percentile

Ranking

  

TSR

Payout

Range

75+  

   150% -200%

60 - 74  

   125% -175%

40 - 59  

   50% - 150%

25 - 39  

   25% - 100%

0 - 24  

   0% - 50%

To evaluate ROCE performance, the Compensation Committee compares Company results to stated internal benchmarks and our primary peer group to determine payouts.

The Compensation Committee evaluated the results below when determining the payout for the PSP 2011—2013 performance period:

 

What We
Measure
  How We
Measure It
  How We Did   Results   Payout
%
    Weight
%
    Corporate
Payout %
 
Return on Capital Employed   WACC

9.3%

Stretch Target

14.4%

  18.5%  

•     9.2 percentage points above WACC

•     59 percent higher than peer company average

    190     50     95
Total Stockholder Return   Relative to

Peer Group

  138.4%  

•     60th percentile

•     35 percent higher than peer company average

    150     50     75
Total Corporate Payout       100     170

Accordingly, the Committee approved the following payouts for each NEO for PSP 2011—2013:

 

Name  

Target

Shares (#)

    Corporate
Payout
Percentage
    Individual
Performance
Adjustment
(1)
   

Total

Shares (#)

 

Mr. Garland

    93,200        170     15.00     182,206   

Ms. Johnson

    10,212        170     15.00     19,964   

Mr. Maxwell

    17,829        170     15.00     34,856   

Mr. Taylor

    21,236        170     17.65     42,472   

Mr. Ziemba

    16,945        170     15.00     33,127   

 

(1)

Individual performance adjustments are attributable to the Compensation Committee’s assessment of NEO individual performance described above.

PSP 2013—2015 Targets

The Compensation Committee approved the following targets for each NEO for the 2013—2015 performance period. The total target units are based on each executive’s base salary, the executive’s target percentage and Phillips 66 stock price (less anticipated ordinary cash dividends during the performance period) on December 31, 2012. The payout for the 2013—2015 performance period will generally range from 0 to 200 percent of the total target units below, depending on Company and

 

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individual performance during this period. These values do not reflect promotional adjustments and may not match the accounting values presented in the “Grants of Plan Based Awards” table on page 48:

 

Name  

Total Target Units

(#)

Mr. Garland   96,129
Ms. Johnson   8,339
Mr. Maxwell   17,152
Mr. Taylor   19,472
Mr. Ziemba   16,612

Stock Option Program

Twenty-five percent of LTI target value is delivered to executives in the form of Stock Options. These are inherently performance-based as the stock price must increase before the executive can realize any gain. We believe Stock Options drive behaviors and actions that enhance stockholder value.

Generally, Stock Options are granted in February each year. The option value is based on the Black-Scholes-Merton model. The exercise price of Stock Options is set at 100 percent of the fair market value of our common stock on the date of grant. Stock Options granted to our NEOs in February 2013 vest ratably over a three-year period and have a ten-year term. These Stock Options do not have voting rights or entitle the holder to receive dividends. The Compensation Committee assesses the individual performance of each NEO, and based on that assessment may adjust an award by +/- 30 percent of the target grant amount. The CEO provides input on the grant amounts and individual performance adjustments on all NEOs (other than himself). The Compensation Committee evaluates the individual performance of the CEO.

Stock Options that were granted to our NEOs in February 2013 are summarized in the following table:

 

Name  

Total Options  (1)

(#)

Mr. Garland   158,500
Ms. Johnson   12,000
Mr. Maxwell   24,600
Mr. Taylor   32,100
Mr. Ziemba   23,900

 

(1) 

Total options granted include individual performance adjustments for each of Messrs. Garland and Taylor of 15% of target. The Compensation Committee considered the 2012 Company performance when determining these individual adjustments.

Restricted Stock Units (RSUs)

In 2013, for the first time, 25 percent of LTI target value was delivered to executives in the form of RSUs. The Compensation Committee believes the addition of RSUs to our LTI program enhances the overall compensation mix for our executives by:

 

   

Driving the right behaviors and actions consistent with creating stockholder value

 

   

Providing diversification of compensation in recognition of the cyclical nature of our industry

 

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Resulting in actual share ownership aligned with our stock ownership guidelines

 

   

Supporting executive retention

RSUs are typically granted in February each year. The number of units is determined based on the fair market value of Company stock on the date of grant. RSUs awarded to our NEOs in February 2013 cliff vest at the end of the three-year holding period and are delivered to the NEOs in the form of unrestricted Company stock. These RSUs do not carry voting rights but do generate dividend equivalents during the holding period. The Compensation Committee assesses the individual performance of each NEO, and based on that assessment may adjust an award by +/- 30 percent of the target grant amount. The CEO provides input regarding awards made to all NEOs (other than himself). The Compensation Committee evaluates the individual performance of the CEO.

RSUs that were granted to our NEOs in February 2013 are summarized below:

 

Name  

Total RSUs
Granted
(1)

(#)

 
Mr. Garland     42,730   
Ms. Johnson     4,191   
Mr. Maxwell     8,619   
Mr. Taylor     9,785   
Mr. Ziemba     6,422   

 

(1) 

Total RSUs granted include individual performance adjustments for Mr. Garland, Ms. Johnson and Messrs. Maxwell and Taylor of 15%, 30%, 30% and 30% of target, respectively. The Compensation Committee considered the 2012 Company performance when determining these individual adjustments.

Other Benefits and Perquisites

Below is a summary of other compensation elements available to our NEOs in addition to the five main programs described above:

Broad-Based Employee Benefit Programs: NEOs participate in the same basic benefits package available to our other U.S. salaried employees. This package includes qualified pension; 401(k) plan; medical, dental, vision, life, and accident insurance plans, as well as flexible spending arrangements for health care and dependent care expenses; and our matching gift program.

Comprehensive Security Program: The Board has adopted a comprehensive security program to address the increased security risks for certain senior executives. Mr. Garland is the only NEO currently designated by the Board as requiring increased security under this program. This program allows for certain additional security measures in specific situations when the senior executive is traveling by car or airplane on Company business. An additional security review of the NEO’s personal residence is also included. Any additional costs to the Company for these activities are imputed to the NEO as Other Income and included in the “Summary Compensation Table” on page 45.

Executive Retirement Plans: We maintain the following supplemental retirement plans for our NEOs.

 

   

Voluntary Deferred Compensation Plan—This plan (the Phillips 66 Key Employee Deferred Compensation Plan, which we refer to as the KEDCP) provides tax-efficient retirement savings by allowing executives to voluntarily defer both the receipt and taxation of a portion of

 

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their base salary and annual bonus until a specified date or when they leave the Company. Further information on the KEDCP is provided in the “Nonqualified Deferred Compensation” table beginning on page 55.

 

   

Defined Contribution Restoration Plan—This plan (the Phillips 66 Defined Contribution Make-Up Plan, which we refer to as the DCMP) restores benefits capped under our qualified defined contribution plan due to Internal Revenue Code limits. Further information on the DCMP is provided in the “Nonqualified Deferred Compensation” table beginning on page 55.

 

   

Defined Benefit Restoration Plan—This plan (the Phillips 66 Key Employee Supplemental Retirement Plan, which we refer to as the KESRP) restores Company-sponsored benefits capped under the qualified defined benefit pension plan due to Internal Revenue Code limits. Further information on the KESRP is provided in the “Pension Benefits as of December 31, 2013” table beginning on page 53.

Executive Life Insurance: We provide life insurance policies on all U.S.-based employees with a face value approximately equal to their annual base salary. For our NEOs, the face value of this coverage is approximately twice their annual base salary.

Executive Severance and Change in Control Plans: We do not maintain individual severance or change in control agreements with our executives. However, we maintain the Phillips 66 Executive Severance Plan and the Phillips 66 Key Employee Change in Control Severance Plan, which we refer to as the CICSP, to accomplish several specific objectives, including:

 

   

Ensuring stockholder interests are protected during business transactions by providing benefits that promote senior management stability

 

   

Providing and preserving an economic motivation for participating executives to consider a business combination that might result in an executive’s job loss

 

   

Competing effectively in attracting and retaining executives in an industry that features frequent acquisitions and divestitures

Executives may not participate in both plans as a result of the same severance event. Among other benefits, the Executive Severance Plan provides a payment equal to one and one-half or two times the executive’s base salary, depending on salary grade level, if he or she is involuntarily terminated without cause. The CICSP provides a payment equal to two or three times the executive’s base salary, depending on salary grade level, if the executive is involuntarily terminated without cause in connection with a change in control or the executive terminates employment for good reason within two years after a change in control. This “double trigger” requirement is in the best interest of stockholders and is considered a best practice.

In 2013, the Compensation Committee approved an amendment to the CICSP that eliminates the early vesting or accelerated lapsing of any equity award unless an executive is involuntarily terminated without cause or terminates employment for good reason within two years of a change in control. This amendment ensures that an executive does not benefit from the CICSP unless the executive’s employment status is negatively impacted by a change in control event. In accordance with provisions of the plan, this change is effective for any change in control events that occur after October 2015.

Details of potential payments under these plans are outlined in the “Potential Payments upon Termination or Change in Control” section beginning on page 57. These plans do not provide any tax gross-up protections.

 

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Personal Use of Company Aircraft: The primary purpose of our corporate aircraft is to facilitate Company business. In the course of conducting Company business, executives will occasionally invite a family member or other personal guest to travel with them to attend a meeting or function. The Company believes this is important and serves a business purpose. When this is deemed taxable to the executive, we provide further payments to reimburse the costs of the inclusion of this item in his or her taxable income.

Executive Compensation Governance

Clawback Provisions

Short- and long-term compensation, deferred compensation and nonqualified retirement benefits received by any executive are subject to clawback provisions in the event financial or other data is materially misstated due to negligence or misconduct on the part of the executive, as determined by the Compensation and Audit Committees.

Stock Ownership

The Compensation Committee believes stock ownership guidelines align executive performance with stockholder value creation and mitigate compensation risk. Each executive must own the following amounts of Phillips 66 common stock within five years from the date of program eligibility:

 

Executive Level   Salary Multiple  
Chairman and CEO     6   
Executive Vice President     4   

RSUs, but not Stock Options or PSP targets, are included when determining the amount of stock owned by an executive. Compliance with the stock ownership guidelines is reviewed annually. All NEOs currently comply with these stock ownership guidelines or are on track to comply within the applicable five-year period.

Tax Considerations-Internal Revenue Code (IRC) Section 162(m)

IRC Section 162(m) generally limits the deductibility of compensation paid to the CEO and the three other highest-paid executive officers (other than the CFO) in any taxable year to $1 million unless compensation is performance-based and the performance criteria are approved by stockholders. The Compensation Committee considers this when making decisions and generally attempts to structure all elements of executive compensation to meet this exception. However, the Compensation Committee has the flexibility to design and maintain the executive compensation programs in a manner that is most beneficial overall to stockholders, including the payment of compensation that is subject to the deduction limits under IRC Section 162(m).

For 2013 the Compensation Committee believes it has taken the necessary steps intended to qualify payments made under the VCIP and awards made under the Long-Term Incentive programs (PSP and RSUs) as performance-based under IRC Section 162(m). Due to a technical error in administering its compliance with Section 162(m), the Company paid certain immaterial amounts under the VCIP for 2012 that were not deductible.

Trading Policies

Our insider trading policy prohibits all employees and directors from trading Company stock while in possession of material, non-publicly disclosed information. This policy requires executives and

 

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directors, as well as employees with regular access to insider information, to follow specific pre-clearance procedures before entering into transactions in our stock. Our policy prohibits hedging transactions related to our stock or pledging our stock, including any stock the executive or director may hold in excess of his or her stock ownership guideline requirements.

Independent Consultant

The Compensation Committee retains Meridian Compensation Partners, LLC as its independent executive compensation consultant. The Committee has evaluated whether Meridian’s work raised any conflict of interest and determined that no such conflict exists.

The primary role of this consultant is to advise the Committee on:

 

   

Our compensation programs and processes relative to external corporate governance standards

 

   

The appropriateness of our executive compensation programs in comparison to those of our peers

 

   

The efficacy of the compensation programs in accomplishing the objectives set by the Compensation Committee with respect to executives

Compensation Risk Assessment

The Compensation Committee oversees management’s risk assessment of all elements of our compensation programs, policies and practices for all employees. Management has concluded that our compensation programs, policies and practices are not reasonably likely to have a material adverse effect on the Company.

 

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Executive Compensation Tables

The following tables and accompanying narrative disclosures provide information concerning total compensation earned by our CEO and other NEOs as of December 31, 2013 for services to Phillips 66 or any of our wholly-owned subsidiaries during 2013 and 2012 (May 1—December 31).

Summary Compensation Table

The following table summarizes the compensation for our NEOs for fiscal years 2013 and 2012 (since Company inception on May 1, 2012).

 

Name and

Position

  Year (1)    

Salary

($)(2)

   

Bonus

($)(3)

   

Stock

Awards

($)(4)

   

Option

Awards

($)(5)

   

Non-Equity

Incentive Plan

Compensation

($)(6)

   

Change in

Pension Value

and

Nonqualified

Deferred

Compensation

Earnings ($)(7)

   

All Other

Compensation

($)(8)

    Total ($)  

Greg C. Garland, Chairman and CEO

    2013        1,441,667               7,276,484        2,658,045        4,108,750        4,045,846        311,413        19,842,205   
    2012        933,333               10,033,281               3,000,000        339,120        117,304        14,423,038   

Paula A. Johnson, Executive Vice President and General Counsel

    2013        501,105               1,671,395        201,240        732,865        280,204        75,173        3,461,982   
    2012        285,684               709,400               483,973        130,272        32,771        1,642,100   

Greg G. Maxwell, Executive Vice President and CFO

    2013        633,546               1,899,948        412,542        1,013,039        74,263        130,368        4,163,706   
    2012        389,231               1,511,779               727,064        47,295        104,655        2,780,024   

Tim G. Taylor, Executive Vice President

    2013        717,285               2,130,711        538,317        1,264,574        169,823        169,629        4,990,339   
    2012        442,935               1,831,050               1,039,530        40,628        34,323        3,388,466   

Lawrence M. Ziemba, Executive Vice President

    2013        626,768               1,829,619        400,803        1,002,202        246,458        122,450        4,228,300   
    2012        376,976               1,324,055               829,752        475,839        35,496        3,042,118   

 

(1) All amounts in this table reflect compensation received for 2013 and 2012—after our May 1, 2012 spin-off.

 

(2) Includes any amounts that were voluntarily deferred under our Key Employee Deferred Compensation Plan.

 

(3) Because our annual bonus program (VCIP) has mandatory performance measures that must be achieved before any payout can be made to our NEOs, VCIP payments are shown in the Non-Equity Incentive Plan Compensation column of the table rather than the Bonus column.

 

(4) Amounts shown represent the aggregate grant date fair value of awards determined in accordance with U.S. generally accepted accounting principles (GAAP). Assumptions used in calculating these amounts are included in Note 19—Employee Benefit Plans in the Notes to Consolidated Financial Statements in our 2013 Annual Report on Form 10-K and attached as Appendix A to this proxy statement.

 

     The amounts shown for stock awards are from our PSP, RSU program and for off-cycle awards. No off-cycle awards were granted to our NEOs during 2013. These include awards that are expected to be finalized as late as 2015. The amounts shown for awards from the PSP relate to performance periods that began in 2012 and 2013 and that end in 2013, 2014 and 2015.

 

     Amounts shown, relating to PSP, are targets set for the PSP awards, because it is the probable outcome at the setting of the target for the applicable performance period that the target will be achieved consistent with the accounting treatment under FASB ASC Topic 718. If the maximum payout were used for the PSP awards, excluding any individual adjustments, the amounts shown relating to PSP would double, although the value of the actual payout would depend on the stock price at the time of the payout. If the minimum payout were used, the amounts for PSP awards would be reduced to zero. Actual payouts with regard to the targets set for the performance period that ended in 2013 were approved by the Compensation Committee at its February 2014 meeting. Those payouts were as follows (with values shown at fair market value on the date of payout): Mr. Garland, $13,165,295; Ms. Johnson, $1,442,499; Mr. Maxwell $2,518,520; Mr. Taylor, $3,068,814; and Mr. Ziemba, $2,393,591.

 

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     Awards under the PSP 2012-2014 are made in restricted stock units that will be forfeited if the NEO is terminated prior to the end of the escrow period set in the award (other than for death or following disability or after a change in control). The escrow period lasts five years from the grant of the award (which is in addition to the performance period) unless the NEO makes an election prior to the beginning of the program period to extend the escrow period until separation from service. In the case of termination due to death, layoff, or retirement after age 55 with five years of service, or after disability or a change in control, however, the escrow period ends at the exceptional termination event. In the event of termination due to layoff or retirement after age 55 with five years of service, restrictions lapse unless the NEO has elected to defer receipt of the stock until a later time.

 

     Awards under the PSP 2013—2015 are made in cash at the end of the performance period and are forfeited if the NEO is terminated prior to the end of the performance period (other than for death or following disability or after a change in control). If the NEO retires after age 55 and with five years of service, the NEO is entitled to a prorated award for any ongoing program in which he or she participated for at least 12 months.

 

(5) Amounts shown represent the aggregate grant date fair value of awards determined in accordance with FASB ASC Topic 718. Assumptions used in calculating these amounts are included in Note 19—Employee Benefit Plans in the Notes to Consolidated Financial Statements in our 2013 Annual Report on Form 10-K and attached as Appendix A to this proxy statement.

 

(6) These are amounts paid under our annual bonus program (VCIP) for 2013, including bonus amounts that were voluntarily deferred under our Key Employee Deferred Compensation Plan. See note (3) above. These amounts were paid in February 2014.

 

(7) Reflects the actuarial increase in the present value of the benefits under our pension plans determined using interest rate and mortality rate assumptions consistent with those used in our financial statements. Interest rate assumption changes have a significant impact on the pension values. There are no deferred compensation earnings reported in this column, as our nonqualified deferred compensation plans do not provide above-market or preferential earnings.

 

     The present value of Mr. Garland’s pension benefit is calculated based on his highest three years of earnings over the last ten years. The increase in his pension benefits reflects a significant increase in earnings since his promotion to Chairman of the Board and Chief Executive Officer.

 

(8) We offer limited perquisites to our NEOs, which, together with Company contributions to our qualified savings and nonqualified defined contribution plans, comprise the All Other Compensation column as summarized below:

 

Name   Year    

Personal
Use of
Company
Aircraft

($)(a)

   

Automobile

Provided

by

Company

($)(b)

   

Home

Security

($)(c)

   

Executive

Group

Life

Insurance

Premiums

($)(d)

   

Miscellaneous

Perquisites

and Tax

Reimbursements

($)(e)

   

Relocation

($)(f)

   

Matching Gift

Program ($)(g)

   

Matching

Contributions

Under the

Tax-Qualified

Savings Plan

($)(h)

   

Company

Contributions to

Nonqualified

Defined

Contribution

Plans ($)(i)

 

Mr. Garland

    2013        5,524        5,036        284        7,439        25,868               5,000        19,233        243,029   

Ms. Johnson

    2013                             1,383        885               2,000        20,778        50,127   

Mr. Maxwell

    2013                             3,269        10,364        4,409        10,500        20,400        81,426   

Mr. Taylor

    2013                             5,681        16,235        19,747               19,843        108,123   

Mr. Ziemba

    2013                             3,234        3,123               5,032        20,400        90,661   

 

  (a) The Phillips 66 Comprehensive Security Program requires in certain circumstances that Mr. Garland fly on Company aircraft. The amount presented above represents the approximate incremental cost to Phillips 66 for personal use of the aircraft. Approximate incremental cost has been determined by calculating the variable costs for each aircraft during the year, dividing that amount by the total number of miles flown by that aircraft, and multiplying the result by the miles flown for personal use during the year. Incremental costs for flights to the hangar or other locations without passengers, commonly referred to as “deadhead” flights, are included in the amount above.

 

  (b) The use of a car and driver is sometimes required by our Comprehensive Security Program for certain executives, including Mr. Garland. The value shown represents the actual cost of car rental with driver service.

 

  (c) The use of a home security system is required as part of our Comprehensive Security Program for certain executives and employees, including Mr. Garland, based on risk assessments made by our Crisis Management and Security Manager. The amount shown represents upgrade costs to Mr. Garland’s home security system with features required by us that are in excess of the cost of a “standard” system typical for homes in the neighborhood where his home is located. Mr. Garland pays for the cost of the “standard” system.

 

  (d) We maintain life insurance policies and/or death benefits for all our U.S.-based salaried employees (at no cost to the employee) with a face value approximately equal to the employee’s annual salary. We maintain group life insurance policies on each of our NEOs equal to approximately two times his or her annual salary. The amounts shown are for premiums paid by us to provide the additional group life insurance above what is provided to the broad-based employees.

 

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  (e) The amounts shown primarily reflect payments by us relating to certain taxes incurred by the NEOs. These payments primarily occur when we request family members or other guests to accompany an NEO to a Company function and, as a result, the NEO is deemed to make personal use of Company assets such as Company aircraft and thereby incurs imputed income. We believe this type of expense is appropriately characterized as a business expense and, if the NEO incurs imputed income in accordance with applicable tax laws, we will generally reimburse the NEO for any increased tax costs. The amount for Mr. Garland includes $221 for gifts received in his capacity as Chairman of the Board of Directors.

 

  (f) This amount reflects relocation expenses incurred by Messrs. Maxwell and Taylor in connection with their employment by the Company.

 

  (g) We maintain a Matching Gift Program under which certain gifts by employees to qualified educational or charitable institutions are matched by the Company. The program matches up to $15,000 annually.

 

  (h) Under the terms of our tax-qualified defined contribution plans, we make contributions to the accounts of all eligible employees, including the NEOs.

 

  (i) Under the terms of our nonqualified defined contribution plans, we make contributions to the accounts of all eligible employees, including the NEOs. See the “Nonqualified Deferred Compensation” table and accompanying narrative and notes beginning on page 55 for more information.

 

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Grants of Plan-Based Awards

The following table provides additional information about plan-based compensation disclosed in the “Summary Compensation Table” on page 45. This table includes both equity and non-equity awards.

 

           

Estimated Future Payouts
Under Non-Equity Incentive

Plan Awards(2)

    Estimated Future Payouts
Under Equity Incentive Plan
Awards
(3)
    All Other
Stock
Awards:
Number of
Shares of
Stock or
Units (#)
    All Other
Option
Awards:
Number of
Securities
Underlying
Options (#)
    Exercise
or Base
Price of
Option
Awards
($/sh)
    Grant Date
Fair Value
of Stock
and
Option
Awards
($)
(4)
 
Name   Grant
Date
(1)
    Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
(#)
    Target
(#)
    Maximum
(#)
         

Mr. Garland

             2,162,500        5,406,250                                                    
      2/7/2013                                                  42,730                      2,656,524   
      2/7/2013                                    96,129        192,258                             4,619,960   
      2/7/2013                                                         158,500        62.17        2,658,045   

Ms. Johnson

             375,828        939,570                                                    
      2/7/2013                                                  4,191                      260,554   
      2/7/2013                                    8,339        16,678                             400,772   
      5/1/2013                                    3,207        6,414                             194,809   
      5/1/2013                                    7,110        14,220                             431,897   
      5/1/2013                                    6,311        12,622                             383,362   
      2/7/2013                                                         12,000        62.17        201,240   

Mr. Maxwell

             519,507        1,298,768                                                    
      2/7/2013                                                  8,619                      535,843   
      2/7/2013                                    17,152        34,304                             824,325   
      5/1/2013                                    1,708        3,416                             103,752   
      5/1/2013                                    3,790        7,580                             230,224   
      5/1/2013                                    3,388        6,776                             205,804   
      2/7/2013                                                         24,600        62.17        412,542   

Mr. Taylor

             588,174        1,470,435                                                    
      2/7/2013                                                  9,785                      608,333   
      2/7/2013                                    19,472        38,944                             935,824   
      5/1/2013                                    1,832        3,664                             111,285   
      5/1/2013                                    4,062        8,124                             246,746   
      5/1/2013                                    3,762        7,524                             228,523   
      2/7/2013                                                         32,100        62.17        538,317   

Mr. Ziemba

             513,949        1,284,873                                                    
      2/7/2013                                                  6,422                      399,256   
      2/7/2013                                    16,612        33,224                             798,373   
      5/1/2013                                    2,296        4,592                             139,470   
      5/1/2013                                    4,240        8,480                             257,559   
      5/1/2013                                    3,868        7,736                             234,961   
      2/7/2013                                                         23,900        62.17        400,803   

 

 

(1) The grant date shown is the date on which the Compensation Committee approved the target awards. Ms. Johnson and Messrs. Maxwell, Taylor and Ziemba received promotions on May 1, 2013, the first anniversary of our spin-off from ConocoPhillips. The Compensation Committee approved these promotions at its April 2013 meeting, effective May 1, 2013. The grants shown above on May 1 represent the promotional target received by each executive under the PSP for the performance periods that end in 2013, 2014 and 2015. The PSP targets are adjusted for promotions during the performance period to reflect the executive’s new base salary and target percentage for the remainder of the performance period using the stock price established at the beginning of the performance period. The number of promotional target units and their fair market value on the May 1, 2013 date of grant for the PSP performance period ending in 2013 are as follows: Ms. Johnson, 3,207 units, $194,809; Mr. Maxwell, 1,708 units, $103,752; Mr. Taylor, 1,832 units, $111,285; Mr. Ziemba, 2,296 units, $139,470. The number of promotional target units and their fair market value on the May 1, 2013 date of grant for the PSP performance period ending in 2014 are as follows: Ms. Johnson, 7,110 units, $431,897; Mr. Maxwell, 3,790 units, $230,224; Mr. Taylor, 4,062 units, $246,746; Mr. Ziemba, 4,240 units, $257,559. The number of promotional target units and their fair market value on the May 1, 2013 date of grant for the PSP performance period ending in 2015 are as follows: Ms. Johnson, 6,311 units, $383,362; Mr. Maxwell, 3,388 units, $205,804; Mr. Taylor, 3,762 units, $228,523; Mr. Ziemba, 3,868 units, $234,961.

 

(2)

Threshold and maximum awards are based on the provisions in the VCIP. Actual awards earned can range from 0 to 200 percent of the target awards, with a further possible adjustment of +/- 50 percent of the target award for individual performance. The Compensation Committee retains the authority to make awards under the program and to use its judgment in adjusting awards, including making awards greater than the amounts shown in the table above, provided the award does not exceed amounts permitted under the 2013

 

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  Omnibus Stock and Performance Incentive Plan of Phillips 66, approved by stockholders. Actual payouts under the annual bonus program for 2013 are calculated using base salary earned in 2013 and reflected in the “Non-Equity Incentive Plan Compensation” column of the “Summary Compensation Table” on page 45.

 

(3) Threshold and maximum awards are based on the provisions of the PSP. Actual awards earned can range from 0 to 200 percent of the target awards. Performance periods under the PSP cover a three-year period, and since a new three-year period commences each year, there could be three overlapping performance periods ongoing at any time. In 2013, all the NEOs received an award for the three-year performance period beginning in 2013 and ending in 2015. The Compensation Committee retains the authority to make awards under the PSP using its judgment, including making awards greater than the maximum payout shown in the table above, provided the award does not exceed amounts permitted under the 2013 Omnibus Stock and Performance Incentive Plan of Phillips 66.

 

(4) For equity incentive plan awards, these amounts represent the grant date fair value at target level under the PSP as determined pursuant to FASB ASC Topic 718. For Stock Option awards, these amounts represent the grant date fair value of the option awards using a Black-Scholes-Merton-based methodology. Actual value realized upon option exercise depends on market prices at the time of exercise. For other stock awards, these amounts represent the grant date fair value of the RSU awards determined pursuant to FASB ASC Topic 718. See Note 19—Employee Benefit Plans in the Notes to Consolidated Financial Statements in our 2013 Annual Report on Form 10-K and attached as Appendix A to this proxy statement, for a discussion of the relevant assumptions used in this determination.

 

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Outstanding Equity Awards at Fiscal Year End

The following table lists outstanding Phillips 66 equity grants for each NEO as of December 31, 2013.

Some awards held by NEOs at the time of our spin-off from ConocoPhillips were adjusted or substituted as described below in order to preserve the intrinsic value, remaining vesting periods, and other terms and conditions of ConocoPhillips awards outstanding on April 30, 2012, in accordance with the Employee Matters Agreement entered into with ConocoPhillips.

 

   

NEOs with exercisable ConocoPhillips Stock Options received options to purchase both ConocoPhillips and Phillips 66 common stock

 

   

NEOs with unexercisable ConocoPhillips Stock Options received substitute options to purchase only Phillips 66 common stock

 

   

NEOs with restricted stock and PSU awards for completed performance periods under the ConocoPhillips PSP received both ConocoPhillips and Phillips 66 Restricted Stock and PSUs

 

   

NEOs with Restricted Stock and RSUs received under all ConocoPhillips programs, other than the ConocoPhillips PSP, received Phillips 66 Restricted Stock and RSUs

 

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The table below includes outstanding Phillips 66 shares and options that resulted from the adjustments described above, but it does not include the ConocoPhillips shares and options that resulted from these adjustments.

 

Name   Grant
Date
(2)
    Option Awards(1)     Stock Awards  
    Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(3)
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
    Option
Exercise
Price ($)
    Option
Expiration
Date
    Number
of Shares
or Units
of Stock
That Have
Not
Vested
(#)
(7)
    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)
    Equity
Incentive
Plan
Awards:
Number
of Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
(#)
(8)
    Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
 

Mr. Garland

    2/10/2011        66,077        53,912 (4)      31.25        2/10/2021                               
    2/9/2012        56,409        112,819 (5)      32.03        2/9/2022                               
    2/7/2013               158,500 (6)      62.17        2/7/2023                               
                                  407,026        31,393,915        466,052        35,946,591   

Ms. Johnson

    2/10/2011        9,215        7,520 (4)      31.25        2/10/2021                               
    2/9/2012        7,802        15,604 (5)      32.03        2/9/2022                               
    2/7/2013               12,000 (6)      62.17        2/7/2023                               
                                  46,289        3,570,271        64,672        4,988,151   

Mr. Maxwell

    2/9/2012        11,806        23,613 (5)      32.03        2/9/2022                               
    2/7/2013               24,600 (6)      62.17        2/7/2023                               
                                  175,573        13,541,945        95,994        7,404,017   

Mr. Taylor

    2/9/2012        25,753        51,507 (5)      32.03        2/9/2022                               
    2/7/2013               32,100 (6)      62.17        2/7/2023                               
                                  94,629        7,298,735        111,250        8,580,713   

Mr. Ziemba

    2/4/2005        11,065               21.32        2/4/2015                               
    2/10/2006        7,517               26.33        2/10/2016                               
    2/8/2007        8,896               29.58        2/8/2017                               
    2/14/2008        8,563               35.38        2/14/2018                               
    2/12/2009        20,811               20.27        2/12/2019                               
    2/12/2010        45,093               21.56        2/12/2020                               
    2/10/2011        39,996        32,634 (4)      31.25        2/10/2021                               
    2/9/2012        33,969        67,940 (5)      32.03        2/9/2022                               
    2/7/2013               23,900 (6)      62.17        2/7/2023                               
                                  113,116        8,724,637        99,304        7,659,318   

 

(1) All options shown in the table have a maximum term for exercise of ten years from the grant date. Under certain circumstances, the terms for exercise may be shorter, and in certain circumstances, the options may be forfeited and cancelled. All awards shown in the table have associated restrictions upon transferability.

 

(2) The dates presented in this column represent the date the awards were granted by ConocoPhillips for grants prior to the spin-off from ConocoPhillips, and by Phillips 66 for all other awards. The awards granted prior to the spin-off were converted to Phillips 66 equity awards in connection with the spin-off and in accordance with the Employee Matters Agreement and remain subject to the same general terms and conditions.

 

(3) The options shown in this column vested and became exercisable in 2013 or prior years (although under certain termination circumstances, the options may still be forfeited). Options become exercisable in one-third increments on the first, second and third anniversaries of the grant date.

 

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(4) Represents the vesting of the final one-third of the February 10, 2011 grant, which became exercisable on February 10, 2014.

 

(5) Represents the vesting of the final two-thirds of the February 9, 2012 grant, half of which became exercisable on February 9, 2014 and the other half which will become exercisable on February 9, 2015.

 

(6) Represents the February 7, 2013 grant. One-third of the grant became exercisable on February 7, 2014, one-third will become exercisable on February 7, 2015, and one-third will become exercisable on February 7, 2016.

 

(7) These amounts include unvested restricted stock and RSUs awarded under the PSP for performance periods ending on or before December 31, 2012; awarded to Messrs. Maxwell and Taylor as an inducement to employment with ConocoPhillips; awarded to Mr. Garland, Ms. Johnson and Messrs. Maxwell and Taylor as special awards in 2012; and awarded as annual awards. These amounts also include the unvested RSU awards under the PSP for the performance period that ended December 31, 2013, as follows: Mr. Garland, 182,206 units; Ms. Johnson, 19,964 units; Mr. Maxwell, 34,856 units; Mr. Taylor, 42,472 units; and Mr. Ziemba, 33,127 units. All awards continue to have restrictions upon transferability. Restrictions on PSP awards for performance periods beginning prior to 2009 lapse upon separation from service. Restrictions on PSP awards for later performance periods lapse five years from the grant date unless the NEO elected prior to the beginning of the performance period to defer lapsing of the restrictions until separation from service. Awards are subject to forfeiture if, prior to lapsing, the NEO separates from service for a reason other than death, disability, layoff, retirement after reaching age 55 with five years of service, or after a change of control, although the Compensation Committee has the authority to waive forfeiture. The awards have no voting rights, but do entitle the holder to receive dividend equivalents in cash. The value of the awards reflects the closing price of our stock, as reported on the NYSE, on December 31, 2013 ($77.13). Awards granted under the PSP for periods beginning in 2012 were recently made subject to additional performance criteria in accordance with Section 162(m) of the Internal Revenue Code.

 

(8) Reflects potential awards from ongoing performance periods under the PSP for performance periods ending December 31, 2014 and December 31, 2015. These awards are shown at maximum levels; however, there is no assurance that awards will be granted at, below or above target after the end of the relevant performance periods, as the determination to make a grant and the amount of any grant is within the judgment of the Compensation Committee. Until an actual grant is made, these unearned awards pay no dividend equivalents. The value of these unearned awards reflects the closing price of our stock, as reported on the NYSE, on December 31, 2013 ($77.13).

Option Exercises and Stock Vested for 2013

The following table summarizes the value received from stock option exercises and stock grants vested during 2013:

 

Name    Option Awards      Stock Awards  
  

Number of

Shares

Acquired on

Exercise

(#)

    

Value Realized

on Exercise

($)

    

Number of

Shares

Acquired on

Vesting

(#)

    

Value Realized

on Vesting

($)

 

Mr. Garland

                     24,808         1,664,245   

Ms. Johnson

                     8,272         535,337   

Mr. Maxwell

                     20,011         1,263,679   

Mr. Taylor

                     17,831         961,263   

Mr. Ziemba

                               

 

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Pension Benefits as of December 31, 2013

Our defined benefit pension plan covering executives, the Phillips 66 Retirement Plan, consists of multiple titles with different terms. Executives are only eligible to participate in one title, but may have frozen benefits under one or more other titles.

 

     Title I (1)    Title II (2)    Title III    Title IV

Current Eligibility

   Mr. Garland    Messrs. Maxwell and
Taylor
   Mr. Ziemba    Ms. Johnson

Normal Retirement

   Age 65

Early Retirement

   Age 55 with five years of service or if laid off during or after the year in which the participant reaches age 50    Executives may
receive their vested
benefit upon
termination of
employment at any
age
   Age 55 with ten years
of service
   Age 50 with ten years
of service

Benefit Calculation (3)

   Calculated as the product of 1.6 percent times years of credited service multiplied by the final annual eligible average compensation    Based on monthly
pay and interest
credits to a cash
balance account
created on the first
day of the month after
an executive’s hire
date. Pay credits are
equal to a percentage
of total salary and
annual bonus.
   Calculated as the product of 1.6 percent times years of credited service multiplied by the final annual eligible average compensation

Final Average Earnings Calculation

   Calculated using the three highest consecutive compensation years in the last ten calendar years before retirement plus the year of retirement    N/A    Calculated using the
highest consecutive
36 months of
compensation in the
last 120 months of
service prior to
retirement
   Calculated using the
higher of the highest
three years of
compensation or the
highest consecutive
36 months of
compensation

Eligible Pension Compensation (4)

   Includes salary and annual bonus    Includes salary and
annual bonus
   Includes salary    Includes salary and
annual bonus

Benefit Vesting (5)

      Employees vest after
three years of service
  

Payment Types

   Allows payments in the form of several annuity types or a single lump sum    Allows payments in
the form of several
annuity types, but
does not allow a
single lump sum
payment
   Allows payments in
the form of several
annuity types or a
single lump sum

IRS limitations

   Benefits under all Titles are limited by the Internal Revenue Code. In 2013, that limit was $255,000. The Internal Revenue Code also limits the annual benefit available under these Titles expressed as an annuity. In 2013, that limit was $205,000 (reduced actuarially for ages below 62).

 

(1)

Mr. Maxwell has a frozen benefit under Title I from prior years of service with predecessor companies.

 

(2)

Executives whose combined years of age and service total less than 44 receive a six percent pay credit, those with 44 through 65 receive a seven percent pay credit and those with 66 or more receive a 9 percent pay credit.

 

     Interest credits are applied to the cash balance account each month. This credit is calculated by multiplying the value of the account by the interest credit rate, based on 30-year U.S. Treasury security rates adjusted quarterly.

 

(3)

An early benefit reduction is calculated on Title I, by reducing the benefit five percent for each year before age 60 that benefits are paid. An early benefit reduction is calculated on Title III, by reducing the benefit 6.67% for each year before age 60 that benefits are paid, unless the participant has at least 85 points awarded, with one point for each year of age and

 

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  one point for each year of service. Title IV early benefit reduction is calculated by reducing the benefit by five percent per year for each year before age 57 that benefits are paid and 4 percent per year for benefits that are paid between ages 57 and 60. The benefit calculation for Titles I, III and IV is reduced by the product of 1.5 percent of the annual primary social security benefit multiplied by years of credited service, although a minimum reduction limit of 50 percent may apply.

 

(4) 

Under Title I, if an executive receives layoff benefits, then the eligible compensation calculation also includes the annualized salary for the year of layoff (rather than the actual salary for that year) and years of service are increased by any period for which layoff benefits are calculated.

 

(5) 

Messrs. Maxwell and Taylor are vested in their benefits due to prior service with ConocoPhillips and predecessor companies.

The following table lists the pension program participation and actuarial present value of each NEO’s defined benefit pension as of December 31, 2013.

 

Name   Plan Name    Number of
Years Credited
Service (#)
(1)
     Present Value
of Accumulated
Benefit
($)
(2)
    

Payments During

Last Fiscal Year
($)

 

Mr. Garland

 

Phillips 66 Retirement Plan—Title I

 

Phillips 66 Key Employee Supplemental Retirement Plan (3)

    

 

 

24

 

  

 

  

    

 

 

959,784

 

9,625,742

  

 

  

    

 

 

—  

 

—  

  

 

  

Ms. Johnson

 

Phillips 66 Retirement Plan—Title IV

 

Phillips 66 Key Employee Supplemental Retirement Plan

    

 

 

11

 

  

 

  

    

 

 

341,725

 

616,830

  

 

  

    

 

 

—  

 

—  

  

 

  

Mr. Maxwell

 

Phillips 66 Retirement Plan—Title I

 

Phillips 66 Retirement Plan—Title II

 

Phillips 66 Key Employee Supplemental Retirement Plan

    

 

 

 

 

23

 

2

 

  

 

  

 

  

    

 

 

 

 

583,427

 

43,660

 

121,838

  

 

  

 

  

    

 

 

 

 

—  

 

—  

 

—  

  

 

  

 

  

Mr. Taylor

 

Phillips 66 Retirement Plan—Title II

 

Phillips 66 Key Employee Supplemental Retirement Plan

    

 

 

2

 

  

 

  

    

 

 

44,453

 

178,606

  

 

  

    

 

 

—  

 

—  

  

 

  

Mr. Ziemba

 

Phillips 66 Retirement Plan—Title III

 

Phillips 66 Key Employee Supplemental Retirement Plan

    

 

 

37

 

  

 

  

    

 

 

1,102,064

 

2,296,815

  

 

  

    

 

 

—  

 

—  

  

 

  

 

(1) Years of credited service include service recognized under the predecessor ConocoPhillips plans from which these plans were spun off effective May 1, 2012. Mr. Maxwell is credited with a total of 25 years of service under the plans described above. The number of years of service credited under Title I is frozen at 23 years of service, but the number of years of service counted under Title II increases each year that he remains employed by us. His years of service under Title I are related to his employment with ConocoPhillips predecessor companies prior to 2000.

 

(2) The eligible pension compensation used to determine the present value of the accumulated benefit for each NEO as of December 31, 2013 is as follows: Mr. Garland, $7,762,315; Ms. Johnson, $2,007,441; Mr. Maxwell, $1,360,609; Mr. Taylor, $1,756,815; and Mr. Ziemba, $1,732,496.

 

(3) The present value of Mr. Garland’s pension benefit is calculated based on his highest three years of earnings over the last ten years. The increase in the present value of his pension benefit reflects a significant increase in earnings since his promotion to Chairman of the Board and Chief Executive Officer.

 

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Nonqualified Deferred Compensation

Our NEOs are eligible to participate in two nonqualified deferred compensation plans, the Phillips 66 Key Employee Deferred Compensation Plan, which we refer to as the KEDCP, and the Phillips 66 Defined Contribution Make-Up Plan, which we refer to as the DCMP.

The KEDCP allows executives to reduce salary voluntarily and request deferral of VCIP or other similar annual incentive compensation program payments that would otherwise be received in the subsequent year. Executives may defer up to 50 percent of salary and up to 100 percent of VCIP payments. The default distribution option is a lump sum payment paid at least six months after separation from service. Executives may elect to defer payments from one to five years, and to receive annual, semiannual or quarterly payments for a period of up to fifteen years. Executives may also elect to defer their VCIP to a specific date in the future.

The DCMP is a nonqualified restoration plan for employer contributions that cannot be made to our 401(k) plan either due to an executive’s salary deferral under the KEDCP or due to the Internal Revenue Code annual limit on compensation that may be taken into account under a qualified plan. Distributions are made as a lump sum six months after separation from service, unless the executive elects to receive one to fifteen annual payments beginning at least one year after separation from service.

Each executive directs investments of his or her individual accounts under the KEDCP and DCMP. Both plans provide a broad range of market-based investments that may be changed daily. No investment provides above-market returns. The aggregate performance of these investments is reflected in the “Nonqualified Deferred Compensation” table below.

Benefits due under these plans are paid from our general assets, although we also maintain rabbi trusts that may be used to pay benefits. The trusts and the funds held in them are Company assets. In the event of our bankruptcy, executives would be unsecured general creditors.

 

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The following table provides information on nonqualified deferred compensation as of December 31, 2013:

 

Name   Applicable Plan(1)  

Beginning

Balance
($)

    Executive
Contributions
in Last Fiscal
Year ($)
    Company
Contributions
in the Last
Fiscal Year
($)
(2)
    Aggregate
Earnings
in Last
Fiscal
Year ($)
(3)
   

Aggregate
Withdrawals/
Distributions

($)

    Aggregate
Balance
at Last
Fiscal
Year End
($)
(4)
 

Mr. Garland

  Phillips 66 Defined
Contribution
Make-Up Plan
    185,895        —          243,029        135,529        —          564,453   
  Phillips 66 Key
Employee Deferred

Compensation Plan

    912,530        —          —          231,422        —          1,143,952   

Ms. Johnson

  Phillips 66 Defined
Contribution
Make-Up Plan
    9,917        —          50,127        16,071        —          76,115   
  Phillips 66 Key
Employee Deferred
Compensation Plan
    —          —          —          —          —          —     

Mr. Maxwell

  Phillips 66 Defined
Contribution
Make-Up Plan
    6,628        —          81,426        23,646        —          111,700   
  Phillips 66 Key
Employee Deferred

Compensation Plan

    419,794        —          —          67,134        —          486,928   

Mr. Taylor

  Phillips 66 Defined
Contribution
Make-Up Plan
    89,872        —          108,123        61,124        —          259,119   
  Phillips 66 Key
Employee Deferred

Compensation Plan

    1,383,720        —          —          190,673        —          1,574,393   

Mr. Ziemba

  Phillips 66 Defined
Contribution
Make-Up Plan
    302,649        —          90,661        129,426        —          522,736   
  Phillips 66 Key
Employee Deferred

Compensation Plan

    697,028        —          —          120,459        —          817,487   

 

(1) We have two defined contribution deferred compensation programs for our executives—the DCMP and the KEDCP. As of December 31, 2013 participants in these plans had 97 investment options. Forty of the options were the same as those available in our 401(k) plan and the remaining options were other mutual funds approved by the plan administrator.

 

(2) These amounts represent Company contributions under the DCMP. These amounts are also included in the “All Other Compensation” column of the “Summary Compensation Table” on page 45.

 

(3) These amounts represent earnings on plan balances from January 1 to December 31, 2013. These amounts are not included in the “Summary Compensation Table” on page 45.

 

(4) The total reflects contributions by our NEOs, contributions by us, and earnings on balances prior to 2013; plus contributions by our NEOs, contributions by us, and earnings from January 1, 2013 through December 31, 2013 (shown in the appropriate columns of this table, with amounts that are included in the “Summary Compensation Table” on page 45 shown in footnote 2 above).

 

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Potential Payments upon Termination or Change in Control

The tables at the end of this section summarize the potential value, as of December 31, 2013, of the incremental benefits to be received by each NEO due to an involuntary termination without cause or a change in control event as of December 31, 2013.

Each of our NEOs is expected to receive amounts earned during his or her period of employment unless he or she voluntarily resigns prior to becoming retirement-eligible or is terminated for cause. Such amounts include:

 

   

VCIP earned during the fiscal year

 

   

Grants under the PSP for the most-recently completed performance period and ongoing performance periods in which the executive participated for at least one year

 

   

Previously granted restricted stock and RSUs

 

   

Vested Stock Option grants

 

   

Amounts contributed and vested under our defined contribution plans

 

   

Amounts accrued and vested under our pension plans

Although normal retirement age under our benefit plans is 65, early retirement provisions allow receipt of benefits at earlier ages if vesting requirements are met. For our incentive compensation programs (VCIP, Stock Options, and PSP), early retirement is generally defined as termination at or after the age of 55 with five years of service.

As of December 31, 2013, all of our NEOs except Ms. Johnson were retirement-eligible under both our benefit plans and our compensation programs. Therefore, as of December 31, 2013, a voluntary resignation of any NEO other than Ms. Johnson would have been treated as a retirement. Because the NEOs other than Ms. Johnson were then eligible for retirement under these programs, they would have been able to resign and retain all awards earned under the current PSP and earlier programs. As a result, the awards to them under these programs are not included in the incremental amounts reflected in the tables below. Please see the “Outstanding Equity Awards at Fiscal Year End” table on page 50 for more information.

In addition, our NEOs participate in two severance plans—the Phillips 66 Executive Severance Plan, which we refer to as the ESP, and the Phillips 66 Key Employee Change in Control Severance Plan, which we refer to as the CICSP. Executives are not entitled to receive benefits under both plans as a result of the same change-in-control event.

Executive Severance Plan: The ESP provides that if we terminate the employment of an executive other than for cause, the executive will receive the following benefits, which may vary depending on salary grade level:

 

   

A lump sum payment equal to one and one-half or two times the sum of the executive’s base salary and current target annual bonus

 

   

A lump sum payment equal to the present value of the increase in pension benefits that would result from crediting the executive with an additional one and one-half or two years of age and service under the pension plan

 

   

A lump sum payment equal to the Company cost of certain welfare benefits for an additional one and one-half or two years

 

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Continued eligibility for a pro rata portion of the annual bonus paid with respect to the year of termination

 

   

Layoff treatment under our compensation plans that generally allows the executive to retain grants of Restricted Stock and RSUs, and maintain eligibility for PSP awards for ongoing periods in which he or she had participated for at least one year

Amounts payable under the ESP are offset by any payments or benefits payable under any of our other plans, and may also be reduced in the event of willful and bad faith conduct demonstrably injurious to the Company. As described above, the ESP and CICSP are Company plans under which awards and payments are subject to clawback provisions and to forfeiture or recoupment, in whole or in part, under applicable law, including the Sarbanes-Oxley Act and the Dodd-Frank Act.

Change in Control Severance Plan: The CICSP provides that if, within two years of a change in control of the Company, an executive’s employment is terminated, other than for cause, or by the executive for good reason, the executive will receive the following benefits, which may vary depending on salary grade level:

 

   

A lump sum payment equal to two or three times the sum of the executive’s base salary and the higher of the current target annual bonus or the average of the annual bonuses paid for the previous two years

 

   

A lump sum payment equal to the present value of the increase in pension benefits that would result from crediting the executive with an additional two or three years of age and service under the pension plan

 

   

A lump sum payment equal to the Company cost of certain welfare benefits for an additional two or three years

 

   

Continued eligibility for a pro rata portion of the annual bonus paid with respect to the year of termination

In 2013 the Compensation Committee amended the terms of the CICSP to require an executive to be severed, as defined in the plan, before vesting in any equity awards or any acceleration of lapsing. Per the terms of the plan, this change is effective for any change in control events that occur after October 1, 2015.

For any change in control events prior to that effective date, the executive would become eligible for vesting in all equity awards and lapsing of any restrictions, with continued ability to exercise Stock Options for their remaining terms.

After a change in control, the CICSP may not be amended or terminated if doing so would be adverse to the interests of any eligible participant without the participant’s written consent. Amounts payable under the CICSP are offset by any payments or benefits payable under any of our other plans, and may also be reduced in the event of willful and bad faith conduct demonstrably injurious to the Company.

Certain assumptions have been made in preparing each of the tables below. Benefits that would be available generally to all or substantially all salaried employees on the U.S. payroll are not included in the amounts shown. The following assumptions were also made:

 

   

Short-Term Incentives—In the event of an involuntary not-for-cause termination unrelated to a change in control, the amount reflects one and one-half or two times current VCIP target. In

 

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the event of an involuntary termination or termination by the executive for good reason related to a change in control, the amount reflects two or three times current VCIP target or two or three times the average of the prior two VCIP payouts.

 

   

Long-Term Incentives—For the performance periods related to PSP, amounts for the period that ended in 2013 are shown based on the number of shares granted in February 2014 for the 2011—2013 performance period, while amounts for other periods are prorated to reflect the portion of the performance period completed by the end of 2013 and shown at maximum payout levels. For the PSP awards, for Restricted Stock and RSUs, amounts reflect the closing price of our stock as reported on the NYSE on December 31, 2013 ($77.13).

 

   

Stock Options—For Stock Options with an exercise price lower than our stock’s closing price on December 31, 2013, amounts reflect the intrinsic value as if the options had been exercised on December 31, 2013, but only for options the NEO would have retained for the specific termination event.

 

   

Incremental Pension Values—Regardless of whether the value is provided directly through a pension plan or through the relevant severance plan, in the event of an involuntary not-for-cause termination unrelated to a change in control, the amount reflects the single sum value of deeming one and a half or two additional years of age and service. In the event of an involuntary or good reason termination related to a change in control, the amount reflects the single sum value of deeming two or three additional years of age and service.

 

   

Post-employment Health & Welfare—In the event of an involuntary not-for-cause termination not related to a change in control, the amount reflects the value of certain health and welfare benefits for one and a half or two additional years of service which is paid in a lump sum. In the event of an involuntary or good reason termination related to a change in control, the amount reflects the value of certain health and welfare benefits for two or three additional years of service which is paid in a lump sum.

Mr. Garland

 

Executive Benefits and
Payments
Upon Termination
   Involuntary
Not-for-Cause
Termination
(Not CIC) ($)
     Involuntary or
Good Reason
Termination
(CIC) ($)
    

Death

($)

     Disability
($)
 

Base Salary

     2,900,000         4,350,000         —           —     

Short-term Incentive

     4,350,000         6,525,000         —           —     

2011—2013 (performance period)

     —           —           —           —     

2012—2014 (performance period)

     —           —           —           —     

2013—2015 (performance period)

     —           —           —           —     

Restricted Stock/Units from prior performance and inducement

     —           —           —           —     

Stock Options/SARs:

           

Unvested and Accelerated

     —           —           —           —     

Incremental Pension

     2,595,375         3,967,499         —           —     

Post-employment Health & Welfare

     39,576         59,363         —           —     

Life Insurance

     —           —           2,900,000         —     
     9,884,951         14,901,862         2,900,000         —     

 

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Ms. Johnson

 

Executive Benefits and
Payments
Upon Termination
   Involuntary
Not-for-Cause
Termination
(Not CIC) ($)
     Involuntary or
Good Reason
Termination
(CIC) ($)
    

Death

($)

     Disability
($)
 

Base Salary

     1,060,032         1,590,048         —           —     

Short-term Incentive

     848,026         1,272,039         —           —     

2011—2013 (performance period)

     1,539,823         1,539,823         1,539,823         1,539,823   

2012—2014 (performance period)

     1,494,934         1,494,934         1,494,934         1,494,934   

2013—2015 (performance period)

     672,111         672,111         672,111         672,111   

Restricted Stock/Units from prior performance

     2,030,447         2,030,447         2,030,447         2,030,447   

Stock Options/SARs:

           

Unvested and Accelerated

     1,213,318         1,228,278         1,228,278         1,228,278   

Incremental Pension

     761,299         888,198         —           —     

Post-employment Health & Welfare

     16,597         24,896         —           —     

Life Insurance

     —           —           1,060,032         —     
     9,636,587         10,740,774         8,025,625         6,965,593   

Mr. Maxwell

 

Executive Benefits and
Payments
Upon Termination
   Involuntary
Not-for-Cause
Termination
(Not CIC) ($)
     Involuntary or
Good Reason
Termination
(CIC) ($)
    

Death

($)

     Disability
($)
 

Base Salary

     1,300,032         1,950,048         —           —     

Short-term Incentive

     1,079,026         2,181,192         —           —     

2011—2013 (performance period)

     —           —           —           —     

2012—2014 (performance period)

     —           —           —           —     

2013—2015 (performance period)

     —           —           —           —     

Restricted Stock/Units from prior performance and inducement

     —           —           —           —     

Stock Options/SARs:

           

Unvested and Accelerated

     —           —           —           —     

Incremental Pension

     284,361         342,862         —           —     

Post-employment Health & Welfare

     28,555         42,832         —           —     

Life Insurance

     —           —           1,300,032         —     
     2,691,974         4,516,934         1,300,032         —     

 

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Mr. Taylor

 

Executive Benefits and
Payments
Upon Termination
   Involuntary
Not-for-Cause
Termination
(Not CIC) ($)
     Involuntary or
Good Reason
Termination
(CIC) ($)
    

Death

($)

     Disability
($)
 

Base Salary

     1,470,000         2,205,000         —           —     

Short-term Incentive

     1,220,100         3,118,589         —           —     

2011—2013 (performance period)

     —           —           —           —     

2012—2014 (performance period)

     —           —           —           —     

2013—2015 (performance period)

     —           —           —           —     

Restricted Stock/Units from prior performance and inducement

     —           —           —           —     

Stock Options/SARs:

           

Unvested and Accelerated

     —           —           —           —     

Incremental Pension

     348,453         414,603         —           —     

Post-employment Health & Welfare

     29,726         44,589         —           —     

Life Insurance

     —           —           1,470,000         —     
     3,068,279         5,782,781         1,470,000         —     

Mr. Ziemba

 

Executive Benefits and
Payments
Upon Termination
   Involuntary
Not-for-Cause
Termination
(Not CIC) ($)
     Involuntary or
Good Reason
Termination
(CIC) ($)
    

Death

($)

     Disability
($)
 

Base Salary