Altria Group DEF 14A 2012
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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:
Altria Group, Inc.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
ALTRIA GROUP, INC.
April 5, 2012
Dear Fellow Shareholder:
It is my pleasure to invite you to join us at the 2012 Annual Meeting of Shareholders of Altria Group, Inc. to be held on Thursday, May 17, 2012 at 9:00 a.m., at the Greater Richmond Convention Center, 403 North 3rd Street, Richmond, Virginia 23219.
At this years meeting, we will vote on the election of 11 directors, the ratification of PricewaterhouseCoopers LLPs selection as the Companys independent registered public accounting firm and, if properly presented, one shareholder proposal. We will also conduct a non-binding advisory vote to approve the compensation of the Companys named executive officers. In addition, there will be a report on the Companys business, and shareholders will have an opportunity to ask questions.
You may bring only one immediate family member who is 21 years of age or older as a guest. To attend the meeting, you must present an admission ticket and government-issued photographic identification. Please note that you must submit a request for an admission ticket. To request an admission ticket, please follow the instructions set forth on page 3 in response to question 6.
The meeting facilities will open at 7:30 a.m. We suggest you arrive early to facilitate your registration and security clearance. Those needing special assistance at the meeting are requested to write to the Companys Corporate Secretary at 6601 West Broad Street, Richmond, Virginia 23230. For your security, you will not be permitted to bring any packages, briefcases, large pocketbooks or bags into the meeting. Also, cellular and digital phones, audio tape recorders, video and still cameras, pagers, laptops and other portable electronic devices as well as pets will not be permitted into the meeting. We thank you in advance for your patience and cooperation with these rules.
This is a particularly meaningful meeting for me as it will be my last as Chairman and Chief Executive Officer of the Company. As we announced in January, I will retire from these roles at the conclusion of the meeting and Martin J. Barrington, who is currently Vice Chairman of the Company, will assume leadership of the organization. Mr. Barrington is also identified in the enclosed Proxy Statement as a nominee for election to the Board. At the Boards annual organizational meeting that follows the shareholder meeting, I expect Mr. Barrington to be appointed Chairman of the Board and Chief Executive Officer. Although I am retiring from the Company and from Board service, I am pleased at having the opportunity to become a consultant to the Company upon my retirement to advise Mr. Barrington and the Board through the leadership transition.
Attached you will find a Notice of Meeting and Proxy Statement that contains additional information about the meeting, including the methods that you can use to vote your proxy, such as the telephone or Internet. We are pleased to be using the U.S. Securities and Exchange Commission rule that allows companies to furnish proxy materials to their shareholders primarily over the Internet. We believe this process expedites shareholders receipt of proxy materials, lowers the costs of our annual meeting and helps conserve natural resources. Accordingly, we are mailing to many of our shareholders a Notice of Internet Availability of Proxy Materials, rather than a paper copy of the Proxy Statement and our 2011 Annual Report to Shareholders. The Notice contains instructions on how to access the proxy materials, vote online and instructions on how shareholders can receive a paper copy of our proxy materials if they wish to do so.
Your vote is important. I encourage you to sign and return your proxy card, or use telephone or Internet voting prior to the meeting, so that your shares of common stock will be represented and voted at the meeting even if you cannot attend.
ALTRIA GROUP, INC.
6601 West Broad Street
Richmond, VA 23230
NOTICE OF 2012 ANNUAL MEETING OF
SHAREHOLDERS OF ALTRIA GROUP, INC.
April 5, 2012
WE URGE EACH SHAREHOLDER TO SIGN AND RETURN THE ENCLOSED PROXY CARD PROMPTLY OR TO USE TELEPHONE OR INTERNET VOTING. SEE OUR QUESTION AND ANSWER SECTION FOR INFORMATION ABOUT VOTING BY TELEPHONE OR INTERNET, HOW TO REVOKE A PROXY, AND HOW TO VOTE YOUR SHARES OF COMMON STOCK IN PERSON.
PLEASE NOTE THAT YOU MUST SUBMIT A REQUEST FOR AN ADMISSION TICKET. TO OBTAIN AN ADMISSION TICKET, PLEASE FOLLOW THE INSTRUCTIONS SET FORTH ON PAGE 3 IN RESPONSE TO QUESTION 6.
Important Notice Regarding the Availability of Proxy Materials
For the Shareholder Meeting to be Held on May 17, 2012
The Companys Proxy Statement and 2011 Annual Report to Shareholders are available at http://www.altria.com/proxy
TABLE OF CONTENTS
ALTRIA GROUP, INC.
6601 WEST BROAD STREET
RICHMOND, VIRGINIA 23230
April 5, 2012
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 17, 2012
Our Board of Directors is furnishing to you this Proxy Statement to solicit proxies on its behalf to be voted at the 2012 Annual Meeting of Shareholders (the 2012 Annual Meeting or the meeting) of Altria Group, Inc. (the Company or Altria) on May 17, 2012 at 9:00 a.m., at the Greater Richmond Convention Center, 403 North 3rd Street, Richmond, Virginia. The proxies also may be voted at any adjournments or postponements of the meeting.
We are first sending the proxy materials to shareholders on or about April 5, 2012.
All properly executed written proxies, and all properly completed proxies submitted by telephone or by the Internet, that are delivered pursuant to this solicitation will be voted at the meeting in accordance with the directions given in the proxy, unless the proxy is revoked before the meeting.
Only holders of record of shares of common stock at the close of business on March 26, 2012 (the record date) are entitled to notice of and to vote at the meeting, or at adjournments or postponements of the meeting. Each shareholder of record on the record date is entitled to one vote for each share of common stock held. On March 26, 2012, there were 2,036,145,920 shares of common stock outstanding.
THE MEETING AND VOTING
1. WHAT ITEMS WILL BE VOTED ON AT THE 2012 ANNUAL MEETING?
Shareholders will vote on four items at the 2012 Annual Meeting:
(a) The election to the Board of the 11 nominees named in this Proxy Statement.
(b) The ratification of the selection of PricewaterhouseCoopers LLP as independent registered public accounting firm for the Company for the fiscal year ending December 31, 2012.
(c) An advisory vote to approve the compensation of the Companys named executive officers.
(d) A vote on one shareholder proposal, if properly presented, concerning the disclosure of lobbying policies and practices.
2. WHAT ARE THE BOARDS VOTING RECOMMENDATIONS?
The Board recommends that you vote your shares:
(a) FOR each of the 11 nominees to the Board named in this Proxy Statement.
(b) FOR the ratification of the selection of PricewaterhouseCoopers LLP as independent registered public accounting firm for the Company for the fiscal year ending December 31, 2012.
(c) FOR the advisory vote to approve the compensation of the Companys named executive officers.
(d) AGAINST the shareholder proposal concerning the disclosure of lobbying policies and practices.
3. WHAT IS A PROXY?
It is your legal designation of another person to vote the stock you own. That other person is called a proxy. If you designate someone as your proxy in a written document, that document also is called a proxy or a proxy card. Michael E. Szymanczyk and Denise F. Keane have been designated as proxies for the 2012 Annual Meeting.
4. WHAT IS THE RECORD DATE AND WHAT DOES IT MEAN?
The record date for the 2012 Annual Meeting is March 26, 2012. The record date is established by the Board of Directors as required by Virginia law. Shareholders of record (registered shareholders and street name holders) at the close of business on the record date are entitled to:
(a) receive notice of the meeting; and
(b) vote at the meeting and any adjournments or postponements of the meeting.
5. WHAT IS THE DIFFERENCE BETWEEN A REGISTERED SHAREHOLDER AND A SHAREHOLDER WHO HOLDS STOCK IN STREET NAME?
If your shares of stock are registered in your name on the books and records of our transfer agent, you are a registered shareholder.
If your shares of stock are held for you in the name of your broker or bank, your shares are held in street name. The answer to Question 18 describes brokers discretionary voting authority and when your bank or broker is permitted to vote your shares of stock without instructions from you.
It is important that you vote your shares if you are a registered shareholder and, if you hold shares in street name, that you provide appropriate voting instructions to your broker or bank as discussed in the answer to Question 18.
6. HOW DO I OBTAIN ADMISSION TO THE MEETING?
To obtain admission to the meeting, you must request an admission ticket. You may bring only one immediate family member as a guest. As we will be discussing our tobacco products at the meeting, all immediate family member guests must be over 21 years of age. In addition, all meeting attendees must present government-issued photographic identification at the meeting. Please submit your request for an admission ticket by Wednesday, May 9, 2012, by mailing or faxing a request to the Companys Corporate Secretary at 6601 West Broad Street, Richmond, Virginia 23230, facsimile: 1-800-352-6172 (from within the United States) or 1-919-697-4949 (from outside the United States). Please include the following information:
7. WHAT ARE THE DIFFERENT METHODS THAT I CAN USE TO VOTE MY SHARES OF COMMON STOCK?
(a) By Telephone and Internet Proxy: All registered shareholders of record can vote their shares of common stock by touchtone telephone using the telephone number on the proxy card (within the United States, U.S. territories and Canada, there is no charge for the call), or by the Internet, using the procedures and instructions described on the proxy card and other enclosures. Street name holders of record may vote by telephone or the Internet if their banks or brokers make those methods available. If that is the case, each bank or broker will enclose instructions with the Proxy Statement. The telephone and Internet voting procedures, including the use of control numbers, are designed to authenticate shareholders identities, to allow shareholders to vote their shares, and to confirm that their instructions have been properly recorded.
(b) In Writing: All shareholders of record also can vote by mailing their completed and signed proxy card (in the case of registered shareholders) or their completed and signed voting instruction form (in the case of street name holders).
(c) In Person: All shareholders of record may vote in person at the meeting; however, street name holders must have a legal proxy from their bank or broker and bring the proxy to the meeting in order to vote in person at the meeting.
8. HOW CAN I REVOKE A PROXY?
You can revoke a proxy prior to the completion of voting at the meeting by:
(a) giving written notice to the Corporate Secretary of the Company;
(b) delivering a later-dated proxy; or
(c) voting in person at the meeting.
9. ARE VOTES CONFIDENTIAL? WHO COUNTS THE VOTES?
We will continue our long-standing practice of holding the votes of each shareholder in confidence from directors, officers and employees except: (a) as necessary to meet applicable legal requirements and to assert or defend claims for or against the Company, (b) in case of a contested proxy solicitation, (c) if a shareholder makes a written comment on the proxy card or otherwise communicates his or her vote to management, or (d) to allow the independent inspectors of election to certify the results of the vote. We will also continue, as we have for many years, to retain an independent tabulator to receive and tabulate the proxies and independent inspectors of election to certify the results.
10. WHAT ARE THE VOTING CHOICES WHEN VOTING ON DIRECTOR NOMINEES, AND WHAT VOTE IS NEEDED TO ELECT DIRECTORS?
When voting on the election of director nominees to serve until the 2013 Annual Meeting of Shareholders, shareholders may:
(a) vote in favor of a nominee;
(b) vote against a nominee; or
(c) abstain from voting on a nominee.
Directors will be elected by a majority of the votes cast. A majority of the votes cast means that a number of votes FOR a director nominee must exceed the number of votes AGAINST that nominee. Any director who receives a greater number of votes AGAINST his or her election than votes FOR such election shall offer to tender his or her resignation to the Board. The Nominating, Corporate Governance and Social Responsibility Committee shall consider the offer and recommend to the Board whether to accept or reject the offer. The full Board will consider all factors it deems relevant to the best interests of the Company, make a determination and publicly disclose its decision and rationale within 90 days after confirmation of the election results.
The Board recommends a vote FOR all of the nominees.
11. WHAT ARE THE VOTING CHOICES WHEN VOTING ON THE RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP, AND WHAT VOTE IS NEEDED TO RATIFY THEIR SELECTION?
When voting on the ratification of the selection of PricewaterhouseCoopers LLP as independent registered public accounting firm for the Company, shareholders may:
(a) vote in favor of the ratification;
(b) vote against the ratification; or
(c) abstain from voting.
The selection of the independent registered public accounting firm will be ratified if the votes cast FOR exceed the votes cast AGAINST.
The Board recommends a vote FOR this proposal.
12. WHAT ARE THE VOTING CHOICES WHEN CASTING THE ADVISORY VOTE TO APPROVE THE COMPENSATION OF THE COMPANYS NAMED EXECUTIVE OFFICERS AND WHAT IS THE EFFECT OF THE VOTE?
When voting to approve the compensation of the Companys named executive officers, shareholders may:
(a) vote in favor of the compensation of the Companys named executive officers;
(b) vote against the compensation of the Companys named executive officers; or
(c) abstain from voting.
The compensation of the Companys named executive officers will be approved on an advisory basis if the votes cast FOR exceed the votes cast AGAINST. This vote is not binding upon the Company, the Board or the Compensation Committee. Nevertheless, the Compensation Committee values the opinions expressed by shareholders in their vote on this proposal and will consider the outcome of the vote when making future compensation decisions for named executive officers.
The Board recommends a vote FOR this proposal.
13. WHAT ARE THE VOTING CHOICES WHEN VOTING ON A PROPERLY PRESENTED SHAREHOLDER PROPOSAL AT THE MEETING AND WHAT VOTE IS NEEDED TO APPROVE THE SHAREHOLDER PROPOSAL?
A vote will be held on the shareholder proposal if it is properly presented at the meeting. When voting on the shareholder proposal, shareholders may:
(a) vote in favor of the proposal;
(b) vote against the proposal; or
(c) abstain from voting.
The shareholder proposal will be approved if the votes cast FOR the proposal exceed the votes cast AGAINST.
The Board recommends a vote AGAINST the shareholder proposal.
14. WHAT IF A SHAREHOLDER DOES NOT SPECIFY A CHOICE FOR A MATTER WHEN RETURNING A PROXY?
Shareholders should specify their choice for each matter on the enclosed proxy. If no specific choice is made, proxies that are signed and returned will be voted FOR the election of all director nominees, FOR the proposal to ratify the selection of PricewaterhouseCoopers LLP, FOR the advisory vote to approve the compensation of the Companys named executive officers and AGAINST the shareholder proposal.
15. WHO IS ENTITLED TO VOTE?
You may vote at the 2012 Annual Meeting if you owned the Companys common stock as of the close of business on March 26, 2012. Each share of common stock is entitled to one vote. As of March 26, 2012, we had 2,036,145,920 shares of common stock outstanding.
16. HOW DO I VOTE IF I PARTICIPATE IN THE DIVIDEND REINVESTMENT PLAN?
The proxy card you have received includes your dividend reinvestment plan shares. You may vote your shares through the Internet, by telephone or by mail, all as described on the enclosed proxy card.
17. WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD?
It means that you have multiple accounts with brokers and/or our transfer agent. Please vote all of these shares. We recommend that you contact your broker and/or our transfer agent to consolidate as many accounts as possible under the same name and address. Our transfer agent is Computershare Trust Company, N.A., P.O. Box 43078, Providence, RI 02940-3078 or you can reach Computershare at 1-800-442-0077 (from within the United States or Canada) or 1-781-575-3572 (from outside the United States or Canada).
18. WILL MY SHARES BE VOTED IF I DO NOT PROVIDE MY PROXY?
If you are a registered shareholder (see Question 5), your shares will not be voted if you do not provide your proxy unless you vote in person at the meeting. It is therefore important that you vote your shares either by proxy or in person at the meeting.
Street Name Holders
If your shares are held in street name (see Question 5) and you do not provide your signed and dated voting instruction form, your shares may be voted by your brokerage firm but only under certain circumstances. Specifically, under the New York Stock Exchange rules shares held in the name of your brokerage firm may be voted by your brokerage firm on certain routine matters even if you do not provide the brokerage firm with voting instructions. The ratification of the selection of PricewaterhouseCoopers LLP as independent registered public accounting firm of the Company is considered a routine matter for which brokerage firms may vote uninstructed shares.
The other proposals to be voted on at our meeting, specifically, the election of director nominees, the advisory vote to approve the compensation of the Companys named executive officers and the shareholder proposal, are not considered routine under New York Stock Exchange rules. When a proposal is not a routine matter and the brokerage firm has not received voting instructions from the beneficial owner of the shares with respect to that proposal, the brokerage firm cannot vote the shares on that proposal. This is called a broker non-vote. It is therefore important to provide instructions to your brokerage firm with respect to your vote on these non-routine matters.
19. ARE ABSTENTIONS AND BROKER NON-VOTES COUNTED?
Abstentions and broker non-votes will not be included in vote totals and will not affect the outcome of the vote at the 2012 Annual Meeting.
20. MAY SHAREHOLDERS ASK QUESTIONS AT THE MEETING?
Yes. The Chairman will answer shareholders questions of general interest during the limited question and answer period of the meeting. In order to provide an opportunity for everyone who wishes to ask a question, shareholders will be limited to two (2) minutes. Shareholders may ask a question a second time only after all others have had their turn and only if time allows. When speaking, shareholders must direct questions to the Chairman and confine their questions to matters that relate directly to the business of the meeting.
21. HOW MANY VOTES MUST BE PRESENT TO HOLD THE MEETING?
Your shares are counted as present at the meeting if you attend the meeting and vote in person or if you properly return a proxy by Internet, telephone or mail. In order for us to conduct our meeting, a majority of our outstanding shares of common stock as of March 26, 2012, must be present in person or by proxy at the meeting. This is referred to as a quorum. Abstentions and shares of record held by a broker or its nominee (Broker Shares) that are voted on any matter are included in determining the number of votes present. Broker Shares that are not voted on any matter will not be included in determining whether a quorum is present.
Board of Directors
The primary responsibility of the Board of Directors (the Board) is to foster the long-term success of the Company. The Board has responsibility for establishing broad corporate policies, setting strategic direction, and overseeing management, which is responsible for the day-to-day operations of the Company. In fulfilling this role, each director must exercise his or her good faith business judgment of the best interests of the Company.
The Board holds regular meetings typically during the months of January, February, May, August, October and December, and special meetings are held when necessary. The organizational meeting follows the annual meeting of shareholders. One of the meetings is primarily devoted to reviewing the Companys strategic plan. The Board held six meetings in 2011. The Board meets in executive session at every Board meeting. Directors are expected to attend Board meetings, the annual meeting of shareholders and meetings of the Committees on which they serve, with the understanding that on occasion a director may be unable to attend a meeting. During 2011, all nominees for director attended at least 75% of the aggregate number of meetings of the Board during their respective terms of service and of all Committees on which they served. In addition, all directors then in office attended the 2011 Annual Meeting of Shareholders on May 19, 2011. W. Leo Kiely III joined the Board in October 2011.
In January 2012, Martin J. Barrington, currently Vice Chairman of the Company, was elected to the Board of Directors and is a nominee for election to the Board, as set forth below. Mr. Barrington was also elected Chairman and Chief Executive Officer of the Company at that time, effective upon the conclusion of the 2012 Annual Meeting, to replace Mr. Szymanczyk who will retire as Chairman and Chief Executive Officer. Mr. Szymanczyk, who is not standing for re-election to the Board, has entered into a Consulting Agreement and an Agreement and General Release with the Company as more fully described in the Compensation Discussion and Analysis on page 37.
The Board has adopted Corporate Governance Guidelines. In addition, the Board has adopted a Code of Business Conduct and Ethics that applies to the members of the Companys Board. The Board has also adopted a policy with regard to reviewing certain transactions in which the Company is a participant and an officer, director or nominee for director has had or may have a direct or indirect material interest. All of these documents are available on the Companys website at www.altria.com/governance. The Company has also adopted the Altria Code of Conduct, which applies to all of its employees, including its principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. The Altria Code of Conduct is available on the Companys website at www.altria.com/codeofconduct.
Information on the Companys website is not, and shall not be deemed to be, a part of this Proxy Statement or incorporated into any other filings the Company makes with the U. S. Securities and Exchange Commission (SEC).
Board Leadership Structure
As previously noted, effective upon the conclusion of the 2012 Annual Meeting, Mr. Barrington has been elected Chairman and Chief Executive Officer of the Company, replacing Mr. Szymanczyk, who has announced his retirement as Chairman and Chief Executive Officer, effective upon the conclusion of the 2012 Annual Meeting. As part of the leadership transition, Mr. Barrington was elected to the Board in January 2012 and appears in this Proxy Statement as a nominee for election to the Board at the 2012 Annual Meeting.
As stated in the Companys Corporate Governance Guidelines, the Board believes that it is important to retain flexibility to allocate the responsibilities of the Chairman of the Board (the Chairman) and the Chief Executive Officer in the way that it believes is in the best interests of the Company. After due consideration by the Nominating, Corporate Governance and Social Responsibility Committee and the Board, including an evaluation of the pending transition of leadership of the Company from Mr. Szymanczyk to Mr. Barrington described above, the Board has concluded that presently combining the roles of Chairman and Chief Executive Officer is in the best interests of the Company. The Companys Mission is to own and develop financially disciplined businesses that are leaders in responsibly providing adult tobacco and wine consumers with superior branded products. The Board believes that the combination of the roles of Chairman and Chief Executive Officer promotes the pursuit of the Companys Mission by allowing the senior-most executive with accountability for the Companys day-to-day operations and execution of the Companys strategic plan, who also possesses significant business and industry knowledge, to set Board meeting agendas (in consultation with the Presiding Director), to lead the related discussions and to communicate with one voice to employees, shareholders and other stakeholders. The Board considers this effective and efficient structure to be particularly appropriate for the Company given the unique challenges that the Company has faced and continues to face in light of the lines of business of its subsidiaries, particularly domestic tobacco and the enhanced regulatory environment.
The Boards strict adherence to sound corporate governance practices, as reflected in the Companys Corporate Governance Guidelines, has promoted, and continues to promote, the effective and independent exercise of Board leadership for the Company and its shareholders. Non-management directors convene at each Board meeting in executive session. Moreover, the Company has a strong and experienced independent Presiding Director who, in discharging the responsibilities detailed below, promotes dialogue among non-management members of the Board and directly and clearly communicates the views of the Board to management.
The Presiding Director presides over executive sessions of the non-management directors and at all meetings at which the Chairman is not present; calls meetings of the non-management directors as he deems necessary; serves as a liaison between the Chairman and the non-management directors; approves agendas and schedules for Board meetings; advises the Chairman of the Boards informational needs and approves information sent to the Board; together with the Chair of the Compensation Committee, communicates goals and objectives to the Chairman and Chief Executive Officer and the results of the evaluation of his performance; and is available for consultation and communication if requested by major shareholders. The Presiding Director is invited to attend all meetings of Committees of the Board of which he or she is not a member. The Presiding Director also presides over executive sessions including only independent directors which are held at least once a year.
Communications with the Board
Shareholders and other interested parties who wish to communicate with the Board may do so by writing to the Presiding Director, Board of Directors of Altria Group, Inc., 6601 West Broad Street, Richmond, Virginia 23230. The non-management directors have established procedures for the handling of communications from shareholders and other interested parties and directed the Corporate Secretary to act as their agent in processing any communications received. Communications that relate to matters that are within the scope of the responsibilities of the Board and its Committees are to be forwarded to the Presiding Director. Communications that relate to matters that are within the responsibility of one of the Board Committees are also to be forwarded to the Chair of the appropriate Committee. Communications that relate to ordinary business matters that are not within the scope of the Boards responsibilities, such as customer complaints, are to be sent to the appropriate subsidiary. Solicitations, junk mail and obviously frivolous or inappropriate communications are not to be forwarded, but will be made available to any non-management director who wishes to review them.
Committees of the Board
The Board has established various separately-designated standing committees of the Board (the Committees) to assist it with the performance of its responsibilities. These Committees and their members are listed below. The Board designates the members of these Committees and the Committee Chairs annually at its organizational meeting following the annual meeting of shareholders, based on the recommendations of the Nominating, Corporate Governance and Social Responsibility Committee. The Chair of each Committee develops the agenda for that Committee and determines the frequency and length of Committee meetings. The Board has adopted written charters for each of these Committees. These charters are available on the Companys website at www.altria.com/governance.
The Audit Committee consists entirely of non-management directors all of whom the Board has determined are independent within the meaning of the listing standards of the New York Stock Exchange and Rule 10A-3 of the Securities Exchange Act of 1934, as amended. Its responsibilities are set forth in the Audit Committee Charter. The Committee was established pursuant to Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The Committees responsibility is to assist the Board in its oversight of (i) the Companys financial statements and financial reporting processes and systems of internal control, (ii) the qualifications, independence and performance of the Companys independent registered public accounting firm, (iii) the internal audit function and (iv) the Companys compliance with legal and regulatory requirements. The Committee is also responsible for preparing the Audit Committee Report that the rules of the SEC require the Company to include in its proxy statement. The Committee met seven times in 2011. The current members of the Committee are: George Muñoz (Chair); John T. Casteen III; Thomas F. Farrell II; and Thomas W. Jones. See pages 70 to 71 for further matters related to the Audit Committee, including its Report for the year ended 2011.
The Board has determined that all members of the Audit Committee are financially literate and that George Muñoz and at least one other member of the Committee are audit committee financial experts within the meaning set forth in the regulations of the SEC. No member of the Audit Committee received any payments in 2011 from Altria Group, Inc. or its subsidiaries other than compensation received as a director of Altria Group, Inc.
The Compensation Committee consists entirely of non-management directors all of whom the Board has determined are independent within the meaning of the listing standards of the New York Stock Exchange; are non-employee directors for the purposes of Rule 16b-3 of the Securities Exchange Act of 1934; and satisfy the requirements of Section 162(m) of the Internal Revenue Code for outside directors. Its responsibilities are set forth in the Compensation Committee Charter. The Committee discharges the Boards responsibilities relating to executive compensation (including the compensation of the Chief Executive Officer), produces an annual Compensation Committee report to be included in the Companys proxy statement and reviews the succession plans for the chief executive officer and other senior executives. In addition, the Committee reviews and makes recommendations regarding compensation disclosures to be provided in the Companys SEC filings, including the Compensation Discussion and Analysis and narrative descriptions in the Committees disclosure of its procedures in determining executive compensation. This Committee met five times in 2011. The current members of the Committee are: Thomas F. Farrell II (Chair); Elizabeth E. Bailey; Gerald L. Baliles; and Thomas W. Jones. See pages 31 through 33 for further matters related to the Compensation Committee, including a discussion of its procedures and its Report on the Compensation Discussion and Analysis appearing on pages 34 through 69.
The Executive Committee has the responsibilities set forth in the Executive Committee Charter, and meets as the Chairman concludes is necessary. The Committee has authority to act for the Board
during intervals between Board meetings to the extent permitted by law. This Committee met one time in 2011. The current members of the Committee are: Michael E. Szymanczyk (Chair); Gerald L. Baliles; Thomas F. Farrell II; Thomas W. Jones; George Muñoz; and Nabil Y. Sakkab.
The Finance Committee has the responsibilities set forth in the Finance Committee Charter. The Committee monitors the Companys financial condition, oversees the sources and uses of cash flow and the investment of certain employee benefit plan assets and advises the Board with respect to capital markets activities, dividend policy, share repurchase programs and other financial matters. This Committee met five times in 2011. The current members of the Committee are: Thomas W. Jones (Chair); Elizabeth E. Bailey; Dinyar S. Devitre; George Muñoz; and Nabil Y. Sakkab.
The Innovation Committee has the responsibilities set forth in the Innovation Committee Charter. The Committee assists the Board in its oversight of the strategic goals and objectives of the research, development and engineering programs of the Companys subsidiaries and technological and other innovation initiatives. This Committee met four times in 2011. The current members of the Committee are: Nabil Y. Sakkab (Chair); Gerald L. Baliles; John T. Casteen III; Dinyar S. Devitre; and George Muñoz.
The Nominating, Corporate Governance and Social Responsibility Committee consists entirely of non-management directors all of whom the Board has determined are independent within the meaning of the listing standards of the New York Stock Exchange. This Committee has the responsibilities set forth in the Nominating, Corporate Governance and Social Responsibility Committee Charter. The Committee identifies individuals qualified to become Board members consistent with the criteria described in the Companys Corporate Governance Guidelines and recommends a slate of nominees for election at each annual meeting of shareholders; makes recommendations to the Board concerning the appropriate size, function, needs and composition of the Board and its Committees; advises the Board on corporate governance matters, including developing and recommending to the Board the Companys corporate governance principles; oversees the self-evaluation process of the Board and its Committees; and provides oversight of the Companys public affairs, corporate reputation and societal alignment strategies. This Committee met five times in 2011. The current members of the Committee are: Gerald L. Baliles (Chair); Elizabeth E. Bailey; Thomas F. Farrell II; George Muñoz; and Nabil Y. Sakkab. See page 13 for a description of the process the Nominating, Corporate Governance and Social Responsibility Committee follows in nominating directors.
The Boards Risk Management Oversight Role
The Board, both acting as a full Board and through its Committees, plays an important oversight role in the Companys risk management processes. Regular Board and Committee meetings cover multiple days and include site visits to Company subsidiary locations both in and outside the Companys Richmond, Virginia headquarters. Management from the Company and different Company subsidiaries and business functions attend each meeting. At these meetings and in communications between Board meetings, management consults directly with the Board and its Committees about operational risks facing the businesses. Similarly, the Board, both directly and through the Audit Committee, receives regular updates on legal and regulatory matters, including developments in litigation and developments related to U.S. Food and Drug Administration regulation of certain of the Companys subsidiaries, thereby reviewing the Companys management of legal and regulatory risk. In addition, reports to the Audit Committee at each of its meetings by the Chief Compliance Officer and corporate audit personnel provide insight into the Companys risk assessment and risk management policies and processes, including enterprise risk management. The Audit Committee and the Finance Committee oversee the Companys management of its financial, accounting and liquidity risks through interaction at each meeting with the Chief Financial Officer, management from financial, accounting, auditing and treasury functions and, for the Audit Committee, personnel from the Companys independent registered public accounting firm. The Nominating, Corporate Governance and Social Responsibility Committee,
through its interaction with functions responsible for the Companys public policy and societal alignment strategies, oversees the ways in which the Company manages reputational risk. The Compensation Committee, as set forth in more detail in the Compensation Discussion and Analysis (page 41), considers the analysis developed by a cross-functional team of executives in the compensation and benefits, corporate audit and legal functions to determine the extent to which the executive compensation program may create risk for the Company. Finally, the Innovation Committee oversees the Companys management of the risks associated with technology, research and product development, including intellectual property. Each Committee provides a report to the full Board following each Committee meeting. The Board believes it has in place effective processes to identify and oversee the material risks facing the Company and its businesses and that these processes are consistent with, and provide additional support for, the current leadership structure of the Board.
Process for Nominating Directors
The Nominating, Corporate Governance and Social Responsibility Committee is responsible for identifying and evaluating nominees for director and for recommending to the Board a slate of nominees for election at the annual meeting of shareholders.
In identifying potential candidates for Board membership, the Committee relies on suggestions and recommendations from the Board, shareholders, management and others. The Committee does not distinguish between nominees recommended by shareholders and other nominees. Shareholders wishing to suggest candidates to the Committee for consideration as directors must submit a written notice to the Corporate Secretary, who will provide it to the Committee. The Companys By-Laws set forth the procedures a shareholder must follow to nominate directors. These procedures are summarized in this Proxy Statement under the caption 2013 Annual Meeting on page 79.
Director Qualifications and Board Diversity
In reviewing nominee candidates, the Committee adheres to the process described above and, in so doing, considers both the Companys Mission to own and develop financially disciplined businesses that are leaders in responsibly providing adult tobacco and wine consumers with superior branded products and its four related Mission goals investing in leadership; aligning with society; satisfying adult consumers; and creating substantial value for shareholders. The Committee has not established any specific minimum qualification standards for nominees to the Board; rather, in evaluating the suitability of individuals for Board membership the Committee considers the ways in which it believes each nominee can assist the Company in pursuing its Mission and advancing one or more Mission goals. The Committee also takes into account many factors, including whether the individual meets requirements for independence and whether the individual will enhance the diversity of perspectives available to the Board in its deliberations. The Company is committed to diversity, as reflected in its Code of Conduct and various Company policies. The Committee has a long-standing commitment to diversity, rather than a formal diversity policy, and is guided by the Companys diversity philosophy in its review and consideration of potential director nominees. In this regard, the Board and the Committee view diversity holistically. More particularly, as set forth in the Companys Corporate Governance Guidelines, the Board considers the individuals general understanding of the various disciplines relevant to the success of a large publicly-traded company in todays global business environment; the individuals understanding of the Companys businesses and markets; the individuals professional expertise and experiences; the individuals educational and professional background; and other characteristics of the individual that promote diversity of views and experience. The Committee evaluates each individual in the context of the Board as a whole, with the objective of recommending a group of directors that can best perpetuate the Companys success and represent shareholder interests through the exercise of sound judgment and the application of its diversity of experience. In determining whether to recommend a director for re-election, the Committee also considers the directors past attendance at meetings and participation in and contributions to the activities of the Board. In addition, the Committee considers whether the Board has specific needs for certain skills or attributes at a given time (for example, financial or chief executive officer experience). Other criteria for Board membership are set forth in the Companys Corporate Governance Guidelines.
It is proposed that 11 directors, 10 of whom are independent directors, be elected to hold office until the next annual meeting of shareholders and until their successors have been elected. The Nominating, Corporate Governance and Social Responsibility Committee has recommended to the
Board, and the Board has approved, the persons named and, unless otherwise marked, a signed and returned proxy will be voted for such persons. Each of the nominees currently serves as a director and was elected by the shareholders at the 2011 Annual Meeting with the exception of W. Leo Kiely III, who was unanimously elected to membership by the Board on October 25, 2011, Martin J. Barrington who was unanimously elected to membership by the Board on January 26, 2012 as part of the transition of Company leadership (as discussed above), and Kathryn B. McQuade, who was unanimously elected to membership by the Board on February 29, 2012. The particular experiences, qualifications, attributes or skills of each nominee that the Committee believes will advance the Companys Mission and one or more Mission goals are included in the individual biographies below. Mr. Kiely and Ms. McQuade were recommended for nomination to our Nominating, Corporate Governance and Social Responsibility Committee by non-management directors of our Board.
On January 26, 2012, Mr. Szymanczyk announced his intention to retire as Chairman and Chief Executive Officer of the Company at the conclusion of the 2012 Annual Meeting. Consequently, Mr. Szymanczyk is not standing for re-election to the Board at the 2012 Annual Meeting. As more fully described on page 37 of Compensation Discussion and Analysis, Mr. Szymanczyk has entered into a Consulting Agreement and an Agreement and General Release with the Company.
Independence of Nominees
On the recommendation of the Nominating, Corporate Governance and Social Responsibility Committee, the Board has determined that each of the following nominees for director is independent in that such nominee has no material relationship with the Company: Elizabeth E. Bailey, Gerald L. Baliles, John T. Casteen III, Dinyar S. Devitre, Thomas F. Farrell II, Thomas W. Jones, W. Leo Kiely III, Kathryn B. McQuade, George Muñoz and Nabil Y. Sakkab. Mr. Huntley, who retired from the Board effective May 19, 2011 was also deemed independent. He served on the Compensation, Executive, Finance and Nominating, Corporate Governance and Social Responsibility Committees in 2011 until his retirement in May 2011. To assist it in making these determinations, the Board has adopted categorical standards of director independence that are set forth in Annex A to the Corporate Governance Guidelines, which is available on the Companys website at www.altria.com/governance. Each of the above-named nominees qualifies as independent under these standards.
In recommending to the Board that these directors should be deemed independent, the Nominating, Corporate Governance and Social Responsibility Committee considered the following:
The Nominating, Corporate Governance and Social Responsibility Committee has determined that the foregoing transactions did not affect the independence of any nominee for director.
Although it is not anticipated that any of the persons named below will be unable or unwilling to stand for election, a proxy, in the event of such an occurrence, may be voted for a substitute designated by the Board. However, in lieu of designating a substitute, the Board may amend the Companys By-Laws to reduce the number of directors.
Compensation of Directors
Directors who are full-time employees of the Company receive no additional compensation for services as a director. With respect to non-employee directors, the Companys philosophy is to provide competitive compensation and benefits necessary to attract and retain high-quality non-employee directors. The Board believes that a substantial portion of director compensation should consist of equity-based compensation to assist in aligning directors interests with the interests of shareholders.
The Nominating, Corporate Governance and Social Responsibility Committee periodically reviews director compensation taking into account the Companys Compensation Survey Group (described on page 42), considers the appropriateness of the form and amount of director compensation and makes recommendations to the Board concerning such compensation with a view toward attracting and retaining qualified directors. In reviewing director compensation in the first quarter of 2012, the Committee considered survey data provided to management by Aon Hewitt Inc. (Aon Hewitt). The data provided by Aon Hewitt was based on parameters established by the Company. Aon Hewitt did not provide any advice or recommendations to either the Committee or the Company in connection with the provision of this information, nor did Aon Hewitt attend any Committee meetings.
In 2011, non-employee directors received:
Pursuant to the Stock Compensation Plan for Non-Employee Directors, approved by shareholders at the 2005 Annual Meeting on April 28, 2005, each non-employee director received an annual share award on May 19, 2011 of that number of shares of common stock having an aggregate fair market value of $150,000 on the date of grant (5,375 shares of common stock with a fair market value of $27.91 per share). Effective in 2012, the Board, on the recommendation of the Nominating, Corporate Governance and Social Responsibility Committee, has increased the aggregate fair market value of the annual award to non-employee directors from $150,000 to $160,000. The cash component of the director compensation program remains unchanged.
The Board believes that stock ownership guidelines further align the interests of the Board with those of the Companys shareholders. The Companys non-employee directors are expected to hold the Companys common stock in an amount equal to the lesser of five times the then-current annual cash retainer or 26,000 shares. Directors are expected to reach this ownership level within five years of being elected to Board membership and to hold the requisite number of shares until retirement. The ownership requirement for non-employee directors may be satisfied with all beneficially owned shares, including deferred shares and share equivalents.
In addition to cash payments and stock awards, non-employee directors are covered under a $100,000 term life insurance policy under the Altria Group, Inc. Group Life Insurance Plan and receive travel and accident coverage under the Companys Business Travel Accident Insurance Plan. Both of the foregoing plans are available generally to all salaried employees.
Non-employee directors may also participate in the Altria Group, Inc. Matching Gift Program immediately upon becoming a member of the Board. This program is available to all employees and
non-employee directors. The Company will match eligible donations of a minimum of $25 up to $30,000 per year, per employee or non-employee director on a dollar-for-dollar basis to eligible non-profit organizations. In 2011, the following directors participated in this program: Elizabeth E. Bailey, Gerald L. Baliles, John T. Casteen III, Dinyar S. Devitre and Thomas W. Jones. The aggregate amount of matching payments for these five directors in 2011 was $96,350.
The following table presents the compensation received by the non-employee directors for services they provided as directors in fiscal year 2011.
NON-EMPLOYEE DIRECTOR COMPENSATION TABLE
Ms. McQuade did not join the Board until February 2012. Consequently, she did not receive any compensation in 2011.
A non-employee director may elect to defer the award of shares of common stock and all or part of his or her retainers. Pursuant to the Deferred Fee Plan for Non-Employee Directors, deferred retainers are credited to an unfunded bookkeeping account and may be invested in various investment choices, including an Altria common stock equivalent account. These investment choices parallel the investment options offered to employees under the Deferred Profit-Sharing Plan and determine the earnings that are credited for bookkeeping purposes to a non-employee directors account. The non-employee director will receive cash distributions from his or her account either prior to or following termination of service, as elected by the non-employee director.
OWNERSHIP OF EQUITY SECURITIES
The following table shows the number of shares of common stock beneficially owned as of March 1, 2012, by each director, nominee for director, executive officer named in the Summary Compensation Table and the directors and executive officers of the Company as a group. Unless otherwise indicated, each of the named individuals has sole voting and investment power with respect to the shares shown. The beneficial ownership of each director and executive officer is less than 1% of the outstanding shares.
In addition to the shares shown in the table above, as of March 1, 2012, those directors who participate in the Companys director deferred fee program had the following Altria share equivalents allocated to their accounts: Dr. Bailey, 369; Mr. Farrell, 14,031; and Mr. Muñoz, 10,292. See Compensation of Directors on page 28 for a description of the deferred fee program for directors.
Also, in addition to the shares shown above, as of March 1, 2012, Mr. Szymanczyk held 210,000 shares of deferred stock. The treatment of Mr. Szymanczyks shares of restricted and deferred stock pursuant to his Consulting Agreement and his Agreement and General Release with the Company are more fully described in the Compensation Discussion and Analysis on page 54.
The following table sets forth information regarding persons or groups known to the Company to be beneficial owners of more than 5% of the outstanding common stock.
Section 16(a) Beneficial Ownership Reporting Compliance
Through an administrative oversight by the Company, a Form 4 for Elizabeth E. Bailey was filed late with respect to a balance reallocation in the Deferred Fee Plan for Non-Employee Directors that resulted in a transfer of Altria phantom stock units to another investment account within the Plan, as elected by Dr. Bailey. With this exception, the Company believes that during 2011 all reports for the Companys executive officers and directors that were required to be filed under Section 16 of the Securities Exchange Act of 1934, as amended, were filed on a timely basis.
The Compensation Committee consists entirely of non-management directors all of whom our Board has determined are independent within the meaning of the listing standards of the New York Stock Exchange. Its responsibilities are described below and set forth in the Compensation Committee Charter, which is available on the Companys website at www.altria.com/governance. The current members of the Committee are: Thomas F. Farrell II (Chair); Elizabeth E. Bailey; Gerald L. Baliles; and Thomas W. Jones.
Compensation Committee Interlocks and Insider Participation
During 2011, none of our executive officers served on the board of directors or compensation committee of another entity one or more of whose executive officers served as a member of our Board of Directors or Compensation Committee. No member of the Compensation Committee at any time during 2011 or at any other time had any relationship with us that would be required to be disclosed as a related person transaction.
Scope of Authority
The responsibilities of the Compensation Committee are set forth in its charter and include, among other duties, the responsibility to:
In accordance with its charter, the Compensation Committee may delegate its authority to subcommittees or the chair of the Committee when it deems appropriate, unless prohibited by law, regulation or New York Stock Exchange listing standards.
Processes and Procedures
The Compensation Committees primary processes and procedures for establishing and overseeing executive compensation are described in the Compensation Discussion and Analysis on pages 34 through 69 of this Proxy Statement. These processes and procedures include:
In 2011, the aggregate Aon Hewitt fees associated with services relating to executive and director compensation totaled $226,292. In 2011, the aggregate Aon Hewitt fees associated with additional services totaled $129,500. These additional services reflected a portion of the Total Compensation Measurement Study survey allocable to non-executive compensation (on an estimated basis) described on page 41 and a benchmarking survey conducted for the Companys broad-based hourly employee benefit plans; each of these additional services was conducted based on parameters developed by management. Management does not believe these additional services create a conflict of interest or prevent Aon Hewitt from providing services relating to executive and director compensation.
To Our Shareholders:
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained on pages 34 through 69 of this Proxy Statement with management. Based on its review and discussions with management, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.
Thomas F. Farrell II, Chair
Elizabeth E. Bailey
Gerald L. Baliles
Thomas W. Jones
The information contained in the report above shall not be deemed to be soliciting material or to be filed with the SEC or subject to Regulation 14A or 14C or the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent specifically incorporated by reference therein.
Company Performance Summary
Altrias executive compensation program remains grounded in Altrias corporate Mission and is designed to reflect the fundamental principle that compensation decisions should be based on the demonstrable achievement of corporate and individual performance goals.
During 2011, Altria and its subsidiaries achieved considerable success in meeting their key financial and strategic goals despite continued challenges in the economic, regulatory and competitive environments in which they operated. Similar to past years, Altria delivered strong financial performance during 2011, as measured by:
In addition, in the fourth quarter of 2011, Altria announced a new initiative to reduce cigarette-related costs that is expected to generate $400 million in annualized savings against previously planned spending by the end of 2013.
* Adjusted diluted EPS is a financial measure that is not consistent with generally accepted accounting principles in the United States (GAAP). See Annex A to this Proxy Statement for information regarding non-GAAP financial measures used in this Proxy Statement and reconciliations of such non-GAAP financial measures to the most directly comparable GAAP measures.
Performance Evaluation and Compensation Decisions
The Compensation Committee of the Board evaluated the Companys financial and strategic performance in the context of the 2011 Annual Incentive Award Program. The Compensation Committee also evaluated the individual performance of the Companys Chairman and Chief Executive Officer (CEO) and the other officers included in the Summary Compensation Table (the named executive officers or NEOs). The Compensation Committee concluded that the successes of the NEOs in achieving their individual performance goals contributed significantly to the Companys strong overall performance.
Based on its overall evaluation, the Compensation Committee approved the following aggregate increases for the NEOs in 2011:
The following table compares the compensation of the NEOs to Altrias 2011 TSR, as well as 2011 dividend and 2011 adjusted diluted EPS growth rates versus 2010:
Altrias executive compensation program continues to be well aligned with the return delivered to shareholders. At the Annual Meeting of Shareholders in 2011, more than 93% of the shares cast approved, on an advisory basis, the compensation of the Companys named executive officers, thereby demonstrating strong support of our alignment of shareholder interests with our executive compensation programs and philosophy.
Retirement of CEO
On January 27, 2012, the Company announced that Michael E. Szymanczyk intends to retire as Chairman and Chief Executive Officer effective upon the conclusion of the Annual Meeting of Shareholders on May 17, 2012. The Board has elected Martin J. Barrington, currently Vice Chairman of the Company, to become Chairman and Chief Executive Officer effective upon the conclusion of the 2012 Annual Meeting. Mr. Barrington was also elected to the Board effective January 26, 2012. The Board also elected David R. Beran, currently Vice Chairman, to become President and Chief Operating Officer effective upon the conclusion of the 2012 Annual Meeting.
After ten years of exceptional service as Chief Executive Officer of Philip Morris USA, Mr. Szymanczyk became Chairman and Chief Executive Officer of Altria on March 28, 2008, following the spin-off of Philip Morris International Inc. (PMI). He led the reshaping of Altria in the wake of that spin-off by diversifying Altria into the cigar, smokeless tobacco and wine businesses. During the three full years of his tenure as Chairman and Chief Executive Officer of Altria (2009-2011), the Companys TSR was 134.4%. Altria also met or exceeded its adjusted diluted EPS goals (as shown in the second chart below), growing adjusted diluted EPS by 24.2% over those three years, while also growing its dividend rate by 28.1% over that same period.
In order to secure for the Company the benefit of his experience and expertise following his retirement, the Company and Mr. Szymanczyk have entered into a Consulting Agreement (together with an Agreement and General Release, the Agreements) pursuant to which he will serve as a consultant to the Company until January 31, 2014. In setting the compensation and other terms of the Agreements, the Compensation Committee considered the value of Mr. Szymanczyks expected future contributions as a consultant to Altrias future performance, as well as his past significant contributions to that performance. Under the terms of the Agreements, Mr. Szymanczyks 2008 five-year grant, and his 2010 three-year grant, of restricted stock will continue to vest during the period that he serves as a consultant to Altria. He will also receive a cash payment equal to the value of his forfeited 2011 grant of deferred stock, and will be eligible for pro-rated incentive payments under the Companys annual and long-term incentive programs. Information on Mr. Szymanczyks compensation following his retirement can be found below under the heading CEO Transition and in the Pension Benefits table.
Executive Compensation Objectives and Design Principles
Our executive compensation program, like all other organizational strategies at Altria, is designed to promote our corporate Mission, which is to own and develop financially disciplined businesses that are leaders in responsibly providing adult tobacco and wine consumers with superior branded products. In pursuing our Mission, we have established the following goals for Altria and its subsidiary companies:
Our values guide our behavior as we pursue our Mission and our goals. Our values include Integrity, Trust and Respect; Passion to Succeed; Executing with Quality; Driving Creativity into Everything We Do; and Sharing with Others. We assess all salaried employees, including our NEOs, on their consistent demonstration of these values as part of our annual performance management process.
Our executive compensation program includes multiple performance metrics to assess the efforts of all executives in pursuing our Mission and corporate goals, while assuring that such efforts are guided by our values. Specifically, our program is designed to satisfy the following objectives:
The elements of our executive compensation program serve these objectives with the following specific design principles:
Elements of Executive Compensation Program
The table below summarizes the individual elements and objectives of the 2011 executive compensation program for the named executive officers. In addition to the objectives noted for each element of compensation, the program is designed to attract and retain world-class leaders.
2011 Executive Compensation Program
Participants in Executive Compensation Decisions
The following table identifies the various individuals and groups who participate in or support decision making for Altrias executive compensation program and summarizes their primary responsibilities.
Risk Assessment Process
Annually, a cross-functional team of executives in the Human Resources & Compliance, Legal and Audit departments reviews Altrias compensation programs (executive and non-executive) to identify features that could encourage excessive risk-taking by program participants and to assess the potential of such risks to have a material adverse effect on Altria. Again for 2011, management requested that the external
compensation consultant, Aon Hewitt, review this risk assessment process specifically the features identified as potentially encouraging excessive risk-taking, features that mitigate risk and managements assessment of those features to confirm consistency with prevailing best practices.
After reviewing the outcome of managements assessment, the Compensation Committee believes that neither the compensation programs design nor the discrete elements of executive compensation encourage senior management, including the named executive officers, to take unnecessary or excessive risks. The following risk-mitigating features of the executive compensation program, while not intended to be exhaustive, contribute to the Compensation Committees conclusion:
Expanding beyond the executive compensation program, the Company believes that risks arising from our compensation policies and practices for our employees and the employees of our subsidiaries are not likely to have a material adverse effect on the Company.
Our executive compensation program is designed to deliver total compensation upon attainment of performance targets at levels between the 50th and the 75th percentiles of compensation paid to executives in the Compensation Survey Group, defined below. This approach has been critical to pursuing our Mission and goals through the attraction and retention of world-class leaders and has contributed to low voluntary executive turnover across all of our businesses. Actual awards can exceed the 75th percentile or be below the 50th percentile depending on business and individual performance in relation to performance targets.
Compensation Survey Group and Altria Peer Group
We annually compare our executive compensation program with the programs of the companies in the Compensation Survey Group. The purpose of this annual review is to assure that our executive compensation program supports our ability to attract and retain executive talent. When determining the companies to include in the Compensation Survey Group, the Compensation Committee focuses on companies that compete with us for talent and meet the following criteria:
The Altria Peer Group is a subset of the Compensation Survey Group that we use, along with major external indices (e.g., S&P 500), to assess financial performance for purposes of determining payments of variable compensation. The 2011 Altria Peer Group consists of 13 U.S.-headquartered consumer product companies that compete with our tobacco operating subsidiaries or otherwise provide useful financial performance comparisons on the basis of revenue or market capitalization.
Based on these criteria, the Compensation Committee included the following companies in the 2011 Compensation Survey Group (the 2011 Compensation Survey Group) and Altria Peer Group (the 2011 Altria Peer Group).
In late 2011, the Compensation Committee removed Fortune Brands, Inc. and Sara Lee Corporation from both the Compensation Survey Group and the Altria Peer Group for 2012 due to their announced corporate restructurings, resulting in neither of those companies meeting the criteria set forth above. Upon the Compensation Committees request, the Company conducted an extensive study of potential replacements, and the Compensation Committee concluded that H.J. Heinz Company and The Coca-Cola Company best met the criteria outlined above. As a result, the Compensation Committee added these two companies to both the Compensation Survey Group and the Altria Peer Group for 2012 compensation decisions.
2011 Elements of Executive Compensation Program
The Compensation Committee considers various factors in approving the amount of each element of compensation. One common factor influencing elements such as base salary increases, annual incentive awards and long-term incentive awards is individual performance in the previous year or other measuring period. Variable elements of compensation are payable only after the relevant performance period whether short or long-term has ended and the Compensation Committee has assessed actual executive performance relative to stated goals. Each executive, including our named executive officers, is rated on a five-point scale. During 2011, we modified our performance assessment process by changing the rating descriptors and definitions, while adjusting the rating distribution guidelines. These new guidelines incorporate greater flexibility and equip evaluators to assess and recognize employee performance and infrastructure contributions more effectively in the context of Altrias organizational structure, business objectives and regulatory environment. Under these guidelines, approximately 0-20% of the overall employee population may receive a rating of Extraordinary, 30-50% may receive a rating of Outstanding, and 30-50% may receive a rating of Valued or lower. (In appropriate circumstances, an employee may receive a rating of More Expected or Unsatisfactory Performance.) Additionally, a maximum of 60% of the overall employee population can receive one of the top two ratings of Extraordinary or Outstanding. From a rewards perspective, the new performance rating guidelines maintain differentiation between performance levels, but slightly reduce the differentiation between the top two ratings.
Base salary is the principal fixed annual element of executive compensation and is intended to provide financial stability to our executives. The Compensation Committee considers a number of factors when reviewing and setting base salaries for named executive officers, including each executives individual performance rating, level of responsibility, experience, the relationship between base salaries paid to other Company executives and the position of the executives base salary within the applicable base salary range. In addition, as appropriate, the Compensation Committee compares the base salaries paid to our executive officers to the base salaries paid to executive officers holding comparable positions at other companies in the Compensation Survey Group. Rather than assigning a numerical weight to each factor, the Compensation Committee analyzes all factors in the aggregate in reaching base salary determinations for our named executive officers.
Base salaries are relevant in establishing annual and long-term incentive award payouts and factor into retirement, group life insurance and certain other benefits available to all salaried employees. Base salaries typically are reviewed on an annual basis and increases generally are effective March 1. Historically, the Chairman and Chief Executive Officers salary has been adjusted every other year.
The 2011 base salary range for each of the Companys named executive officers was as follows:
In 2011, Michael E. Szymanczyk, Chairman of the Board and Chief Executive Officer, was in salary band A. The other named executive officers Howard A. Willard, David R. Beran, Martin J. Barrington and Denise F. Keane were in salary band B.
The Annual Incentive Award program is a cash-based, pay-for-performance plan for management employees, including our named executive officers. Each participant has an annual award target, which is based on salary band and expressed as a percentage of base salary. The award target is established based on our benchmarking process and is paid only after both business and individual results are assessed against targeted levels of performance. The 2011 Annual Incentive Award target percentages and target award ranges for executives in salary bands A and B were as follows:
2011 Annual Incentive Award Target Percentages and Target Award Ranges (1)
Taking into account the financial and strategic performance of Altria in 2011, the Compensation Committee assigned an Annual Incentive Award rating of 105 to Altria and used the 105 rating to determine the following 2011 award planning ranges for salary bands A and B:
2011 Annual Incentive Award Actual Ranges (1)
In December of each year, the Compensation Committee reviews the financial and strategic performance of Altria, as well as the performance of each of our tobacco and wine businesses for that year. The primary financial metrics for Altria are adjusted diluted EPS growth, weighted at 75%, and adjusted discretionary cash flow, weighted at 25%.
To be assured of a payout based on each of these financial metrics, the Compensation Committee generally expects growth in adjusted diluted EPS (and, at the operating company level, adjusted operating companies income (OCI)) and the attainment of certain minimum adjusted discretionary cash flow performance levels. The Compensation Committee also considers TSR in its evaluation of overall performance.
In addition to their assessment of financial metrics, the Compensation Committee evaluates the performance of Altria and each business against key strategic measures and any significant events during the year. Based on its overall review, the Compensation Committee assigns Annual Incentive
Award ratings that are used to determine the size of the incentive award pool. Businesses that perform at planned levels of performance receive a rating of 100. Depending on performance, Annual Incentive Award ratings can range from 0 to 130.
Altrias Annual Incentive Award rating of 105, based on the 2011 financial and strategic performance described below, impacted the 2011 awards of our NEOs.
Key Performance Factors
Other Strategic Results
Key Business Highlights
Altria awards long-term incentives to senior executives through a combination of cash-based long-term performance incentive awards and equity awards, primarily restricted stock. The mix of these awards, which varies based on salary band, focuses executives on TSR, long-term operational performance and progress against strategic and societal alignment objectives while remaining sensitive to shareholder dilution concerns. The cash-based long-term incentives are based on the performance of the Company in total as opposed to the performance of each operating company. We pay the long-term incentive awards only after the Compensation Committee has assessed the actual performance rendered by the Company and concluded that the executive has delivered performance that meets the stated performance goals over the entire performance cycle.
2011-2013 Long-Term Cash Incentive Awards
Under the LTIP, we use three-year long-term performance cycles that are end-to-end and do not overlap. This approach is consistent with the strategic planning process employed by our businesses. For each cycle, the Compensation Committee approves long-term strategic performance goals for the Company that can only be measured effectively after completion of the cycle. Awards are payable to executives in cash only after the end of each three-year cycle, based on an assessment of overall corporate and individual performance during the entire award cycle. Each executive has an award target based on his or her salary band, normally expressed as a percentage of cumulative year-end base salaries over the three-year cycle.
Although the Compensation Committee takes the executives earnings opportunity under the LTIP into account when setting his or her compensation each year, that opportunity remains at risk until the end of the performance cycle.
The Compensation Committee has considered alternative approaches, such as overlapping three-year cycles (with a new three-year cycle beginning each year), which would result in annual payouts versus payouts every three years following each end-to-end cycle. Although such an approach would result in less fluctuation of annual compensation to executives over time, the Compensation Committee believes that this reporting benefit would be outweighed by the diminished retention value and clarity of long-term performance incentives associated with the current plan design.
The 2011-2013 performance cycle of the LTIP rewards the achievement of key financial and strategic performance measures that are intended to create substantial value for shareholders. The primary financial measures are TSR relative to the then current compensation survey group, Altria peer group and the S&P 500 and adjusted diluted EPS growth. In addition, the Compensation Committee assesses five key strategic objectives that it believes contribute to TSR over the three-year period. Due to their competitively sensitive nature, specific details regarding these strategic objectives are defined for the executives, but not disclosed publicly before the end of the cycle. We will disclose relevant performance metrics for the 2011-2013 performance cycle after the associated compensation decisions for the then current named executive officers have been made. The financial metrics and strategic metrics each comprise 50% of the overall rating for the LTIP.
The LTIP award target percentages and target award ranges for executives in salary bands A and B for the 2011-2013 performance cycle are as follows:
Long-Term Incentive Plan Award Target Percentages and Target Award Ranges (1)
After the conclusion of each LTIP cycle, the Compensation Committee assesses the Companys performance on each of the key measures and determines an LTIP rating for the entire three-year period. The LTIP rating is used to determine final LTIP funding and can range from 0 to 130.
Equity awards are intended to enhance executive retention, focus executives on increasing long-term shareholder value and promote executive stock ownership. The Company has awarded shares of restricted or deferred stock rather than stock options since 2003 because they:
Equity awards generally vest three or more years after the date of the award, subject to earlier vesting on death, disability or normal retirement (defined as retirement at age 65). The multi-year vesting period provides us with a means of both retaining and motivating executives and promoting long-term performance aspirations. Recipients receive cash dividends or dividend equivalents on unvested shares of restricted or deferred stock in order to more fully align the interests of executives with those of our shareholders.
The Compensation Committee reviews and approves equity award recommendations annually at its January meeting. The awards are granted on the date of approval. The value of shares awarded is based on an evaluation of each executives performance and potential to advance within the organization. The number of shares awarded is based on the fair market value of our stock on the date of grant.
For awards granted in January 2011, the equity award ranges for our named executive officers in salary band B were as follows:
2011 Equity Award Ranges
The Compensation Committee historically has exercised discretion in making equity awards for the Chairman and Chief Executive Officer (salary band A) based on a cumulative equity award strategy and its assessment of competitive data. With respect to Mr. Szymanczyk, in January 2011, the Compensation Committee reviewed an analysis of various equity award scenarios, including past practices of those companies within the 2011 Compensation Survey Group, in order to establish both an appropriate range of awards as well as an appropriate cumulative equity award size over his expected period of service as Chairman and Chief Executive Officer. The Compensation Committee also took into account Mr. Szymanczyks individual performance.
The perquisites that the Company provides to its named executive officers are modest, representing less than 3% of salary band A compensation and less than 1% of salary band B compensation in 2011. The perquisites received by our named executive officers in 2011 are set forth in the All Other Compensation section of the Summary Compensation table on page 57. In addition to these perquisites, our named executive officers received the same benefits that were available to our salaried employees generally. For reasons of security and personal safety, Mr. Szymanczyk is required to use Company aircraft for all air travel. Pursuant to a time-sharing agreement that took effect in 2009, Mr. Szymanczyk reimburses the Company for annual personal aircraft usage in excess of $300,000. Mr. Szymanczyk does not make personal use of a Company driver or automobile. The Compensation Committee considers the value of Mr. Szymanczyks personal aircraft usage in determining his total annual compensation.
Post-Termination Benefits and Change in Control Payments
The Company provides post-termination benefits to the named executive officers including retirement benefits and termination payments, as well as payments upon a change in control.
The named executive officers participate in certain qualified and non-qualified retirement plans, which the Company believes promote executive retention and provide the opportunity for financial security in retirement. These retirement benefits are discussed in more detail in the narrative following the Pension Benefits table (pages 64 to 66) and the Non-Qualified Deferred Compensation table (page 67).
Change in Control Payments
Our 2005 and 2010 Performance Incentive Plans provide for the vesting and acceleration of certain elements of compensation immediately upon a change in control regardless of whether the executive remains employed by the Company. This structure will best ensure that executives can focus on delivering shareholder value during a period of uncertainty. It further provides executives with the same opportunities as shareholders of the Company, who are free to sell their equity at the time of the change of control and to realize the value created at the time of the transaction, while ensuring that continuing executives are treated the same as terminated executives. The details of these provisions are discussed in the Payments Upon Change in Control or Termination of Employment section (pages 67 to 69).
The Severance Pay Plan for Salaried Employees is intended to provide an opportunity for financial protection against the unexpected event of an involuntary termination of employment. The details of this plan also are discussed in the Payments Upon Change in Control or Termination of Employment section.
The Agreements, which the Company entered into in connection with Mr. Szymanczyks retirement, are discussed below under CEO Transition.
2011 Executive Compensation Decisions
In addition to assessing actual Company and individual performance against stated goals during the relevant performance periods, the Compensation Committee looks at comprehensive contextual information when making executive compensation decisions, including, but not limited to, industry market data, relevant historical context of compensation decisions and potential wealth accumulation. The Compensation Committee reviewed tally sheets for each of the NEOs that included many of these data points. Specifically, the tally sheets reviewed by the Compensation Committee included each NEOs total cash compensation, total long-term compensation, total defined benefit / defined contribution payments and perquisites related to each of the last three years. The Compensation Committee used the tally sheets as qualitative reference information prior to making executive compensation decisions. They did not apply a quantitative formula to the information on these tally sheets.
The assessment of the individual performance of each of our named executive officers in 2011 is discussed below. Based on this assessment and the plan designs described in 2011 Elements of Executive Compensation Program, the Compensation Committee approved the compensation paid or awarded to our named executive officers included in the compensation tables. In the case of each executive, individual awards were within the award ranges specified for each element of compensation discussed above.
Michael E. Szymanczyk. Mr. Szymanczyk served as Chairman of the Board and Chief Executive Officer of the Company. His four years of service in this role have coincided with significant economic, regulatory and competitive challenges. In spite of such challenges, he again led the Company to achieve its financial and cost savings goals during 2011. In 2011s performance period for fixed and variable compensation, Altria achieved TSR growth of 26.9% and adjusted diluted EPS growth of 7.9%. Under his leadership in 2011, Altria also exceeded its $1.5 billion cost savings goal (off a 2006 cost base) from SG&A and manufacturing optimization cost reduction initiatives across the Altria family of companies, and recently announced a new initiative expected to generate $400 million in annualized savings against previously planned spending by the end of 2013.
Also during 2011, Mr. Szymanczyk championed the Companys engagement strategy with the FDA and oversaw our tobacco operating and service companies compliance with current requirements of the Family Smoking Prevention and Tobacco Control Act.
Finally, during 2011, Mr. Szymanczyk maintained his and the Boards focus on developing future leadership capability for the Company, to include developing a highly capable successor for the Chief Executive Officer position.
Howard A. Willard. Mr. Willard served as Executive Vice President and Chief Financial Officer of the Company. His responsibilities included oversight of the Finance department and PMCC. His significant contributions included effective management of the balance sheet to accomplish debt refinancing that reduced the Companys financing charges and allowed $1.3 billion in stock buybacks. Mr. Willard also played a significant role in guiding the completion of the Companys 20072011 $1.5 billion cost reduction program and establishing the new $400 million program mentioned above.
David R. Beran. Mr. Beran served as Vice Chairman of the Company. His responsibilities included oversight of PM USA, U.S. Smokeless Tobacco Co. LLC, Middleton, Ste. Michelle, AGDC, Information Systems, Procurement, and Marketing. His significant contributions included leading the operating companies through the difficult economic environment to deliver excellent results for shareholders. The operating companies contributed to Altrias adjusted diluted EPS growth, reduced costs and continued to grow organizational quality. AGDC completed its integration of acquired businesses and implemented new information systems throughout the organization that are designed to improve productivity and customer service.
Martin J. Barrington. Mr. Barrington served as Vice Chairman of the Company. His responsibilities included oversight of Human Resources & Compliance, External Affairs, Regulatory Affairs, Technology and Regulatory and Health Sciences. His significant contributions included guiding the continued expansion of the Regulatory Affairs department to keep pace with the development of FDA regulations, engaging with FDA on important issues for FDA determination and providing strategic oversight for the Companys government affairs efforts on excise taxes and other issues. He also oversaw the development of successful new product initiatives like Copenhagen Wintergreen Pouches and Skoal X-tra, and the establishment of a development and manufacturing agreement with Okono A/S, an affiliate of Fertin Pharma A/S.
Denise F. Keane. Ms. Keane served as Executive Vice President and General Counsel of the Company. Her responsibilities included management of all the diverse litigation challenges faced by Altria and its operating companies, including significant tobacco and health litigation at the state and federal levels. Additionally, Ms. Keane continued to lead the Companys effort to effectively and efficiently expand its legal infrastructure to accommodate litigation and regulatory requirements. She has also demonstrated continued success in managing the Companys brand integrity initiatives in order to deter counterfeit and contraband activities affecting the Companys brands.
The Compensation Committee increased the base salaries of the named executive officers based on the criteria noted in the Base Salary section above as follows:
2011 Base Salary Increases (1)
Stock Ownership Guidelines and Restriction on Hedging
We have established stock ownership guidelines under which an executive is expected to hold common stock until his or her termination of employment in an amount equal to a multiple of base salary as determined by his or her position. These guidelines are expressed as a number of shares and a dollar value. Ownership requirements can be satisfied by meeting the lesser of the required number of shares or dollar value. The guidelines are based on the applicable multiple of the salary in effect as of the beginning of the year in which the executive became subject to the guidelines and are set at 12 times base salary for salary band A and six times base salary for salary band B. The required number of shares is calculated by multiplying the applicable multiple by the base salary and then dividing by the current stock price. The required dollar value is based on the current value of stock owned. For the purpose of these guidelines, stock ownership includes shares over which the executive has direct or indirect ownership or control, including restricted and deferred stock. Executives are expected to meet their ownership guidelines within five years of becoming subject to the guidelines (or three years from the promotion date in the case of a promotion of an executive in band F or above). As of December 31, 2011, all of our named executive officers had satisfied their stock ownership requirements in advance of the designated deadline.
Our named executive officers are not permitted to engage in hedging activities with respect to our stock.
Tax and Accounting Considerations
In addition to our executive compensation objectives and design principles, we also consider tax and accounting treatment when designing and administering our program. An important tax consideration is Section 162(m) of the Internal Revenue Code, which limits our ability to deduct compensation paid to covered officers for tax purposes to $1.0 million annually. Covered officers include the principal executive officer and the Companys next three highest paid executive officers, other than the Companys principal financial officer. However, this limitation does not apply to performance-based compensation, provided certain conditions are satisfied. We have taken appropriate actions, to the extent feasible, to preserve the deductibility of annual and long-term cash incentive awards and equity awards. The restricted stock grants that the Compensation Committee awarded to our covered officers in January 2011 and the 2011 Annual Incentive Awards were subject to, and made in accordance with, performance-based compensation arrangements previously implemented that were intended to qualify as tax-deductible. However, notwithstanding this general policy, the Compensation Committee has authorized, and continues to retain the discretion to authorize, other payments that may not be deductible if it believes that they are in the best interests of our shareholders. Such determinations include, for example, payment of a base salary to an officer that exceeds $1.0 million, with the result that a portion of such officers base salary exceeds the deductibility limit. Similarly, a covered officers compensation may exceed the $1.0 million deductibility limit due to other elements of annual compensation, such as vesting of certain restricted or deferred stock grants, other non-performance-based stock grants, dividends or dividend equivalents paid on certain restricted or deferred stock and perquisites.
Policy Regarding the Adjustment or Recovery of Compensation
We have adopted a policy providing for the adjustment or recovery of compensation in certain circumstances. If the Board or an appropriate committee of the Board determines that, as a result of a restatement of our financial statements, an executive has received more compensation than would have been paid absent the incorrect financial statements, the Board or its committee, in its discretion, will take such action as it deems necessary or appropriate to address the events that gave rise to the restatement and to prevent its recurrence. Such action may include, to the extent permitted by applicable law, in appropriate cases, requiring partial or full reimbursement of any bonus or other incentive compensation paid to the executive, causing the partial or full cancellation of restricted stock or deferred stock awards and outstanding stock options, adjusting the future compensation of such executive and dismissing or taking legal action against the executive, in each case as the Board or its committee determines to be in the best interests of the Company and our shareholders. Our restricted and deferred stock award agreements include similar provisions.
Say on Pay / Say on Frequency
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) provides shareholders with an advisory (non-binding) vote (Say on Pay) on the compensation of the Companys named executive officers, as such compensation is disclosed in the Proxy Statement. At the 2011 Annual Meeting of Shareholders of Altria Group, Inc. held on May 19, 2011, more than 93% of the shares cast approved, on an advisory basis, the compensation of the Companys named executive officers. Upon consideration of, and as a result of the strong support shown by, the vote results, the Compensation Committee decided that no change to the executive compensation programs at Altria was necessary as a result of that vote.
In addition, at the 2011 Annual Meeting of Shareholders, 69.93% of the shares cast approved, on an advisory basis, of holding an annual advisory vote on the compensation of the Companys named
executive officers. The Board and the Compensation Committee will hold such a Say on Pay vote annually, unless and until such time as circumstances may suggest that a different frequency is in shareholders best interests. The Dodd-Frank Act requires that this Say on Frequency vote be held at least once every six years.
Compensation and Benefits Program Changes for 2012
Altria has announced several changes to the overall employee benefit structure in order to balance the objectives of providing a package of benefits in the top tier of the market at a reasonable cost with further aligning our benefits programs with the interests of our shareholders.
Employees retiring on or after April 1, 2012, will no longer be eligible for Survivor Income Benefits and will receive reduced life insurance benefits as retirees.
As announced in February 2012, all salaried employees who participate in Altrias defined benefit pension plan, including our named executive officers, will be subject to a reduction in the Companys annual profit sharing contribution to their Deferred Profit Sharing Plan accounts, beginning with contributions made in February 2013. The maximum amount that can be contributed to the individual accounts of such employees by the Company will be reduced from 15% of eligible earnings to 12% of eligible earnings and will continue to be linked to the Companys performance. This change was made after a comprehensive review of benefit levels, in a desire to further align employee rewards with shareholder goals of performance growth.
In addition, as referenced previously in this Compensation Discussion and Analysis, we changed our performance management process during 2011 to utilize new rating labels, while decreasing the level of awards associated with the highest rating and thereby decreasing the differentiation of pay between the two highest ratings, enabling the organization to more effectively recognize and reward consistently superior performance.
Michael E. Szymanczyk intends to retire as Chairman and Chief Executive Officer effective upon the conclusion of the Annual Meeting of Shareholders on May 17, 2012. Following is a summary of the payments and benefits related to Mr. Szymanczyks retirement and the Agreements described on page 37:
Mr. Szymanczyk is also entitled to payments, contributions and benefits under the normal terms and conditions of the Companys benefit plans and compensation arrangements. However, Mr. Szymanczyk is not eligible to make further contributions to, or receive contributions, credits or accruals under, the Companys retirement plans with respect to periods after May 31, 2012. In January 2008, the Compensation Committee limited the present value of Mr. Szymanczyks accrued pension benefit (tax qualified and supplemental) to no more than $30 million. Mr. Szymanczyks accrued pension benefit otherwise would have exceeded that amount. Specific values for Mr. Szymanczyks pension benefits are noted in the appropriate sections and tables of this Compensation Discussion and Analysis.
The compensation of Mr. Barrington in connection with his appointment as Chairman and Chief Executive Officer of the Company effective upon the conclusion of the 2012 Annual Meeting has not yet been determined by the Compensation Committee. He will receive no additional compensation for services as a director.
In connection with his appointment as President and Chief Operating Officer of the Company effective upon the conclusion of the 2012 Annual Meeting, Mr. Berans annual base salary will continue to be $870,100. Also in connection with his appointment, Mr. Beran received a special grant of 100,000 shares of restricted stock on January 25, 2012, which will vest three years from the grant date. Mr. Beran will also be permitted personal use of Company aircraft subject to an annual allowance of up to $100,000. Mr. Beran will remain a salary band B employee and his annual incentive, LTIP and annual equity award targets remain unchanged from his previous targets as follows: Mr. Berans annual incentive award target for 2012 will be 90% of base salary and his LTIP award target will be 200% of the sum of each year-end base salary for the three years of the performance cycle; his annual equity award target will be $1,275,000.
Other Important Information
The Summary Compensation Table and accompanying notes provide information on 2011 base salaries and the amounts of the 2011 awards, as well as other elements of the NEOs compensation.
Last years Summary Compensation Table and CD&A also detailed lump-sum payments earned by each NEO under the Long-Term Incentive Plan (LTIP). This years Summary Compensation Table and associated footnotes will not list any such award amounts for 2011 because the LTIP program is an end-to-end three-year performance cycle and 2011 was the first year of a new three-year performance period.
Summary Compensation Table
The following table sets forth information concerning the cash and non-cash compensation of our named executive officers for 2011, 2010 and 2009.
The next LTIP award payment is not scheduled to occur until early 2014 for the 2011-2013 cycle.
All Other Compensation
Grants of Plan-Based Awards during 2011
On January 25, 2012, the average of the high and low trading prices of our stock was $28.465. The closing price of our stock on that date was $28.67.
Outstanding Equity Awards (Altria) as of December 31, 2011
Stock Option Exercises and Stock Vested (Altria) during 2011
On February 9, 2012, vesting restrictions lapsed for the following Altria restricted stock awards granted in 2009 with a value on the vest date as follows: Mr. Szymanczyk, 250,000 shares, $7,281,250; Mr. Willard, 44,520 shares, $1,296,645; Mr. Beran, 100,900 shares, $2,938,713; Mr. Barrington, 89,030 shares, $2,592,999; and Ms. Keane, 89,030 shares, $2,592,999. Values are based on $29.125, the average of the high and low price of Altrias common stock on February 9, 2012.
Stock Option Exercises and Stock Vested (Kraft) during 2011
The Pension Benefits table and the Non-Qualified Deferred Compensation table below generally reflect amounts accumulated as a result of service over the named executive officers full career with the Company. The increments related to 2011 are reflected in the Change in Pension Value column of the Summary Compensation Table or, in the case of defined contribution plans, the Allocation to Defined Contribution Plans column of the All Other Compensation table.
As of December 31, 2011, the present values of such post-retirement SIB benefits for the named executive officers with spouses who would be eligible, assuming their spouses survived them, based on the same mortality and other assumptions used to derive the present values for pension plan benefits, were as follows: Mr. Szymanczyk, $339,046; Mr. Beran, $229,413; and Ms. Keane, $29,780. Mr. Willard and Mr. Barrington currently are not projected to be eligible for such SIB benefits. Also, because none of the other named executive officers retired before April 1, 2012, none of the named executive officers will be eligible for the SIB benefit.
In the case of the pre-retirement death of a married employee prior to age 61, a pre-retirement death benefit in the form of a SIB allowance of 25% of the deceased employees base compensation may commence beginning four years after the employees death, if the surviving spouse has not remarried. This benefit is reduced by the amount of any pre-retirement survivor allowance payable to the surviving spouse under the Retirement Plan, BEP and SERP, and is generally payable in the form of a monthly annuity until the earlier of remarriage or the first day of the month in which the employee would have attained age 65. If the spouse has not remarried and the deceased employee had completed at least five years of service, the SIB allowance beginning after age 65 and payable for the life of the surviving spouse, when combined with the pre-retirement survivor allowance, is equal to the amount the surviving spouse would have received if the employee had continued to work to age 65 at the same base compensation in effect on the date of death, retired and began receiving payments under the Retirement Plan (and the BEP and the SERP, if applicable) in the form of a joint and 50% survivor annuity.
Defined Benefit Plans
Named executive officers, along with the other salaried employees (except those hired after certain dates and those who cease to accrue further benefit service), participate in the Retirement Plan, a tax-qualified defined benefit pension plan. In addition, named executive officers and other executives participate in the BEP and the SERP, which are unfunded supplemental plans providing benefits in excess of those provided under the Retirement Plan. Additional information regarding the plans follows.
The majority of our salaried employees are covered by the Retirement Plan, a funded tax-qualified non-contributory pension plan. Generally, salaried employees hired prior to January 1, 2008 with at least five years of service are eligible for an annual, lifetime pension benefit. The benefit for the majority of those plan participants, including all of our current named executive officers, is based on the following formula:
Under the terms of the Retirement Plan, credited service is limited to 35 years if incentive compensation is included in the determination of average annual compensation. If incentive compensation is not included in the determination of average annual compensation, then credited service is not limited to 35 years, and the benefit for credited service over 35 years is 1.45% of the employees highest average annual compensation. Social Security-covered compensation is generally an amount equal to the average of the Social Security taxable wage bases for the 35-year period that ends in the year the participant reaches Social Security Retirement Age.
Pension benefit amounts are expressed as a single life annuity payable commencing at normal retirement date. The amount may be reduced as a result of permitted elections of continued payments to beneficiaries in the event of the employees death and/or for commencement of payments before attaining normal retirement age. Employees who terminate employment before age 55 with vested benefits may elect to commence payment of their accrued pensions after attaining age 55. For such employees, the election to commence payments before age 65 results in a reduction in the annual amount payable at a rate of 6% per year multiplied by the number of full and partial years by which benefit commencement precedes attainment of age 65. For employees who continue in employment until age 55 or older and have completed five years or more of credited service, the reduction for early commencement is 6% for each year and partial year by which the benefit commencement precedes age 60. Mr. Barrington currently is eligible for such reduced early retirement benefits. Mr. Willard is not currently eligible for early retirement benefits.
If an employee is at least age 55 with 30 years of service or age 60 or older with five years of service, the annuity immediately payable upon early retirement is 100% of that payable at normal retirement age. The result of becoming eligible for such an early retirement benefit is a substantial increase in the present value of the pension. Mr. Szymanczyk, Mr. Beran and Ms. Keane currently are eligible for such unreduced early retirement benefits.
Tax laws applicable to the Retirement Plan limit the five-year average annual compensation that can be taken into account under that plan. As a result of these or certain other tax requirements, only a portion of the benefits calculated under the Retirement Plan described above can be paid to the named executive officers and a number of other employees from the Retirement Plan. To compensate for benefits that would be lost by the application of these tax limits, all of the named executive officers accrue supplemental pension benefits under the BEP (BEP Pension). BEP Pension accruals relating to periods after 2004 are paid in a lump sum following retirement. Distribution of the pre-2005 supplemental plan benefits are subject to the BEP Pension terms applicable on December 31, 2004.
During 2006, the Compensation Committee decided to limit pension benefits for executives in salary bands A and B. This decision altered pension benefits as follows: the annual cash incentive compensation considered for purposes of pension determinations as described above was limited to the lesser of either (i) actual annual cash incentive or (ii) annual cash incentive at an Annual Incentive Award rating of 100 and individual performance rating of Exceeds (rating descriptor changed in 2011 to Outstanding). This limitation does not apply to any executive who was age 55 or older at December 31, 2006. The current named executive officers subject to this limit are Mr. Beran, Mr. Barrington, Ms. Keane and Mr. Willard. The 2011 annual incentive awards paid in early 2012 and the amount recognized for future pension calculations are as follows:
Also, in January 2008 the Compensation Committee provided that the present value of Mr. Szymanczyks accrued pension (tax-qualified and supplemental) would not exceed $30,000,000. Mr. Szymanczyks accrued pension would otherwise have exceeded that amount.
The amounts payable by Altria under the BEP Pension are determined taking into account certain payments made to the executives before 2008 in order to prevent duplicative benefit payments.
The SERP provides a framework for certain other retirement benefits that cannot be paid under the Retirement Plan because of tax limitations and are not covered by the BEP. The benefits provided under the SERP to any individual employee are determined in accordance with the provisions of an agreement between the individual and the Company. As with the BEP Pension, the SERP prevents duplicative benefits by taking into account the Funding Payments and Target Payments made to employees before 2008.
During 2002, we entered into a SERP agreement with Mr. Szymanczyk as a retention incentive. This incentive provided that if Mr. Szymanczyk continued employment until age 55, he would be credited with an additional five years of benefit service for all purposes and receive his pension benefit without reduction for early commencement of payments. For employment beyond age 55, he would be credited with two years of benefit service for each year of service until age 60. Mr. Szymanczyk attained age 60 in January 2009. Mr. Szymanczyk is the only named executive officer who participates in the SERP. Mr. Szymanczyks SERP benefit is included in determining the amount subject to the $30,000,000 limit noted above.
Non-Qualified Deferred Compensation
Defined Contribution Plans
The named executive officers participate in the Companys broad-based, tax-qualified defined contribution plan, the Deferred Profit-Sharing Plan for Salaried Employees (DPS Plan) and the deferred profit-sharing portion of the BEP (BEP DPS), the unfunded, non-qualified supplemental plan.
The majority of our salaried employees are eligible for the DPS Plan. Under the DPS Plan, the Company makes a contribution (the Company Contribution) on behalf of each eligible participant for each year. Participants may also defer up to 15 percent of their eligible compensation on a pre-tax or after-tax basis into the DPS Plan, subject to DPS Plan and tax-qualification limits. For 2011, the Company Contribution was determined by a formula based on Altrias consolidated earnings, but capped at 15 percent of each DPS Plan participants eligible compensation. The formula resulted in a Company Contribution for each eligible participant for 2011 equal to 15 percent of eligible compensation. For information on changes to the formula to compute the Company Contribution beginning for the 2012 plan year, please see the previous section titled Compensation and Benefits Program Changes for 2012. For purposes of the DPS Plan, eligible compensation for named executive officers is the amount reported as salary in the Summary Compensation Table. Participants may receive the balance in their account under the DPS Plan upon termination of employment in a lump sum, as a deferred lump sum payment or in installments over a period of years not to exceed their life expectancy.
The BEP DPS provides benefits that cannot be provided under the DPS Plan because of one or more statutory limits. For example, the tax laws limit the amount of compensation that can be taken into account under the DPS Plan for any year and impose other limits on the amounts that can be allocated to individuals. A participant whose salary exceeds the compensation limit or was otherwise affected by a tax law limit is entitled to an amount generally equal to the additional benefit the participant would have received under the DPS Plan but for the application of the tax law limits. Accordingly, bookkeeping accounts reflecting this additional amount have been maintained under the BEP DPS for the named executive officers and other affected participants. A further notional allocation is made annually to reflect the amount credited to the participants account under the BEP DPS assuming the account was invested in the Interest Income Fund maintained under the DPS Plan. The Interest Income Fund is invested in a variety of high-quality fixed-income instruments with strong credit ratings and, for 2011, produced earnings at a rate of 3.21%. BEP DPS allocations relating to periods after 2004 are paid in a lump sum following separation from service. Distribution of the pre-2005 account is subject to the BEP DPS terms applicable on December 31, 2004.
As with the BEP Pension benefit, between 1996 and 2007, our named executive officers and other executive officers received payments that were made directly to them or to individual trusts and that offset the pre-2005 BEP DPS allocations. When BEP (Pension and DPS) and SERP accruals ceased for 2005 through 2007, the named executive officers and other officers received Target Payments for 2005 through 2007 in lieu of BEP DPS allocations. The reinstated BEP that was effective January 1, 2008 also included reinstatement of the BEP DPS. As is noted above, the amounts payable by Altria under the BEP DPS are determined taking into account Target Payments made to executives before 2008 in order to prevent duplicative benefits payments.
Payments Upon Change in Control or Termination of Employment
We do not have individual employment, severance or change in control agreements with any of our named executive officers, except for the agreements entered into with Mr. Szymanczyk that are described in Retirement of CEO and CEO Transition above. The following arrangements apply in the event of a change in control or certain terminations of employment.
Change in Control Payments
Under the terms of our shareholder-approved 2005 and 2010 Performance Incentive Plans that apply to all participants including our NEOs, a change in control of the Company would have the following consequences:
For these purposes, a change in control occurs: (i) upon an acquisition of 20% or more of either our outstanding common stock or the voting power of our outstanding voting securities by an individual or entity, excluding certain acquisitions involving us or our affiliates or where our beneficial owners continue to meet certain ownership thresholds, coupled with, under the 2010 Performance Incentive Plan, the election to the Board of at least one individual determined in good faith by a majority of the then serving members of the Board to be a representative or associate of such individual or entity; (ii) when members of our Board, or members thereafter nominated or elected by such members, cease to constitute a majority of our Board; (iii) upon certain reorganizations, mergers, share exchanges, and consolidations involving us; or (iv) upon our liquidation or dissolution, or sale of substantially all of our assets, with limited exceptions.
The amounts that would have become payable on a change in control of the Company, as of December 31, 2011, were as follows:
Effective January 1, 2011, the Company established a non-qualified grantor trust (the Trust), commonly known as a rabbi trust, to provide a limited amount of financial security for the participants unfunded benefits under the Benefit Equalization Plan and Supplemental Management Employees Retirement Plan (together, the supplemental plans) in the event of a change in control of the
Company. The Trust is unfunded unless triggered by a change in control. In such an event, Trust assets would still be subject to the claims of general creditors of the Company in cases of insolvency and bankruptcy. The Trust does not provide additional benefits or enhancements to the participants in the supplemental plans.
Other than the Trust funding, none of our retirement plans nor any other related agreements provide our named executive officers with an additional enhancement, early vesting or other benefit in the event of a change in control or termination of employment, except for certain plan provisions applicable to all plan participants that in the event of a change in control ensure vesting and continuation of profit-sharing contributions for the year of a change in control and the following two years. All named executive officers were already fully vested. Similarly, no special provisions apply to named executive officers with respect to continued medical, life insurance or other insurance coverage following termination of employment whether or not in connection with a change in control.
In the event of involuntary separation, other than for cause, due to reduction in work force or unsatisfactory work performance, our salaried employees, including all of our named executive officers, are eligible for severance benefits under the Severance Pay Plan for Salaried Employees (Severance Plan). The Severance Plan provides for severance pay (based on base salary) and continuation of certain benefits of up to 12 months depending on years of service. In order to be eligible for any of these benefits, the employee must execute a general release of claims. Periods for which employees are entitled to severance payments may be counted toward vesting and eligibility for purposes of the Retirement Plan as well as post-retirement medical coverage.
The Severance Plan was amended for our recently announced 2011-2012 Salaried Workforce Restructuring Program. Certain employees selected by management to separate from the organization between December 31, 2011 and June 30, 2012 are eligible for enhanced severance benefits under this amendment. These enhanced benefits include up to an additional three or six months of pay, depending on years of completed service. Enhanced severance is not counted toward vesting and eligibility for purposes of the Retirement Plan. None of our named executive officers was included in the 2011-2012 Salaried Workforce Restructuring Program.
In addition, following separation, each of our named executive officers is subject to a confidentiality and non-competition agreement, which was executed in consideration of the 2011 restricted and deferred stock awards.
The Agreements, which the Company entered into in connection with Mr. Szymanczyks retirement, are discussed above under CEO Transition.
To Our Shareholders:
Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal accounting control. The Audit Committee monitors the Companys financial reporting processes and systems of internal accounting control, the independence and the performance of the independent registered public accounting firm and the performance of the internal auditors.
The Audit Committee has received representations from management that the Companys consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, and the Audit Committee has reviewed and discussed the consolidated financial statements with management and the independent registered public accounting firm. The Audit Committee has discussed with the independent registered public accounting firm their evaluation of the accounting principles, practices and judgments applied by management, and the Audit Committee has discussed any items required to be communicated to it by the independent registered public accounting firm in accordance with regulations promulgated by the SEC and the Public Company Accounting Oversight Board and standards established by the American Institute of Certified Public Accountants and the Independence Standards Board.
The Audit Committee has received from the independent registered public accounting firm written disclosures and a letter required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firms communications with the Audit Committee concerning independence and has discussed with the independent registered public accounting firm the independent registered public accounting firms independence from the Company and its management. The Audit Committee has pre-approved all fiscal year 2011 audit and permissible non-audit services provided by the independent registered public accounting firm and the fees for those services. As part of this process, the Audit Committee has reviewed the audit fees of the independent registered public accounting firm. It has also reviewed non-audit services and fees to assure compliance with regulations prohibiting the independent registered public accounting firm from performing specified services that might impair their independence as well as compliance with the Companys and the Audit Committees policies.
The Audit Committee discussed with the Companys internal auditors and independent registered public accounting firm the overall scope of and plans for their respective audits. The Audit Committee has met with the internal auditors and the independent registered public accounting firm, separately and together, with and without management present, to discuss the Companys financial reporting processes and internal control over financial reporting. The Audit Committee has reviewed significant audit findings prepared by the independent registered public accounting firm and those prepared by the internal auditors, together with managements responses.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board the inclusion of the audited consolidated financial statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2011.
George Muñoz, Chair
John T. Casteen III
Thomas F. Farrell II
Thomas W. Jones
The information contained in the report above shall not be deemed to be soliciting material or to be filed with the SEC or subject to Regulation 14A or 14C or the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent specifically incorporated by reference therein.
Aggregate fees, including out-of-pocket expenses, paid to our independent registered public accounting firm, PricewaterhouseCoopers LLP (PricewaterhouseCoopers), were comprised of the following (in millions):
The Audit Committees policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is detailed as to the particular service or category of service and is subject to a specific budget. The Audit Committee requires the independent registered public accounting firm and management to report on the actual fees charged for each category of service at Audit Committee meetings throughout the year.
During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before engaging the independent registered public accounting firm. The Audit Committee has delegated pre-approval authority to the Chair of the Audit Committee for those instances when pre-approval is needed prior to a scheduled Audit Committee meeting. The Chair of the Audit Committee must report on such approvals at the next scheduled Audit Committee meeting.
PUBLIC ACCOUNTING FIRM
The Audit Committee has selected PricewaterhouseCoopers as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2012 and has directed that management submit such selection to shareholders for ratification at the 2012 Annual Meeting. Representatives of PricewaterhouseCoopers are expected to be present at the meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.
Shareholder ratification of the selection of PricewaterhouseCoopers as the Companys independent registered public accounting firm is not required by the Companys By-Laws or otherwise. However, we are submitting the selection of PricewaterhouseCoopers to the shareholders for ratification as a matter of good corporate practice. If the shareholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain PricewaterhouseCoopers. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of a different independent registered public accounting firm at any time during the year if it is determined that such a change would be in the best interests of the Company and its shareholders.
The Board recommends a vote FOR the ratification of the selection of PricewaterhouseCoopers, and proxies received by the Company will be so voted unless shareholders specify a contrary choice in their proxies.
NAMED EXECUTIVE OFFICERS
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) and related regulations provide shareholders with an advisory (non-binding) vote to approve the compensation of the Companys named executive officers, as such compensation is disclosed in this Proxy Statement. The Company currently plans to hold this non-binding advisory vote annually. Following the 2012 Annual Meeting, the next non-binding advisory vote to approve the compensation of the Companys named executive officers is planned to be held at the Companys 2013 Annual Meeting of Shareholders.
At our 2011 Annual Meeting, more than 93% of the shares voted were cast in support of the Companys executive compensation programs. The Company recommends that shareholders again approve and support the decisions pertaining to the compensation of the Companys named executive officers and the Companys executive compensation programs because they successfully align the interests of the Companys named executive officers with the interests of our shareholders by promoting the Companys Mission and business strategies, rewarding the successful execution of those strategies in a fair and disciplined manner and supporting the ability to attract, develop and retain world-class leaders.
This alignment of interests was demonstrated during the compensation performance period ending in 2011. Through the leadership of our named executive officers, the Company achieved considerable success during the year on both an absolute basis and a relative basis as compared to its peer group, and its shareholders benefited from tha