ConocoPhillips DEF 14A 2007
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
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600 North Dairy Ashford
Houston, Texas 77079
MAY 9, 2007
May 9, 2007
10:30 a.m. local time
Omni Houston Hotel at
13210 Katy Freeway
Houston, Texas 77079
April 2, 2007
Dear ConocoPhillips Stockholder:
On behalf of your board of directors and management, you are cordially invited to attend the Annual Meeting of Stockholders to be held at the Omni Houston Hotel at Westside, 13210 Katy Freeway, Houston, Texas, on Wednesday, May 9, 2007, at 10:30 a.m.
It is important that your shares be represented at the meeting. Whether or not you plan to attend the meeting, please either complete and return the enclosed proxy card in the accompanying envelope or submit your proxy using the Internet or telephone procedures provided on the proxy card. Please note that submitting a proxy using any one of these methods will not prevent you from attending the meeting and voting in person.
You will find information regarding the matters to be voted on at the meeting in the enclosed proxy statement. ConocoPhillips 2006 Annual Report to Stockholders has been previously mailed to you.
In addition to the formal items of business to be brought before the meeting, there will be a report on ConocoPhillips operations during 2006 followed by a question and answer period. Your interest in ConocoPhillips is appreciated. We look forward to seeing you on May 9th.
600 North Dairy Ashford
Houston, Texas 77079
TABLE OF CONTENTS
NOTICE OF 2007 ANNUAL MEETING OF STOCKHOLDERS
Items of Business:
By Order of the Board of Directors
Janet Langford Kelly
Who is soliciting my vote?
The Board of Directors of ConocoPhillips is soliciting your vote at the Annual Meeting of ConocoPhillips stockholders.
What am I voting on?
You are voting on:
How does the Board recommend that I vote my shares?
Unless you give other instructions on your proxy card, the persons named as proxy holders on the proxy card will vote in accordance with the recommendations of the Board of Directors. The Boards recommendation can be found with the description of each item in this proxy statement. In summary, the Board recommends a vote:
Who is entitled to vote?
You may vote if you were the record owner of ConocoPhillips common stock as of the close of business on March 12, 2007. Each share of common stock is entitled to one vote. As of March 12, 2007, we had 1,683,410,382 shares of common stock outstanding and entitled to vote. There is no cumulative voting.
How many votes must be present to hold the meeting?
Your shares are counted as present at the Annual Meeting if you attend the meeting and vote in person or if you properly return a proxy by Internet, telephone or mail. In order for us to hold our meeting, holders of a majority of our outstanding shares of common stock as of March 12, 2007, must be present in person or by proxy at the meeting. This is referred to as a quorum. Abstentions and broker non-votes will be counted for purposes of establishing a quorum at the meeting.
What is a broker non-vote?
If a broker does not have discretion to vote shares held in street name on a particular proposal and does not receive instructions from the beneficial owner on how to vote those shares, the broker may return the proxy card without voting on that proposal. This is known as a broker non-vote. Broker non-votes will have no effect on the vote for any matter properly introduced at the meeting.
How many votes are needed to approve each of the proposals?
Our Board has adopted a majority voting standard with respect to the election of our directors. As a result, all director nominees and other proposals submitted require the affirmative FOR vote of a majority of those shares present in person or represented by proxy at the meeting and entitled to vote on the proposal. Unless you indicate otherwise on your proxy card, the persons named as your proxies will vote your shares FOR all the director nominees named in this proxy statement.
How do I vote?
You can vote either in person at the meeting or by proxy without attending the meeting.
To vote by proxy, you must either:
If you hold your ConocoPhillips stock in a brokerage account (that is, in street name), your ability to vote by telephone or over the Internet depends on your brokers voting process. Please follow the directions on your proxy card or voter instruction form carefully.
Even if you plan to attend the meeting, we encourage you to vote your shares by proxy. If you plan to vote in person at the Annual Meeting, and you hold your ConocoPhillips stock in street name, you must obtain a proxy from your broker and bring that proxy to the meeting.
How do I vote if I hold my stock through ConocoPhillips employee benefit plans?
If you hold your stock through ConocoPhillips employee benefit plans, you must either:
You will receive a separate voting instruction form for each employee benefit plan in which you have an interest. Please pay close attention to the deadline for returning your voting instruction form to the plan trustee. The voting deadline for each plan is set forth on the voting instruction form. Please note that different plans may have different deadlines.
Can I change my vote?
Yes. You can change or revoke your vote at any time before the polls close at the Annual Meeting. You can do this by:
Who counts the votes?
We have hired Mellon Investor Services LLC, our transfer agent, to count the votes represented by proxies cast by ballot, telephone, and the Internet. Employees of Mellon Investor Services will act as Inspectors of Election.
Will my shares be voted if I dont provide my proxy and dont attend the Annual Meeting?
If you do not provide a proxy or vote your shares held in your name, your shares will not be voted.
If you hold your shares in street name, your broker may be able to vote your shares for certain routine matters even if you do not provide the broker with voting instructions. The election of directors and the ratification of Ernst & Young LLP as our independent registered public accounting firm for 2007 are considered routine matters.
If you do not give your broker instructions on how to vote your shares, for matters not considered routine, the broker may return the proxy card without voting on that proposal. This is a broker non-vote. Votes in connection with the six stockholder proposals are not considered routine matters.
If you hold your shares through ConocoPhillips employee benefit plans and do not vote your shares, your shares (along with all other shares in the plan
for which votes are not cast) will be voted pro rata by the trustee in accordance with the votes directed by other participants in the plan who elect to act as a fiduciary entitled to direct the trustee of the applicable plan on how to vote the shares.
How are votes counted?
For all proposals, you may vote FOR, AGAINST, or ABSTAIN. If you ABSTAIN, it has the same effect as a vote AGAINST.
What if I return my proxy but dont vote for some of the matters listed on my proxy card?
If you return a signed proxy card without indicating your vote, your shares will be voted FOR the director nominees listed on the card, FOR the ratification of Ernst & Young LLP as ConocoPhillips independent registered public accounting firm for 2007 and AGAINST each of the stockholder proposals.
Could other matters be decided at the Annual Meeting?
We are not aware of any other matters that will be considered at the Annual Meeting. If any other matters are properly brought before the Annual Meeting, the persons named in your proxies will vote in accordance with their best judgment.
Who can attend the meeting?
The Annual Meeting is open to all holders of ConocoPhillips common stock. Each stockholder is permitted to bring one guest. No cameras, recording equipment, large bags, briefcases or packages will be permitted in the Annual Meeting, and security measures will be in effect in order to ensure the safety of attendees.
Do I need a ticket to attend the Annual Meeting?
Yes, you will need an admission ticket or proof of ownership of ConocoPhillips stock to enter the meeting. If your shares are registered in your name, you will find an admission ticket attached to the proxy card sent to you. If your shares are in the name of your broker or bank or you received your materials electronically, you will need to bring evidence of your stock ownership, such as your most recent brokerage statement. All stockholders will be required to present valid picture identification. IF YOU DO NOT HAVE VALID PICTURE IDENTIFICATION AND EITHER AN ADMISSION TICKET OR PROOF THAT YOU OWN CONOCOPHILLIPS STOCK, YOU MAY NOT BE ADMITTED INTO THE MEETING.
How can I access ConocoPhillips proxy materials and annual report electronically?
This proxy statement and the 2006 annual report are available on our website at www.conocophillips.com. Most stockholders can elect to view future proxy statements and annual reports over the Internet instead of receiving paper copies in the mail.
If you own ConocoPhillips stock in your name, you can choose this option and save us the cost of producing and mailing these documents by checking the box for electronic delivery on your proxy card, or by following the instructions provided when you vote by telephone or over the Internet. If you hold your ConocoPhillips stock through a bank, broker or other holder of record, please refer to the information provided by that entity for instructions on how to elect to view future proxy statements and annual reports over the Internet.
If you choose to view future proxy statements and annual reports over the Internet, you will receive a proxy card next year containing the Internet address to use to access our proxy statement and annual report. Your choice will remain in effect until you tell us otherwise. You do not have to elect Internet access each year. If you later change your mind and would like to receive paper copies of our proxy statements and annual reports, please contact Mellon Investor Services at 1-800-356-0066 (from the United States, Canada and Puerto Rico), at 1-201-680-6578 (from all other locations) or via the Internet at https://vault.melloninvestor.com/isd.
What is the makeup of the Board of Directors and how often are the members elected?
Our Board of Directors currently has 17 members. Our Board is classified into three classes serving staggered three-year terms. Directors for each class are elected at the Annual Meeting of Stockholders held in the year in which the term for their class expires. Any director vacancies created between meetings (such as by a current directors death, resignation or removal for cause or an increase in the number of directors) may be filled by a majority of the remaining directors then in office. Any director appointed in this manner would hold office until the next election for his or her respective class. If a vacancy resulted from an action of our stockholders, only our stockholders are entitled to elect a successor.
What if a nominee is unable or unwilling to serve?
That is not expected to occur. If it does, shares represented by proxies will be voted for a substitute nominated by the Board of Directors.
What if a director nominee does not receive a majority of votes cast?
If a nominee who is serving as a director is not elected at the Annual Meeting and no one else is elected in place of that director, then, under Delaware law, the director would continue to serve on the Board as a holdover director. However, under our By-Laws, the holdover director is required to tender his or her resignation to the Board. The Committee on Directors Affairs would then make a recommendation to the Board whether to accept or reject the tendered resignation, or whether some other action should be taken. The Board of Directors would then make a decision whether to accept the resignation taking into account the recommendation of the Committee on Directors Affairs. The Board is required to publicly disclose (by a press release, a filing with the SEC or other broadly disseminated means of communication) its decision regarding the resignation and the rationale behind the decision within 90 days from the date of the certification of the election results.
How are directors compensated?
Please see our discussion of director compensation beginning on page 58.
How often did the Board meet in 2006?
The Board of Directors met six times in 2006. Each director attended at least 75 percent of the aggregate of:
Do the Board committees have written charters?
Yes. The charters for our Audit and Finance Committee, Executive Committee, Compensation Committee, Committee on Directors Affairs and Public Policy Committee can be found on ConocoPhillips website at www.conocophillips.com under the Corporate Governance caption (accessed through the Investor Information link). Stockholders may also request printed copies of our Board committee charters by following the instructions located under the caption Available Information on page 85.
What are the Committees of the Board?
(Proposal 1 on the Proxy Card)
Who are this years nominees?
The Class II directors standing for election this year to hold office until the 2010 Annual Meeting of Stockholders and until his or her successor is elected are:
What does the Board recommend?
THE BOARD RECOMMENDS THAT
YOU VOTE FOR THE ELECTION
OF THESE DIRECTORS
Who are the directors continuing in office?
Class III Directors Term Expires in 2008
Class I Directors Term Expires in 2009
Corporate Governance Matters and Communications with the Board
The Committee on Directors Affairs and our Board undertook a comprehensive review of the Companys governance structure in light of the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE). The Board approved Corporate Governance Guidelines for the Company, which document many pre-existing policies and practices of the Company and also address issues responsive to the Sarbanes-Oxley Act and SEC and NYSE rules. The Corporate Governance Guidelines, posted on the Companys Internet site under the Corporate Governance caption and available in print upon request (see Available Information on page 84), address the following matters, among others: director qualifications, director responsibilities, Board committees, director access to officers, employees and independent advisors, director compensation, Board performance evaluations, director orientation and continuing education, and CEO evaluation and succession planning. The Corporate Governance Guidelines also contain director independence standards, which are consistent with the standards set forth in the NYSE listing standards, to assist the Board in determining the independence of the Companys directors. The Board has determined that each director, except Mr. Mulva, meets the standards regarding independence set forth in the Corporate Governance Guidelines and is free of any material relationship with the Company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company). In making such determination regarding independence, the Board specifically considered the fact that many of our directors are directors, retired officers and stockholders of companies with which we conduct business. In addition, some of our directors serve as employees of, or consultants to, companies which do business with ConocoPhillips and its affiliates (as further described in Related Party Transactions on p. 12). Finally, we recognize that some of our directors may purchase retail products (such as gasoline, fuel additives or lubricants) from the Company. In all cases, it was determined that the nature of the business conducted and the interest of the director by virtue of such position were immaterial both to the Company and to such director. Finally, the Board considered the Charitable Gift Program (further described in Non-Employee Director Compensation on page 58) and, in part because the right to such benefit vests after one year of service, concluded that such program does not impair the independence of our directors. The Board has determined that, although the current Chairman of the Audit and Finance Committee serves on the audit committees of more than three public companies, he is not impaired from effectively serving on the Boards Audit and Finance Committee.
Our Corporate Governance Guidelines provide that non-employee directors will meet in executive session at each meeting. The Chairman of the Committee on Directors Affairs presides at these meetings. Mr. Duberstein is Chair of the Committee on Directors Affairs and is responsible for setting the agenda for executive sessions of non-management directors and presiding at such meetings.
The Board of Directors maintains a process for stockholders and interested parties to communicate with the Board. Stockholders and interested parties may write, email or call our Board of Directors by contacting our Corporate Secretary, Janet Langford Kelly, as provided below:
P.O. Box 4783
Houston, TX 77210-4783
Communications addressed to individual Board members will be forwarded by the Corporate Secretary to the individual addressee. Any communications addressed to the Board of Directors will be forwarded by the Corporate Secretary to Mr. Duberstein, Chairman of the Committee on Directors Affairs.
Recognizing that director attendance at the Companys Annual Meeting can provide the Companys stockholders with an opportunity to communicate with Board members about issues affecting the Company, the Company actively encourages its directors to attend the Annual Meeting of Stockholders. In 2006, all of the Companys directors attended the Annual Meeting.
Code of Business Ethics and Conduct
ConocoPhillips has adopted a worldwide Code of Business Ethics and Conduct for Directors and Employees designed to help directors and employees resolve ethical issues in an increasingly complex global business environment. Our Code of Business Ethics and Conduct applies to all directors and employees, including the Chief Executive Officer and the Chief Financial Officer. Our Code of Business Ethics and Conduct covers topics including, but not limited to, conflicts of interest, insider trading, competition and fair dealing, discrimination and harassment, confidentiality, payments to government personnel, anti-boycott laws, U.S. embargos and sanctions, compliance procedures and employee complaint procedures. Our Code of Business Ethics and Conduct is posted on our Internet site under the Corporate Governance caption. Stockholders may also request printed copies of our Code of Business Ethics and Conduct by following the instructions located under the caption Available Information on page 84.
Related Party Transactions
Our Code of Business Ethics and Conduct requires that all directors and executive officers promptly bring to the attention of the General Counsel and, in the case of directors, the Chairman of the Committee on Directors Affairs or, in the case of executive officers, the Chairman of the Audit and Finance Committee, any transaction or relationship that arises and of which she or he becomes aware that reasonably could be expected to constitute a related party transaction. Any such transactions are reviewed by the Companys management and the appropriate Board Committee to ensure that they do not constitute a conflict of interest and are reported appropriately. Additionally, the Committee on Directors Affairs conducts an annual review of related party transactions between each of our directors and the Company (and its subsidiaries) and makes recommendations to the Board regarding the continued independence of each board member. In 2006, there were no related party transactions in which the Company was a participant and in which any director or executive officer (or their immediate family members) had a direct or indirect material interest. The Committee on Directors Affairs specifically considered the following relationships in making its independence determination:
Nominating Processes of the Committee on Directors Affairs
The Committee on Directors Affairs (the Committee) comprises four non-employee directors, all of whom are independent under New York Stock Exchange (NYSE) listing standards and our Corporate Governance Guidelines. The Committee identifies, investigates and recommends to the Board director candidates with the goal of creating balance of knowledge, experience and diversity. Generally, the Committee identifies candidates through business and organizational contacts of the directors and management. Potential directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of the Companys stockholders. In addition to reviewing a candidates background and accomplishments, the Committee reviews candidates for director nominees in the context of the current composition of the Board and the evolving needs of the Companys businesses. It is the Boards policy that at all times at least a substantial majority of its members meets the standards of independence promulgated by the NYSE and the SEC, and as set forth in the Companys Corporate Governance Guidelines. The Committee also seeks to ensure that the Board reflects a range of talents, ages, skills, diversity, and expertise, particularly in the areas of accounting and finance, management, domestic and international markets, leadership, and oil and gas related industries, sufficient to provide sound and prudent guidance with respect to the Companys operations and interests. The Board also requires that its members be able to dedicate the time and resources necessary to ensure the diligent performance of their duties on the Companys behalf, including attending Board and applicable committee meetings. Each director is required to retire at the next annual stockholders meeting of the Company following his or her 72nd birthday.
The Companys By-Laws permit stockholders to nominate directors for election at a stockholders meeting whether or not such nominee is submitted to and evaluated by the Committee on Directors Affairs. To nominate a director using this process, the stockholder must follow procedures set forth in the Companys By-Laws. Those procedures require a stockholder to notify the Companys Secretary of a proposed nominee not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders, or, in the case of a special meeting of stockholders, not less than 10 days nor more than 60 days prior to the date of such special meeting. The notice to the Secretary must include the following:
The Committee will consider director candidates recommended by stockholders. If a stockholder wishes to recommend a director for nomination by the Committee, he or she should follow the same procedures set forth above for nominations to be made directly by the stockholder. In addition, the stockholder should provide such other information as it may deem relevant to the Committees evaluation. Candidates recommended by the Companys stockholders are evaluated on the same basis as candidates recommended by the Companys directors, CEO, other executive officers, third-party search firms or other sources.
In February 2007, the Board approved an amendment to ConocoPhillips By-Laws to require directors to be elected by the majority of the votes cast with respect to such director in uncontested elections (i.e. the number of votes cast FOR a director must exceed the number of votes cast AGAINST that director). In a contested election (a situation in which the number of nominees exceeds the number of directors to be elected), the standard for election of directors will be a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. If a nominee who is serving as a director is not elected at the annual meeting and no one else is elected in place of that director, then, under Delaware law, the director would continue to serve on the Board as a holdover director. However, under our By-Laws, the holdover director is required to tender his or her resignation to the Board. The Committee on Directors Affairs would then make a recommendation to the Board whether to accept or reject the tendered resignation, or whether some other action should be taken. The Board of Directors would then make a decision whether to accept the resignation taking into account the recommendation of the Committee on Directors Affairs. The Board is required to publicly disclose (by a press release, a filing with the SEC or other broadly disseminated means of communication) its decision regarding the resignation and the rationale behind the decision within 90 days from the date of the certification of the election results. The director who tenders his or her resignation will not participate in the Boards decision. If a nominee who was not already serving as a director is not elected at the annual meeting, under Delaware law that nominee would not become a director and would not serve on the Board as a holdover director. In 2007, all nominees for the election of directors are currently serving on the Board.
Role of the Compensation Committee
Authority and Responsibilities
The Compensation Committee of the Board of Directors of ConocoPhillips is responsible for providing independent, objective oversight for ConocoPhillips executive compensation programs and determining the compensation of anyone who meets our definition of a Senior Officer. Currently, our internal guidelines define a Senior Officer as an employee who is a senior vice president or higher, an executive who reports directly to the CEO, or any other employee considered an officer under Section 16(b) of the Securities Exchange Act of 1934. All of the Named Executive Officers in the compensation tables that follow are Senior Officers. In addition, the Compensation Committee acts as plan administrator of the compensation programs and benefit plans for Senior Officers and as an avenue of appeal for current and former Senior Officers regarding disputes over compensation and benefits.
One of the Compensation Committees responsibilities is to assist the Board in its oversight of the integrity of the Companys Compensation Discussion and Analysis found starting on page 17 of this Proxy Statement. That report summarizes certain of the Compensation Committees activities during 2006 and 2007 concerning compensation earned during 2006.
A complete listing of the authority and responsibilities of the Compensation Committee is set forth in the written charter adopted by ConocoPhillips Board of Directors and last amended on December 11, 2006, which is available on our website www.conocophillips.com under the caption Corporate Governance.
The Compensation Committee currently consists of four members. The members of the Compensation Committee and the member to be designated as Chair, like the members and Chairs of all of the Boards committees, are reviewed and recommended annually by the Committee on Directors Affairs to the full Board. The Board of Directors has final approval of the committee structure of the Board. The only pre-existing requirement for service on the Compensation Committee is that members of the Compensation Committee must meet the independence requirements for non-employee directors under the Securities Exchange Act of 1934, for independent directors under the NYSE listing standards, and for outside directors under the Internal Revenue Code.
The Compensation Committee has regularly scheduled meetings in association with each regular Board meeting, and meets telephonically between such meetings as necessary to properly discharge its duties. The Compensation Committee reserves time at each regularly scheduled meeting to review matters in executive session with no members of management or management representatives present except as specifically requested by the Compensation Committee. In 2006, the Compensation Committee had six regularly scheduled meetings, and two other meetings. More information regarding the Committees activities at such meetings can be found in the Compensation Discussion and Analysis beginning on page 17.
The Compensation Committee is committed to a process of continuous improvement in exercising its responsibilities. To that end, the Compensation Committee also:
Compensation Committee Report
Review with Management. The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis presented in this proxy statement starting on page 17. Members of management with whom the Compensation Committee discussed the Compensation Discussion and Analysis included the Companys Chief Executive Officer, Chief Financial Officer and Vice President, Human Resources.
Discussions with Independent Executive Compensation Consultant. The Compensation Committee has discussed with Towers Perrin, an independent executive compensation consulting firm, the executive compensation programs of the Company, as well as specific compensation decisions made by the Compensation Committee. Towers Perrin is retained directly by the Compensation Committee, independent of the management of the Company. The Compensation Committee has received written disclosures from Towers Perrin concerning other work performed for the Company by Towers Perrin, has discussed with Towers Perrin its independence from ConocoPhillips, and believes Towers Perrin to be independent of management.
Recommendation to the ConocoPhillips Board of Directors. Based on its review and discussions noted above, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in ConocoPhillips proxy statement on Schedule 14A (and, by reference, included in ConocoPhillips Annual Report on Form 10-K for the year ended December 31, 2006).
THE CONOCOPHILLIPS COMPENSATION COMMITTEE
Norman R. Augustine, Chairman
Harold W. McGraw, III
William R. Rhodes
William E. Wade, Jr.
Compensation Discussion and Analysis
Our discussion and analysis of our executive compensation programs is arranged in three parts:
Compensation Objectives and Process
Executive Compensation Goals, Philosophy, and Principles
Our Goals: Our goals are to attract, retain and motivate high-quality employees and maintain high standards of principled leadership so that we can responsibly deliver energy to the world and provide sustainable value for our stakeholders, now and in the future.
Our Philosophy: We believe that our ability to responsibly deliver energy and to provide sustainable value is driven by superior individual performance. We believe that a company must offer competitive compensation to attract and retain experienced, talented and motivated employees. Moreover, we believe employees with a leadership role within the organization are motivated to perform at their highest levels by making performance-based pay a significant portion of their compensation.
Our Principles: To achieve our goals, we implement our philosophy through the following guiding principles:
The Compensation Committee
As discussed under Role of the Compensation Committee on page 15, the Compensation Committee (the Committee) is charged with all compensation actions related to our Named Executive Officers.
A complete listing of the authority and responsibilities of the Committee is set forth in its Charter, which can be found on our website at www.conocophillips.com under the caption Corporate Governance.
The Committees charter permits the Committee to delegate authority to subcommittees or other committees of the Board. In 2006, the
Committee made no delegations of its authority over compensation matters relating to our Named Executive Officers.
The Compensation Committee is specifically authorized in its charter to retain external legal, accounting or other advisors and consultants at the Companys expense. Since 2004, the Compensation Committee has retained Towers Perrin as its independent executive compensation consultant. In September 2005, the Committee adopted specific guidelines for outside compensation consultants retained to advise the Committee. The guidelines require (and Towers Perrin provides an annual attestation regarding compliance with such guidelines) that work done for the Company at managements request be approved in advance by the Committee, require a review of the advisability of independent consultant rotation after a period of five years, and prohibit the Company from employing any individual who worked on the Companys account for a period of one year after leaving the employ of the independent consultant. The Committee strongly discourages proposals to retain the independent consultants for any work other than advising the Committee and does not approve any work proposed by management for the Company that would compromise the independence of the consultants.
Since the adoption of the independence guidelines, the Committee has approved only two such requests. One request was to continue purchasing multi-company non-executive compensation surveys in the ordinary course of business at a nominal cost. The other request was to hire Towers Perrin, for a minimal sum, to assist on a one-time basis with a country-specific workforce planning project because of their special expertise in related matters. In the view of the Committee, neither of these requests compromised the independence of Towers Perrin as a consultant to the Committee, and the Committee concurred with managements assessment that Towers Perrin was better suited to provide the requested services than alternative providers.
Towers Perrin attends most regularly scheduled meetings of the Compensation Committee, as well as preparatory meetings with the Committee Chairman. Among other tasks assigned by the Committee, Towers Perrin typically:
The Committee seeks counsel from Towers Perrin regarding whether the executive compensation programs, and the targets set under the programs for Named Executive Officers, are within the range of typical practice for the Companys primary peers and that the total compensation actually paid to Named Executive Officers falls within the criteria established by the Committee. Towers Perrin also undertakes such other special projects as are assigned by the Committee. Additionally, Towers Perrin attends executive sessions of the Committee as requested by the Committee.
The Committee is supported by the Vice President, Human Resources of the Company (VPHR), and such other executives and employees of the Company and consultants to the Company as the VPHR deems appropriate or the Compensation Committee requests. The Committee relies on the CEO and VPHR (who, in turn engage such Company personnel and representatives as they deem appropriate) to implement its decisions.
The CEO and VPHR work with internal resources and the Companys compensation consultant, Mercer Human Resource Consulting (Mercer), to design programs, implement Committee decisions, recommend amendments to existing, or the adoption of new, compensation and benefits programs and plans applicable to Senior Officers (a Senior Officer is described in Role of the Compensation Committee on page 15) as well as to prepare necessary briefing materials for the Committees review as part of its decision-making process.
Program design and implementation plans for Senior Officers are generally reviewed with the Chief Executive Officer, the Chief Financial Officer, Mercer and Towers Perrin prior to being presented to the Committee.
The Committee annually reviews the Companys compensation structure and programs; retirement, benefit and severance programs; and management succession plans. The Committee meets with the Committee on Directors Affairs each year to review the role of the CEO in the Companys performance, his role in advancing the strategic objectives of the Company, and other factors relating to his individual performance during the year, as well as to establish performance objectives and targets for the coming year.
The annual compensation process concludes at the Committees February meeting (the date of which is set at least a year in advance), when it evaluates the Companys performance against targets for the just-concluded performance period, and determines the associated Corporate performance payout components, determines awards earned by Senior Officers under the Companys short-term and long-term incentive programs for the previous fiscal year, and sets target compensation for Senior Officers for the upcoming year.
Before the Committee makes the foregoing determinations, the CEO provides his recommendations to the Compensation Committee on compensation actions for all Senior Officers, other than himself. The CEO and the Compensation Committee also discuss the CEOs assessment of the performance of our Senior Officers and any other factors that the CEO believes the Compensation Committee should consider. The Compensation Committee reviews benchmarking data for similarly situated executives at other large, publicly-held energy companies (as well as large publicly-held non-energy companies, for staff executives) compiled by Mercer and reviewed by Towers Perrin.
With respect to our CEO, the Compensation Committee, with the input of Towers Perrin and Mercer, reviews a range of salary adjustments, incentive plan payouts for the most recently concluded one and three-year performance periods, and recommended targets for the upcoming one- and three-year performance periods based upon benchmarking studies for other CEOs within our primary peer group for benchmarking purposes.
Compensation Program Design
Our compensation programs for executives take into account marketplace compensation for executive talent, internal equity with our employees, past practices of the Company, corporate, business unit and individual results and the talents, skills and experience that each individual executive brings to ConocoPhillips.
The Compensation Committee begins by establishing target levels of total compensation for our Senior Officers for a given year. The targets take into account and reflect the considerations discussed in more detail below, including the use of peer benchmarking, internal pay equity and salary grade structure. Once an overall target compensation level is established, the Committee considers the weighting of each of our primary compensatory programs (Base Salary, Variable Cash Incentive Program, Stock Option Program and Performance Share Program) within the intended total target compensation.
Generally, our programs are designed to increase the proportion of performance-based or at-risk pay as a percentage of total compensation as an executives responsibilities increase because we believe that our senior executives have more opportunity to affect the relative performance of the Company and that their performance will be enhanced by ensuring that a larger portion of their potential compensation is tied to the performance of the Company.
Salary Grade Structure
In 2002, management, with the assistance of outside compensation consultants, undertook a thorough examination of the scope and complexity of jobs throughout ConocoPhillips and a study of competitive compensation practices for such jobs. As a result of this work, management developed a compensation scale under which different positions are designated specific grades. Each grade has an associated base salary minimum, midpoint, and maximum and a target, which is expressed as a percentage of salary, for our annual bonus program. Eligible grades also have an associated restricted stock unit and option target, also expressed as a percentage of salary. For our executives, the base salary midpoint increases at each increasing grade,
but at a lesser rate than increases in target incentive compensation percentages, causing the percent of total compensation that is at risk for an executive to increase by grade. Modifications to our salary grade structure to reflect marketplace trends are reviewed annually and, with respect to our Senior Officers, approved by the Compensation Committee. The Compensation Committee also approves any salary grade changes for our Senior Officers, including our Named Executive Officers.
In setting target compensation, we, with assistance from Mercer, refer to multiple relevant compensation surveys that include but are not limited to large energy companies. We then compare that information to the base salary ranges and incentive compensation targets by grade to determine any necessary changes so that the cumulative target, which includes base salary and all incentive compensation, for each salary grade is broadly at the 50th percentile for similar positions as revealed by the survey data.
An individual analysis is then conducted for our Named Executive Officers in which we seek to obtain compensation data for our primary peer group for benchmarking purposes specific to the position. For example, we focus on large, publicly-held energy companies as the proper primary peer group for benchmarking purposes in determining targets for our CEO; while we often include broader measures, such as other publicly-held energy companies for our operating executives, as well as other large publicly-held non-energy companies for staff executives. The conclusions are reviewed and independently confirmed by the Compensation Committees independent compensation consultant, Towers Perrin. The Compensation Committee uses the results of these surveys as a factor in setting compensation structure and targets relating to our Named Executive Officers.
The Compensation Committees use of primary peer groups in the context of our compensation programs generally falls into two broad categories: setting compensation targets and measuring Company performance.
As discussed above, before setting individual targets under each of our primary compensation programs, the Compensation Committee establishes target levels of total compensation for our Senior Officers each year. Once total compensation targets are established, the Committee sets targets within each program. In setting total compensation targets and targets within each individual program the Compensation Committee uses the following primary peer group for benchmarking purposes ExxonMobil Corporation, Royal Dutch Shell plc, BP p.l.c., and Chevron Corporation.
The Committee also utilizes a secondary group of peer companies for benchmarking the compensation of our Named Executive Officers other than our CEO Valero Energy Corporation, Marathon Oil Corporation, Sunoco, Inc., Hess Corporation, Occidental Petroleum Corporation, and, for staff executives, other large publicly-held non-energy companies.
We utilize the primary peer group in setting compensation targets because these companies are broadly reflective of the industry in which we compete for business opportunities, as well as executive talent, and because they provide a good indicator of the current range of compensation for executives.
In assessing our actual performance for a given performance period under our performance-based programs, we use ExxonMobil, Royal Dutch Shell, BP, Total S.A., and Chevron as our primary peer group for performance measurement because we believe our performance is best measured against the largest publicly-held, international, integrated oil and gas companies. This is the group against which we compete in our business operations and, because of these similarities, this is the group we believe best to use in measuring our performance.
Developing Performance Measures
We have attempted to develop performance metrics that assess the performance of the Company relative to its primary peer group for performance
measurement instead of its absolute performance, because absolute performance can be affected positively or negatively by industry-wide factors over which our executives have no control, such as prices for crude oil and natural gas. We have also attempted to isolate the underlying performance necessary to enable achievement of those goals considering our unique circumstances within the industry. We have selected multiple metrics, as described below, because we believe no one metric is sufficient to capture the performance we are seeking to drive, and any metric in isolation is unlikely to promote the well-rounded executive performance necessary to enable us to be successful for the long term. We recognize, however, that no metric or set of metrics can reliably measure actual performance in light of unanticipated opportunities and challenges.
Internal Pay Equity
We believe our salary grade structure provides a framework for an equitable compensation ratio between executives, with higher targets for jobs at salary grades having greater duties and responsibilities. Taken as a whole, our compensation program is designed so that the individual target level rises as salary grade level increases, with the portion of performance-based compensation rising as a percentage of total targeted compensation. One result of this structure is that actual total compensation of an executive as a multiple of the total compensation of his or her subordinates is designed to increase in periods of above-target performance and decrease in times of below-target performance.
Alignment of Interests
We place a premium on aligning the interests of executives with those of our stockholders. Our Stock Ownership Guidelines require executives to own stock valued at a multiple of base salary, ranging from 1.8 times salary, for lower-level executives, to 6 times salary, for the CEO. The multiple of equity held by each of our Named Executive Officers exceeds our established guidelines for their positions. Employees have five years from the date they become subject to the Guidelines to comply with the Guidelines.
We require our executives to hold restricted stock units received under the Performance Share Program, and in predecessor programs, until death, disability, retirement, layoff, or severance after a change in control. The units are generally forfeited if an executive voluntarily leaves the Companys employ when not retirement eligible. We are informed by both Mercer and Towers Perrin that this is a highly unusual feature. We employ the holding period to align our executives interests with those of our stockholders for the duration of their career with the Company and to encourage executives to stay with the Company. A result is that our Named Executive Officers do not vest in a substantial part of their compensation for the duration of their employment by the Company. Thus, amounts shown under Stock Awards in the Outstanding Equity Awards at Fiscal Year End table beginning on page 41 reflect accumulated restricted stock and restricted stock units from their entire tenure as an executive and, therefore, are higher than they would be for a comparably compensated executive at another company whose performance incentives vested after a period of a few years, which we are advised is more typical.
Statutory and Regulatory Considerations
In designing our compensatory programs, we consider and take into account the various tax, accounting and disclosure rules associated with various forms of compensation. The Compensation Committee also reviews and considers the deductibility of executive compensation under section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1 million that is paid to certain individuals. The Company generally will be entitled to take tax deductions relating to compensation that is performance-based or that will not be paid until the executive leaves the Company, which may include cash incentives, stock options, restricted stock, restricted stock units and other performance-based awards. The Compensation Committee seeks to preserve tax deductions for executive compensation to the extent consistent with the Committees determination of compensation arrangements necessary and appropriate to foster achievement of our business goals. However, the Compensation Committee has also awarded compensation that might not be fully tax deductible when it believes such grants are nonetheless in the best interests of our stockholders.
On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax
rules applicable to nonqualified deferred compensation arrangements. While the final regulations have not yet become effective, the Company believes it is operating in good faith compliance with the statutory provisions which were effective January 1, 2005. A more detailed discussion of the Companys nonqualified deferred compensation arrangements is provided on page 49 under the heading Nonqualified Deferred Compensation.
ConocoPhillips is a global, integrated energy company with operations and employees worldwide and, as such, we must respond to local conditions, practices, and laws in our compensation programs. Therefore, no compensation arrangements are applicable to all of our salaried employees. However, since our Named Executive Officers are each United States-based salaried employees, we discuss programs applicable to our Named Executive Officers only to the extent they are not also applicable to all United States-based salaried employees.
The Compensation Committee carefully considers aspects of shorter-term performance that will drive the long-term sustainable performance we seek, as well as the best measures of that performance. Where appropriate, performance targets have been established relative to the performance of other energy companies rather than on an absolute basis. Although the Committee sets performance measures for performance-based programs, compensation under those programs is not mandated by attainment of specified performance levels. Rather, all employees are informed of the performance measures that will be used to evaluate their performance for a given period, such as relative annual total stockholder return, but also understand that no given performance under those measures will entitle them to any guaranteed resulting payments under these programs. The Compensation Committee gives great weight to the Companys performance on these measures relative to our primary peer group for performance measurement. However, the Compensation Committee also retains discretion to consider other factors as the Committee seeks to determine the Companys or business units relative performance within the industry and the contribution of the individual to that performance.
The Compensation Committee believes that the stockholders interests are best served by having the Committee retain discretion to implement the compensation philosophy described earlier. Therefore, the Committee has not adopted specific compensation policies because they would tend to limit the Committees discretion to act as appropriate to the circumstances.
When the Committee grants options to its Named Executive Officers, the Company uses an average of the high and low of stock prices on the date of grant (or the preceding business day, if the markets are closed on the date of grant) to determine the exercise price of the options. Grants of options are generally made at the Compensation Committees February meeting (the date of which is determined at least a year in advance) or, in the case of new hires, on the date of commencement of employment or the date of Compensation Committee approval, whichever is later.
Our Named Executive Officers each serve without an employment agreement. All compensation for these officers is set by the Committee as described above.
Compensation Program Elements
Our executive compensation program has four primary components which are intended, collectively, to compensate and create incentives for our executives with respect to past, current and future performance. These four primary components are:
In addition to these primary components, the Company also provides its executives with retirement, severance, health and other personal benefits as described below.
Base salary is a major component of the compensation for any of our salaried employees, although it becomes a smaller component of total targeted compensation as an employee rises through the ConocoPhillips salary grade structure. Base salary is important, especially at lower salary grades, to give an individual financial stability for personal planning purposes. There are also motivational and reward aspects to base salary, as base salary can be increased or decreased from target to account for considerations such as individual performance and time in position.
Base salary, alone or in combination with an executives salary grade, is a factor in determining the amount of awards under, and eligibility to participate in, many of our compensation and benefits arrangements.
Performance-Based Pay Measures and Criteria
Performance Measures We use corporate, business unit and individual performance criteria in determining individual payouts.
Additionally, the Committee considers Company performance for the year and, in 2006, considered the following accomplishments in its determination of overall corporate performance:
At the beginning of each performance period, management establishes award units and the performance criteria for each award unit. Examples of performance criteria are provided below in the section entitled Annual Incentive (Bonus). At the conclusion of a performance period, management makes a subjective determination of the units performance for the year, which determination includes an evaluation of performance versus the pre-established criteria for such award unit.
Performance-Based Pay Programs
Annual Incentive (Bonus) The Variable Cash Incentive Program (VCIP) is a broadly-available annual incentive program for our employees
throughout the world, and it is our primary vehicle for recognizing Company, business unit, and individual performance for the past year. We believe that having an at risk element for all of our employees gives them a financial stake in the achievement of our business objectives on an annual basis and therefore motivates them to use their best efforts to ensure the achievement of those objectives. We believe that one year is a valuable measurement period that should be included in a compensation program because we measure and report our business accomplishments annually, as do our primary peers and other public companies, and our valuation is derived, in part, from comparisons of such annual results with the results of our primary peers and relative to prior annual periods. We also believe that one year is a time period over which all employees who participate in the program can have the opportunity to establish and achieve their specified goals.
Long-Term Incentives Our primary long-term incentive compensation programs for executives are the Stock Option and Stock Appreciation Rights Program (Stock Option Program) and the Performance Share Program (PSP) which, along with VCIP, are each programs under our stockholder approved 2004 Omnibus Stock and Performance Incentive Plan (2004 Omnibus Plan). These programs evaluate and reward performance over longer periods than our annual incentive programs. The Stock Option Program provides annual grants of stock options to our executives, the amount of which is based on their salary, their salary grade level, and their performance during the preceding year. The PSP measures performance over three-year periods and, since the settlement of the award is made in restricted stock units which may not be transferred while an executive remains employed by the Company, has the effect of encouraging executives to stay with the Company and of aligning the interests of the executive with those of the stockholders for the balance of the executives career with the Company. The combination of the Stock Option Program, the
PSP, and the extended holding periods associated with the restricted stock units received under the PSP combine to provide a comprehensive package of medium and long-term compensation incentives for our executives that align their interests with those of our long-term stockholders and enable the Company to more readily withdraw awards should circumstances arise that merit such action.
Targets under our long-term incentive programs are based on a guideline value for restricted stock units and stock options as a percent of salary established for each salary grade level of management, which is based on a competitive analysis of long-term compensation opportunities for persons holding comparable positions as discussed in Benchmarking - Setting Compensation Targets on page 20. In 2005 and later years, targets generally provide approximately 50 percent of the long-term incentive award in the form of stock options and 50 percent in the form of restricted stock units awarded under the PSP. The ratio was approximately 60 percent stock options and 40 percent restricted stock units for the programs in 2004, and approximately 70 percent stock options and 30 percent restricted stock for the programs prior to that. These changes reflect, in part, ongoing trends in compensation at large companies, including the Companys primary peers, accounting changes related to stock option grants, and a recognition that both restricted stock units and stock options are useful compensatory devices for rewarding past individual performance, encouraging long-term corporate performance, and aligning the interests of the recipients with those of our stockholders. The Company began using restricted stock units rather than restricted stock in 2004 primarily in response to changes in U.S. tax laws that affected both the Company and its employees. However, these units are expected to be settled in Company stock when restrictions lapse.
The guideline value for restricted stock determines the targets for each PSP participant and is expressed in a number of restricted stock units, set at the beginning of the performance period. The guideline value takes into account a discount due to the estimated foregone dividend payments during the performance period for the targeted award (prior to issuance of the actual award).
Each executives individual award is subject to a performance adjustment at the end of the
performance period. Although the Compensation Committee maintains final discretion to adjust compensation in accordance with any unique circumstances that may arise, program guidelines generally result in an award range between 0 to 200 percent of target. Final awards are based on the Committees subjective evaluation of the Companys performance relative to the established metrics noted above and of each executives individual performance and long-term potential, considering input from the CEO for each participant other than himself. Targets for participants whose salary grades are changed during a performance period are prorated for the period of time such participant remained in each relevant salary grade.
Other Possible Awards ConocoPhillips may make awards outside the Stock Option Program or the PSP (off-cycle awards). Pursuant to the Compensation Committees charter, any off-cycle awards to Senior Officers must be approved by the Compensation Committee. Occasionally, awards are made to executives in connection with special projects, such as an acquisition or divestiture. For example in 2002, in connection with the merger of Conoco Inc. (Conoco) and Phillips Petroleum Company (Phillips), awards in the form of restricted stock were made to, among others, Mr. Carrig, who is one of our Named Executive Officers. The restrictions on these awards are scheduled to lapse in October 2007. While it retains discretion to do so, the Compensation Committee has indicated to our management that it does not expect to make off-cycle awards in connection with specific projects in the future.
Off-cycle awards are also used in connection with hiring executive-level personnel. Such awards may be in any form, but usually consist of stock options, restricted stock, and/or restricted stock units, with the grant price for stock options set at the fair market value of our stock on the executives first day of employment or the date of Compensation Committee approval, whichever is later. In 2006, an off-cycle restricted stock award was made to Mr. Limbacher as an inducement to become and remain an employee of the Company upon the acquisition of Burlington Resources. Restrictions on that award lapse in equal installments on the first two anniversaries of the grant. Also, in 2006, an off-cycle stock option award was made to Mr. Gallogly as an inducement to become and remain an employee of ConocoPhillips. The options vest in one-third increments on the next three anniversaries of the grant.
Our Named Executive Officers participate in the same basic benefits package as our other U.S. salaried employees. This includes a basic welfare benefits package consisting of medical, dental, vision, life insurance, retirement and accident insurance plans, as well as flexible spending arrangements for health care and dependent care expenses.
Perquisites and Personal Benefits
We provide our Named Executive Officers with a limited number of perquisites. These are designed primarily to minimize the amount of time they devote to administrative matters other than Company business, promote a healthy work/life balance, provide opportunities for developing business relationships, and put a human face on our social responsibility programs. However, with respect to our executive life insurance coverage and our defined
contribution and defined benefit plans, our goal is to provide a competitive package of compensation and benefits. All such programs are approved by the Compensation Committee.
Severance Plans and Changes in Control
We maintain plans to address severance of our executives in certain circumstances as described under the heading Executive Severance and Changes in Control on page 52. The use and structure of these plans is competitive within the industry and is intended to aid the Company in attracting and retaining executives.
The Executive Severance Plan was approved by the Compensation Committee and provides benefits to executives in salary grades corresponding to vice president (or equivalent) and higher in the event that the Company discharges the executive without cause. This plan was adopted to provide the Company with flexibility to make personnel changes at the executive level when executives impacted by such changes would not be entitled to the layoff benefits provided in the broad-based severance plan for employees. We believe this plan aids us in recruiting executives externally when necessary as it provides new hires a measure of protection, and it enables us to avoid negotiating individual severance arrangements with newly hired executives or departing executives. We also believe this plan reduces the likelihood and extent of litigation from executive severance.
The Compensation Committee also approved a Change in Control Severance Plan to provide similar benefits in the event of a discharge of covered executives after a change in control of the Company. The Change in Control Severance Plan provides benefits to executives in salary grades corresponding to vice president (or equivalent) and higher in the event that the Company discharges the executive without cause following a change in control. In our view, the severance level provided under the plan is appropriate as it is the current standard for senior executives in many U.S. industries. The Change in Control Severance Plan also incorporates a provision to deal with the impact of the federal excise tax on excess parachute payments. The so-called golden parachute tax rules subject excess parachute payments to a dual penalty: the imposition of a 20 percent excise tax upon the recipient and non-deductibility of such payments by the paying corporation. While the excise tax is seemingly evenhanded, the excise tax can discriminate against long-serving employees in favor of new hires, against individuals who do not exercise stock options in favor of those who do and against those who elect to defer compensation in favor of those who do not. For these reasons, we believe that the provision of the excise tax gross-up in the Change in Control Severance Plan is appropriate.
The Executive Compensation Tables beginning on page 34, together with the accompanying narrative disclosures and notes, provide information concerning the total compensation of our Named Executive Officers. However, further explanation is necessary to transparently show how the programs, processes and decisions described within this Compensation Discussion and Analysis are reflected in the Executive Compensation Tables. As we discussed in Compensation Objectives & Process Compensation Program Design beginning on page 19, the Compensation Committee sets targets under each of our four primary compensation programs for our Named Executive Officers. Following the close of the relevant
performance periods, Company, business unit and individual performance are considered and actual awards are adjusted as appropriate in light of such performance.
The amounts considered by the Committee for annual or program-specific awards both in setting targets and making awards are not necessarily reflected in the amounts shown under the Stock Awards and Option Awards columns of the Summary Compensation Table on page 34. This difference occurs primarily because the Stock Awards and Option Awards columns in the Summary Compensation Table do not reflect solely the values of awards made for a particular year while the amounts considered by the Committee reflect solely the values of awards made for a particular year or program.
The Summary Compensation Table columns include the Financial Accounting Standards Board Statement No. 123(R), Share-Based Payment (FAS 123(R)) expense recognized by the Company in the year for all outstanding stock and option awards, which, because of the hold-until-retirement feature of our restricted stock/restricted stock unit programs, can be a substantial amount. Because we require our executives to hold restricted stock and restricted stock unit awards that have performance-vested until they retire, any appreciation in our stock price during a given year results in the Company recognizing the value of such appreciation with respect to certain previously-earned awards in its financial statements, and therefore, in the Summary Compensation Table. The Compensation Committee does not consider the effect of stock price appreciation or depreciation on previously performance-vested awards in making target or award decisions. The Compensation Committee recognizes that the hold-until-retirement feature results in larger amounts being reflected in the Summary Compensation Table than would be the case for awards fully-vested after the performance vesting occurs, because a change in stock price would have no effect on values reported in the Summary Compensation Table for stock awards that have fully vested. However, the Committee believes our program best aligns the interests of executives with those of our stockholders over the long-term.
Other factors we are required to take into account in determining the FAS 123(R) value that is reported in the Summary Compensation Table do not necessarily impact Compensation Committee decisions. The Committee does not consider the age or proximity to retirement of an individual executive in making target or award decisions. However, FAS 123(R) requires that an executives age and proximity to retirement eligibility be considered in determining the financial statement impact of his or her stock based awards. As a result, for FAS 123(R) and Summary Compensation Table purposes, an individual who is retirement-eligible will, generally speaking, have a larger amount recognized as compensation expense for the same award than will an executive who is not retirement-eligible.
Finally, changes in accounting rules or our interpretation of the application of those rules to our programs may affect the FAS 123(R) value of all or some outstanding awards in the year in which the change in rule or interpretation occurs, resulting in an increase or decrease in the amount reported in the Stock Awards and/or Options Awards columns of the Summary Compensation Table. However, in making target and award decisions, the Committee considers the value of the awards then being considered under then-prevailing rules and interpretations, and does not consider changes in the value of previously-granted awards resulting from rule or interpretation changes.
In addition to determining the 2006 compensation payouts, the Compensation Committee, at its December 2006 and February 2007 meetings, established the following targets for 2007 compensation for our CEO under our four primary compensation programs:
As discussed under Performance-Based Pay Programs beginning on page 24, with the exception of salary, the targeted amounts shown above are performance-based and, therefore, actual amounts received under such programs, if any, may differ from the targets shown above.
The table below reconciles the targeted and awarded amounts considered by our Compensation Committee under each of our compensation programs for each Named Executive Officer (other than Mr. Nokes, who retired in 2006) with the amount that is required to be reported in the Summary Compensation Table on page 34. Targets for equity awards are expressed in dollar amounts (using the assumptions in the notes to the table).
SUPPLEMENT TO SUMMARY COMPENSATION TABLE
Stock Performance Graph
This graph shows ConocoPhillips cumulative total stockholder return over the five-year period from December 31, 2001, to December 31, 2006. The graph reflects total stockholder return for Phillips Petroleum Company (Phillips) from December 31, 2001, to August 30, 2002, and for ConocoPhillips from September 3, 2002, to December 31, 2006. August 30, 2002, was the last day of trading on the NYSE for Phillips stock, and September 3, 2002, was the first day of trading on the NYSE for ConocoPhillips stock. The graph also shows the cumulative total returns for the same five-year period of the S&P 500 Index and our performance peer group of companies consisting of BP, Chevron, ExxonMobil, Royal Dutch Shell, and Total. The comparison assumes $100 was invested on December 31, 2001, in Phillips stock (which was converted on a one-for-one basis into ConocoPhillips stock on August 30, 2002), in the S&P 500 Index and in ConocoPhillips peer group and assumes that all of the dividends were reinvested.
Five Years Ended December 31, 2006
Executive Compensation Tables
The following tables and accompanying narrative disclosures and footnotes provide information concerning total compensation paid to the Chief Executive Officer, the Chief Financial Officer, and certain other officers of ConocoPhillips (the Named Executive Officers). Please also see our discussion of the relationship between the Compensation Discussion and Analysis to these tables under Compensation Decisions beginning on page 29. The data presented in the tables that follow include amounts paid to the Named Executive Officers by ConocoPhillips or any of its subsidiaries in 2006. Information about stock and stock-based awards has been adjusted in the tables below to reflect the 2-for-1 split of the Companys common stock that was effective on June 1, 2005.
SUMMARY COMPENSATION TABLE
As discussed in the Compensation Discussion and Analysis section of this proxy statement, ConocoPhillips provides its executives with a number of compensation and benefit arrangements. The Summary Compensation Table below reflects amounts earned with respect to 2006 under those arrangements. We have excluded arrangements that are generally available to our U.S.-based salaried employees, such as our medical, dental, disability, and flexible spending account arrangements, since all of our Named Executive Officers are U.S.-based salaried employees. Our Named Executive Officers each serve without an employment agreement. Salary and other compensation for these officers are set by the Compensation Committee of the Board of Directors, as described in the Compensation Discussion and Analysis. Based on the salary and total compensation amounts for Named Executive Officers for 2006 shown in the table below, salary accounted for approximately 6 percent of the total compensation of the Named Executive Officers and incentive compensation programs (stock awards, option awards, and non-equity incentive plan compensation) accounted for approximately 79 percent of the total compensation for Named Executive Officers. For the CEO alone, salary accounted for approximately 3 percent of the total compensation and incentive compensation programs accounted for approximately 83 percent of the total compensation. These numbers reflect the emphasis placed by the Company on performance-based pay, as discussed in the Compensation Discussion and Analysis section of this proxy statement.
GRANTS OF PLAN-BASED AWARDS TABLE
The Grants of Plan-Based Awards Table is used to show participation by the Named Executive Officers in the incentive compensation arrangements described below.
The columns under the heading Estimated Future Payouts Under Non-Equity Incentive Plan Awards show information regarding the ConocoPhillips Variable Cash Incentive Program (VCIP), a performance-based bonus program that sets a target level and minimum and maximum cash payouts for each one-year performance cycle. These targets are set as a percentage of salary which varies by salary grade level. Minimum possible payouts are set at zero, as the Compensation Committee retains the authority to reduce any award from the target to zero. Maximum possible payouts are set at $10 million for each of the Named Executive Officers, under a limitation of the program designed to comply with section 162(m) of the Internal Revenue Code. This maximum was set at the December 2005 meeting of the Compensation Committee, at which it also approved separate performance criteria for any VCIP payment to the Named Executive Officers with regard to the 2006 program year. In practice, that limit has never been reached in the history of the program, due to the Compensation Committee exercising its discretion to reduce any award from the maximum payout level. Within the parameters of the program, a second (lower) maximum possible payout related to corporate and business unit performance is set at 200 percent of the target level, with a further possible adjustment of up to 50 percent of the target level for individual performance. This applies to all participants in VCIP, including the Named Executive Officers, although since the Compensation Committee has ultimate authority to grant awards, it is permitted to grant awards higher than the maximum set in the program. The maximum possible payouts set forth in the Table are shown at 250 percent of target. The amounts shown in the Table are those applicable to the 2006 program year using a minimum of zero and a maximum of 250 percent of VCIP target for each participant and do not represent actual payouts for that program year. Actual payouts for the 2006 program year were made in February 2007 and are shown in the Summary Compensation Table under the Non-Equity Incentive Plan Compensation column.
The columns under the heading Estimated Future Payouts Under Equity Incentive Plan Awards shows information regarding the ConocoPhillips Performance Share Program (PSP), a performance-based program that sets a target level and minimum and maximum restricted stock unit payouts at the conclusion of the three-year performance period. The Compensation Committee, at its annual compensation review and approval meeting in February, approves targets for each of the Senior Officers of the Company, including each of the Named Executive Officers. These targets are set as a percentage of salary, which varies by salary grade level. Minimum possible payouts are set at zero, as the Compensation Committee retains the authority to reduce any award from the target to zero. Within the parameters of the program, the maximum possible payout is set at 200 percent of the target level. This applies to all participants in PSP, including the Named Executive Officers, although since the Compensation Committee has ultimate authority to grant awards, it may grant awards higher than the maximum set in the program. The maximum possible payouts set forth in the Table for Listed Executive Officers are shown at 200 percent of target. The amounts shown in the Table are those set for 2006 compensation tied to the 2006 through 2008 program period under PSP (PSP IV) and do not represent actual payouts for that program year. Actual payouts of restricted stock or restricted stock units, if any, for PSP IV are not expected to be made until February 2009, after the close of the three-year performance period.
The All Other Stock Awards column reflects any off-cycle stock awards or any other stock awards outside of PSP for our Named Executive Officers approved in 2006.
The All Other Option Awards column reflects option awards granted in 2006 to our Named Executive Officers. Option awards are generally granted under our Stock Option (and Stock Appreciation Rights) Program (SOP), although off-cycle option awards or other option awards outside of SOP are possible under the 2004 Omnibus Plan. In 2006, there were no option awards to Named Executive Officers other than those made under SOP. Targets for option awards under SOP are set as a percentage of salary, which varies by salary grade level. The option awards shown were granted on the same day that the target was approved. For the 2006 program year under SOP, targets were set and awards granted at the regularly scheduled February 2006 meeting of the Compensation Committee, except for Mr. Gallogly, whose target was set and award granted at an April 2006 meeting, shortly after his commencement of employment.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
OPTION EXERCISES AND STOCK VESTED
ConocoPhillips maintains several defined benefit plans for its eligible employees. With regard to U.S.-based salaried employees, the primary defined benefit plan that is qualified under the Internal Revenue Code is the ConocoPhillips Retirement Plan (CPRP). In addition, upon the acquisition on March 31, 2006, of Burlington Resources Inc., the Company also assumed and continues to maintain the Burlington Resources Pension Plan (BRPP), which is also a tax-qualified plan.
The CPRP is a non-contributory plan that is funded through a trust. The CPRP consists of four titles, each one corresponding to a different pension formula and having numerous other differences in terms and conditions. Employees are eligible for current participation in only one title, and eligibility is based on heritage company and time of hire. Of the Named Executive Officers, Messrs. Mulva, Carrig, Berry, and Gallogly (having been employees of Phillips) are eligible for, and vested in, benefits under Title I of the CPRP, while Mr. Nokes (having been an employee of Conoco) is eligible for, and vested in, benefits under Title IV. Both Titles I and IV provide a final average earnings type of pension benefit for eligible employees payable at normal or early retirement from the Company. Under both Titles I and IV, normal retirement occurs upon termination on or after age 65. Under Title I, early retirement can occur at age 55 with 5 years of service (or if laid off after age 50 with 5 years of service), while under Title IV, early retirement can occur at age 50 with 10 years of service. Under Title I, early retirement benefits are reduced by 5 percent per year for each year before age 60 that benefits are paid, but for benefits that commence at age 60 through age 65, the benefit is unreduced. Under Title IV, early retirement benefits are reduced by 5 percent per year for each year before age 57 and 4 percent per year between ages 57 and 60. Mr. Nokes was eligible for early retirement treatment when he retired in 2006. Mr. Mulva is eligible for early retirement. None of the other Named Executive Officers were eligible for early retirement at the end of 2006 (although Mr. Carrig has since reached the age of 55 and become eligible for early retirement). Employees become vested in the benefits after five years of service, and all of the Named Executive Officers are vested in their benefits. Both Titles I and IV allow the employee to elect the form of benefit payment from among several annuity types and a single sum payment option, but all of the options are actuarially equivalent. The election for form of benefit is made at retirement, so only Mr. Nokes has made such an election. He elected to have his benefit paid in a single sum.
For both Title I and Title IV, the benefit formula applicable to our eligible Named Executive Officers is the same. Retirement benefits are calculated as the product of 1.6 percent times years of credited service multiplied by the final annual average eligible compensation. For Title I, final annual eligible average compensation is calculated using the three highest consecutive years in the last ten years before retirement. For Title IV, final annual eligible average compensation is calculated using the higher of the highest consecutive 36 months of compensation or the highest non-consecutive 3 years of compensation. In both cases, such benefits are reduced by the product of 1.5 percent of the annual primary Social Security benefit multiplied by years of credited service. The formula below provides an illustration as to how the retirement benefits are calculated. For purposes of the formula, pension compensation denotes the final annual eligible average compensation described above.
Eligible pension compensation generally includes salary and bonus (shown in the Summary Compensation Table under the column titled Non-Equity Incentive Plan Compensation), and years of credited service generally include only actual years of service. However, under Title I, in the event that an eligible employee receives layoff benefits from the Company, eligible pension compensation includes the annualized salary for the year of layoff, rather than actual salary, and years of credited service are increased by any period for which layoff benefits are calculated. Furthermore, certain foreign service as an employee of Phillips is counted as time and a quarter when determining the service element in the benefit formula under Title I. Eligible pension compensation under both
Titles I and IV is limited in accordance with the Internal Revenue Code. In 2006, that limit was $220,000. The Internal Revenue Code also limits the annual benefit (expressed as an annuity) available under both Titles I and IV. In 2006, that limit was $175,000 (reduced actuarially for ages below 62).
The BRPP is also a non-contributory plan that is funded through a trust. The BRPP offers alternative pension formulas with different terms and conditions, with employees eligible for only one of the formulas. Mr. Limbacher is eligible for, and vested in, the final average earnings formula. This provides benefits payable at normal or early retirement from the Company. Normal retirement occurs upon termination on or after age 65. Early retirement can occur at age 55 with 10 years of service. Early retirement benefits include a supplemental benefit, discussed further below. Mr. Limbacher is not yet eligible for early retirement. Employees become vested in the benefits after five years of service. The BRPP allows the employee to elect the form of benefit payment from among several annuity types and a single sum payment option, but all of the options are actuarially equivalent. The election for form of benefit is made at retirement, so Mr. Limbacher has not yet made such an election.
For the BRPP, the benefit formula applicable to Mr. Limbacher provides for retirement benefits to be calculated as the product of (a) 1.1 percent times final annual average eligible compensation for the three highest consecutive years in the last ten years before retirement (pension compensation) plus 0.5 percent times pension compensation above the Social Security breakpoint and (b) years of credited service. The Social Security breakpoint is one-third of the Social Security wage base in the year that the employee leaves the Company. In 2006, that amount was $31,400. The formula below provides an illustration as to how the retirement benefits are calculated.
Eligible pension compensation generally includes salary and bonus (shown in the Summary Compensation Table under the column titled Non-Equity Incentive Plan Compensation), and years of credited service generally include only actual years of service. Payments commencing prior to age 65 are reduced by one-sixth of 1 percent for each month of retirement prior to age 65. Eligible pension compensation under the BRPP is limited in accordance with the Internal Revenue Code. In 2006, that limit was $220,000. The Internal Revenue Code also limits the annual benefit (expressed as an annuity) available under the BRPP. In 2006, that limit was $175,000 (reduced actuarially for ages below 62).
Under the BRPP, employees eligible for early retirement also receive a supplemental benefit payment until reaching age 65. The benefit formula applicable to the supplemental benefit is calculated as the product of 1 percent times pension compensation up to the Social Security breakpoint and years of credited service. This is reduced by one-sixth of 1 percent for each month of early retirement prior to age 65. The Internal Revenue Code limits discussed above also apply to the supplemental benefit.
In addition, the Company maintains several nonqualified pension plans. These are funded through the general assets of the Company, although the Company also maintains trusts of the type generally known as rabbi trusts that may be used to pay benefits under the nonqualified pension plans. Two of these nonqualified pension plans apply to the Named Executive Officers, one in which Mr. Limbacher participates as a heritage Burlington Resources employee and the other in which the other Named Executive Officers participate. The plan available only to eligible heritage Burlington Resources employees is the Burlington Resources Inc. Supplemental Benefits Plan (BRSBP). The plan available to the other Named Executive Officers is the ConocoPhillips Key Employee Supplemental Retirement Plan (KESRP). Each of those plans is designed to replace benefits that would otherwise not be received due to limitations contained in the Internal Revenue Code that apply to qualified plans. The two such limitations that most frequently impact the benefits to employees are the limit on compensation that can be taken into account in determining benefit accruals and the maximum annual pension benefit. In 2006, the former limit was set at $220,000, while the latter was set at $175,000. Both KESRP and BRSBP determine a benefit without regard to such limits, and then reduce that benefit by the amount of benefit payable from the related qualified plan, respectively CPRP and BRPP. Thus, in operation the combined benefits payable from the related
plans for the eligible employee equals the benefit that would have been paid if there had been no limitations imposed by the Internal Revenue Code. Benefits under KESRP are generally paid in a single sum the later of age 55 or six months after retirement. When payments do not begin until after retirement, interest at then current six-month T-bill rates will, under most circumstances, be credited on the delayed benefits. Under BRSBP, a participant may elect to receive a lump sum distribution after separation from service or a payout of 5 or 10 substantially equal annual payments beginning after separation from service. Distribution may also be made upon a determination of disability. Distributions may also be made if the administrator determines that the participant has incurred a severe financial hardship.
Certain foreign service as an employee of Phillips is counted as time and a quarter when determining the service element in the benefit formula under KESRP. Also under KESRP, certain incentive payments approved by the Phillips Board of Directors in 2000, are considered as pension compensation. Otherwise, the benefit formulas under both KESRP and BRSBP take into account only actual service with the employer and compensation arising from salary and bonuses (including bonuses that are performance-based and are included in the Summary Compensation Table as Non-Equity Incentive Plan Compensation for that reason). The footnotes below provide further detail on extra credited service and compensation.
Except where otherwise noted, assumptions used in calculating the present value of accumulated benefits in the Table are found in Note 23 in the Notes to the Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2006.
NONQUALIFIED DEFERRED COMPENSATION
ConocoPhillips maintains several nonqualified deferred compensation plans for its eligible employees. Those available to the Named Executive Officers are briefly described below.
The Key Employee Deferred Compensation Plan of ConocoPhillips (KEDCP) is a nonqualified deferral plan that permits certain key employees to voluntarily reduce salary and request deferral of VCIP, or other similar program payments, that would otherwise be received in the subsequent year. KEDCP permits eligible employees to defer compensation of up to 100 percent of VCIP, or other similar program payments, (if eligible) and up to 50 percent of salary. All of the Named Executive Officers are eligible to participate in KEDCP.
Under KEDCP, for amounts deferred and vested after December 31, 2004, the default distribution option in KEDCP is to receive a lump sum to be paid at least six months after separation from service. Participants may elect to defer payments from 1 to 5 years after separation, and to receive annual, semi-annual or quarterly payments for a period of up to 15 years. For elections that set a date certain for payment, the distribution will begin in the calendar quarter following the date requested and will be paid out on the distribution schedule elected by the participant.
For amounts deferred prior to January 1, 2005, a one-time revision of the 10 annual installment payments schedule is allowed from 365 days to no later than 90 days prior to retirement at age 55 or above or within 30 days after being notified of layoff in the calendar year in which the employee is age 50 or above. Participants may receive distributions in 1 to 15 annual installments, 2 to 30 semi-annual installments or 4 to 60 quarterly installments.
The Defined Contribution Make-Up Plan of ConocoPhillips (DCMP) is a nonqualified restoration plan under which the Company makes employer contributions and stock allocations that cannot be made in the qualified ConocoPhillips Savings Plan (CPSP) a defined contribution plan of the type often referred to as a 401(k) plan due to certain voluntary reductions of salary under KEDCP or due to limitations imposed by the Internal Revenue Code. For 2006, the Internal Revenue Code limited the amount of compensation that could be taken into account in determining a benefit under the CPSP to $220,000. Employees make no contributions to DCMP.
Under DCMP, amounts vested after December 31, 2004, will be distributed as a lump sum 6 months after separation from service, or, at a participants election, in 1 to 15 annual payments, no earlier than 1 year after separation from service. For amounts vested prior to January 1, 2005, participants may, from 365 days to no later than 90 days prior to termination or within 30 days of being notified of layoff, indicate a preference to defer the value into their account under the KEDCP.
Each participant directs investments of the individual accounts set up for that participant under both KEDCP and DCMP. Participants may make changes in the investments as often as daily. Investment alternatives include phantom Company stock and a broad range of mutual funds, and the value of the accounts will vary depending upon the investment choices made and their performance in the marketplace.
In addition, upon the acquisition on March 31, 2006, of Burlington Resources Inc., the Company also assumed and now maintains several plans that provide nonqualified deferred compensation for heritage Burlington Resources employees. Of the Named Executive Officers, only Mr. Limbacher is eligible to participate in these plans.
The Burlington Resources Inc. Incentive Compensation Plan (BRICP) provides for payment of incentive bonuses (of a type that would be reflected in the bonus column of the Summary Compensation Table). The BRICP allows a participant to voluntarily defer an incentive award made under it, either until separation from service or, if approved, to a specified date. A participant may elect to receive payments as a lump sum distribution after separation from service (or any approved specified date) or a payout of 5 or 10 substantially equal annual payments beginning after separation from service (or any approved specified date). Distribution may also be made upon a determination of disability or if the administrator determines that the participant has incurred a severe financial hardship.
The Burlington Resources Inc. Deferred Compensation Plan (BRDCP) is a nonqualified deferral plan that permits certain key employees to voluntarily reduce salary that would otherwise be received and defer receipt to a subsequent year. BRDCP permits eligible employees to defer compensation of up to 100 percent of salary. Mr. Limbacher, as a heritage Burlington Resources employee, is eligible to participate in BRDCP, but did not make any salary reduction elections for 2006. BRDCP also serves as the administrative framework for deferrals made under certain other plans, as described below.
The Burlington Resources Inc. Performance Share Unit Plan (BRPSUP) provides for incentive payments denominated as phantom stock of the Company (originally, as phantom stock of Burlington Resources Inc.) of the type that would appear in the Summary Compensation Table as a Stock Award. At the end of a performance cycle, subject to meeting conditions in the plan, a cash payment of the value of the award would be made. However, participants were allowed to defer receipt of the payment. The value of the deferral is credited to accounts under the BRDCP. A participant may elect to receive a lump sum distribution after separation from service or a payout of 5 or 10 substantially equal annual payments beginning after separation from service. Distribution may also be made upon a determination of disability or if the administrator determines that the participant has incurred an unforeseeable emergency. Payment to certain specified employees is required to begin no earlier than 6 months after separation from service or death, if earlier.
The Burlington Resources Inc. Supplemental Benefits Plan (BRSBP) is a nonqualified restoration plan under which the Company matches contributions that cannot be made in the qualified Burlington Resources Retirement Savings Plan (BRRSP) a defined contribution plan of the type often referred to as a 401(k) plan due to voluntary reduction of salary under a deferred compensation arrangement or due to limitations imposed by the Internal Revenue Code. For 2006, the Internal Revenue Code limited the amount of compensation that could be taken into account in determining a benefit under the BRRSP to $220,000. Employees make no contributions to BRSBP. Under BRSBP, a participant may elect to receive a lump sum distribution after separation from service or a payout of 5 or 10 substantially equal annual payments beginning after separation from service. Distribution may also be made upon a determination of disability. Distributions may also be made if the administrator determines that the participant has incurred a severe financial hardship.
The Burlington Resources Inc. Stock Incentive Plan (BRSIP) provides for, among other things, incentive payments denominated as restricted stock of the Company (originally, as restricted stock of Burlington Resources Inc.) of the type that would appear in the Summary Compensation Table as a Stock Award. At the end of a performance cycle, subject to meeting conditions in the plan, the restrictions lapse. However, participants are allowed to elect to forfeit the restricted stock and have the fair market value thereof deferred. The value of the deferral is credited to accounts under the BRDCP. A participant may elect to receive a lump sum distribution after separation from service or a payout of 5 or 10 substantially equal annual payments beginning after separation from service. Distribution may also be made upon a determination of disability or if the administrator determines that the participant has incurred an unforeseeable emergency. Payment to certain specified employees is required to begin no earlier than 6 months after separation from service or death, if earlier.
Deferred amounts under each of the Burlington Resources nonqualified deferred compensation plans (BRICP, BRPSUP, BRSBP, BRSIP, and BRDCP) are credited to accounts set up for the participant, who may direct the investment of the accounts to one of several investment opportunities provided under the plans. Those investment opportunities include an interest-bearing account, an account credited with phantom Company stock, and an account simulating the return of Standard & Poors 500® Index. The accounts are invested in the interest-bearing account by default (except for amounts which were deferred from stock-based awards, which are placed in the stock account by default), but the participant may, as often as daily, request that the administrator of the plan redirect investment of some or all of the balances of the accounts to the other investment opportunities. The interest-bearing account may, in certain years, provide a return higher than normal market-based rates, as it uses the yield rate paid on bonds in a specified index (the Moodys Long-Term Bond Index®), but the participant does not bear the risk of loss in the value of the underlying principal.
Benefits due under each of the plans discussed above are paid from the general assets of the Company, although the Company also maintains trusts of the type generally known as rabbi trusts that may be used to pay benefits under the plans. The trusts and the funds held in them are assets of ConocoPhillips. In the event of bankruptcy, participants would be unsecured general creditors.
Executive Severance and Changes in Control
Each of our Named Executive Officers serves without an employment agreement. Salary and other compensation for these officers is set by the Compensation Committee, as described in the Compensation Discussion and Analysis beginning on page 17 of this proxy statement. These officers may participate in the employee benefit plans and programs of the Company for which they are eligible, in accordance with their terms. The amounts earned by the Named Executive Officers for 2006 appear in the various Executive Compensation Tables beginning on page 34 of this proxy statement.
Each of our Named Executive Officers is expected to receive amounts earned during his term of employment unless he voluntarily resigns prior to becoming retirement-eligible or is terminated for cause. Such amounts include:
While normal retirement age under our benefit plans is 65, early retirement provisions allow benefits at earlier ages if vesting requirements are met, as discussed in the sections of this proxy statement entitled Pension Benefits Table and Nonqualified Deferred Compensation Table. For our compensation programs (VCIP, SOP, and PSP), early retirement is generally defined to be termination at or after the age of 55 with five years of service. Mr. Mulva has met the early retirement criteria under both our benefit plans and our compensation programs. Mr. Nokes met the early retirement criteria under both our benefit plans and our compensation programs, and he retired in April 2006. None of the other Named Executive Officers met the criteria as of December 31, 2006 (although Mr. Carrig met the criteria in January 2007). Therefore, as of December 31, 2006, any voluntary resignations by the Named Executive Officers other than Mr. Mulva would not have been treated as retirements. Since Mr. Mulva is eligible for early retirement under these programs, he would be able to resign and retain all awards earned under the PSP and earlier programs. As a result, Mr. Mulvas awards under such programs are not included in the incremental amounts reflected in the tables below. Please see Outstanding Equity Awards at Fiscal Year End on page 41 for more information.
In addition, specific severance arrangements for executive officers, including the Named Executive Officers other than Mr. Limbacher, are provided under two severance plans of ConocoPhillips, one being the
ConocoPhillips Executive Severance Plan, available to a limited number of senior executives; and the other being the ConocoPhillips Key Employee Change in Control Severance Plan, also available to a limited number of senior executives, but only upon a change in control. These arrangements are described below. Executives are not entitled to participate in both plans as a result of a single event, that is, executives receiving benefits under the ConocoPhillips Key Employee Change in Control Severance Plan would not be entitled to benefits potentially payable under the ConocoPhillips Executive Severance Plan relating to the event giving rise to benefits under the ConocoPhillips Key Employee Change in Control Severance Plan. Mr. Limbacher is currently excluded from these arrangements because he remains subject to various change in control arrangements provided under Burlington Resources Inc. plans and programs.
ConocoPhillips Executive Severance Plan
The ConocoPhillips Executive Severance Plan (CPESP) covers executives in salary grades generally corresponding to vice president and higher. The CPESP provides that if the Company terminates the employment of a participant in the plan other than for cause, as defined in the plan, upon executing a general release of liability and, if requested by the Company, an agreement not to compete with the Company, the participant will be entitled to:
The CPESP may be amended or terminated by the Company at any time. Amounts payable under the plan will be offset by any payments or benefits that are payable to the severed employee under any other plan, policy, or program of ConocoPhillips relating to severance, and amounts may also be reduced in the event of willful and bad faith conduct demonstrably injurious to the Company, monetarily or otherwise.
ConocoPhillips Key Employee Change in Control Severance Plan
The ConocoPhillips Key Employee Change in Control Severance Plan (CICSP) covers executives in salary grades generally corresponding to vice president and higher. The CICSP provides that if the employment of a participant in the plan is terminated by the Company within two years of a change in control of ConocoPhillips, other than for cause, or by the participant for good reason, as such terms are defined in the plan, upon executing a general release of liability, the participant will be entitled to:
After a change in control, the CICSP may not be amended or terminated if such amendment would be adverse to the interests of any eligible employee, without the employees written consent. Amounts payable under the plan will be offset by any payments or benefits that are payable to the severed employee under any other plan, policy, or program of ConocoPhillips relating to severance, and amounts may also be reduced in the event of willful and bad faith conduct demonstrably injurious to the Company, monetarily or otherwise.
Quantification of Severance Payments
The tables below reflect the amount of incremental compensation payable in excess of the items listed above to each of our Named Executive Officers in the event of termination of such executives employment other than as a result of voluntary resignation. The amount of compensation payable to each Named Executive Officer upon involuntary not-for-cause termination, for-cause termination, termination following a change-in-control (CIC) (either involuntarily without cause or for good reason) and in the event of the death or disability of the executive is shown below. The amounts shown assume that such termination was effective as of December 31, 2006, and thus include amounts earned through such time and are estimates of the amounts which would be paid out to the executives upon their termination. The actual amounts to be paid out can only be determined at the time of such executives separation from the Company.
The following tables reflect additional incremental amounts to which each of our Named Executive Officers (except for Mr. Nokes who retired in April 2006) would be entitled if their employment were terminated due to the events described above.
Notes Applicable to All Termination Tables In preparing each of the tables above, certain assumptions have been made. Benefits that would be available generally to all or substantially all salaried employees on the U.S. payroll are not included in the amounts shown. The following additional assumptions were also made:
Non-Employee Director Compensation
The primary elements of our non-employee director program consist of an equity compensation program and a cash compensation program.
Objectives and Principles
Compensation for directors is reviewed annually by the Committee on Directors Affairs with the assistance of such third-party consultants as the Committee deems advisable, and set by action of the Board of Directors. The Boards goal in designing directors compensation is to provide a competitive package that will enable it to attract and retain highly skilled individuals with relevant experience and that reflects the time and talent required to serve on the board of a complex, multinational corporation. The Board seeks to provide sufficient flexibility in the form of delivery to meet the needs of different individuals while ensuring that a substantial portion of directors compensation is linked to the long-term success of ConocoPhillips. In furtherance of ConocoPhillips commitment to be a socially responsible member of the communities in which it participates, the Board believes that it is appropriate to extend ConocoPhillips matching gift program to charitable contributions made by individual directors and to provide a charitable gift program the proceeds of which are contributed at the designation of individual directors, each as more fully described below.
Non-employee directors receive an annual grant of restricted stock units with an aggregate value of $120,000 on the date of grant. Restrictions on the units issued to non-employee directors will lapse in the event of retirement, disability, death, or upon a change of control, unless the director has elected to receive the shares after a stated period of time. Directors forfeit the units if, prior to the lapse of restrictions, the Board finds sufficient cause for forfeiture (although no such finding can be made after a change of control). Before the restrictions lapse, directors cannot sell or otherwise transfer the units, but the units are credited with dividend equivalents in the form of additional restricted stock units. When restrictions lapse, directors will receive unrestricted shares of Company stock as settlement of the restricted stock units, but, in the event of a change of control, settlement is not made until the director separates from service with the Board.
ConocoPhillips grants issued prior to 2005 had restrictions that lapsed after three years from the date of grant or in the earlier event of retirement, disability, death, or upon a change of control. Settlement for grants before 2005 could be delayed at the election of the director and settled in either cash or stock, also at the election of the director. For grants that remained unvested at the beginning of 2005, directors were allowed to make an election prior to March 15, 2005, to set the time of settlement and whether settlement was to be in a lump sum or over a period of years. Restricted stock units granted to directors who are not from the United States may have modified terms to comply with laws and tax rules that apply to them. Thus, the restricted stock units granted to Messrs. Auchinleck and Norvik lapse only in the event of retirement, death, or loss of office.
All non-employee directors receive $100,000 annual cash compensation. Non-employee directors serving in specified committee positions also receive the following additional cash compensation:
All cash fees are payable monthly. Directors may elect, on an annual basis, to receive all or part of their cash compensation in unrestricted stock or in restricted stock units (such unrestricted stock or restricted stock units are issued on the last business day of the month valued using the average of the high and the low market prices of our common stock on such date), or to have the amount credited to the
directors deferred compensation account. All restrictions placed on stock units granted in lieu of cash compensation lapse in the event of retirement, disability, death, or upon a change of control, unless the director has elected to receive the shares after a stated period of time. Directors forfeit the units if, prior to the lapse of restrictions, the Board finds sufficient cause for forfeiture (although no such finding can be made after a change of control). Before the restrictions lapse, directors cannot sell or otherwise transfer the units, but the units are credited with dividend equivalents in the form of additional restricted stock units. When restrictions lapse, directors will receive unrestricted shares of Company stock as settlement of the restricted stock units, but, in the event of a change of control, settlement is not made until the director separates from service with the Board. Due to differences in the tax laws of other countries, the Board, at its July 1, 2003 meeting approved modification of the compensation for directors who are taxed under the laws of other countries. Effective in 2004, Canadian directors (then and currently, Mr. Auchinleck) were able to elect to receive cash compensation either in cash or in restricted stock units, redeemable only upon retirement, death, or loss of office. Effective in 2007, Norwegian directors (currently Mr. Norvik) receive compensation that would otherwise have been received as cash, in the form of restricted stock units.
Deferral of Compensation
Directors can elect to defer their cash compensation into the Deferred Compensation Program for Non-Employee Directors of ConocoPhillips (Director Deferral Plan). Deferred amounts are deemed to be invested in various mutual funds and similar investment choices (including ConocoPhillips common stock) selected by the director from a list of investment choices available under the Director Deferral Plan. Mr. Auchinleck (from Canada) and Mr. Norvik (from Norway) do not have the opportunity to defer cash compensation in this manner.
Compensation deferred prior to January 1, 2003, by former directors of Conoco and Phillips, continues to be deferred and is deemed to be invested in various mutual funds as selected by the director. The deferred amounts may be paid as a lump sum or as installment payments following retirement from the Board.
The future payment of any compensation deferred by non-employee directors of ConocoPhillips after January 1, 2003, and by former directors of Phillips prior to January 1, 2003, may be funded in a grantor trust designed for this purpose. The future payment of any cash compensation deferred by former directors of Conoco prior to January 1, 2003, is not funded.
Charitable Gift Programs
On July 1, 2003, the Board adopted a charitable gift program for directors. This program allows eligible directors to designate charities and tax-exempt educational institutions to receive a donation from the Company of up to $1 million upon his or her death. Directors are vested in the program after one year of service. Donations will be payable over five years following the death of the director. These programs may be funded through the purchase of life insurance policies on the lives of the directors. The Company is the owner and beneficiary of all insurance policies purchased to fund the programs.
Directors Matching Gift Program
All active and retired directors are eligible to participate in the Directors Annual Matching Gift Program. This provides a dollar-for-dollar match of a gift of cash or securities, up to a maximum of $15,000 per donor for active directors and $7,500 per donor for retired directors during any one calendar year, to charities and educational institutions, excluding religious, political, fraternal, or athletic organizations, that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code of the United States or meet similar requirements under the applicable law of other countries.
The Board believes that it is important for spouses/significant others of directors and executive officers to attend certain meetings to enhance the collegiality of the Board. The cost of such attendance is treated by the Internal Revenue Service as income, and as such is taxable to the recipient. The Board believes that such costs are expenses of creating a collegial environment that enhances the effectiveness of the Board and so it reimburses directors for the cost of resulting income taxes. Amounts are contained in the All Other Compensation column representing this reimbursement.
Directors are expected to own as much stock as the amounts of the annual equity grants during their first five years on the Board. Directors are expected to reach this level of target ownership within five years of joining the Board. Actual shares of stock, restricted stock, or restricted stock units, including deferred stock units, may be counted in satisfying the stock ownership guidelines.
The Non-Employee Director Compensation Table beginning on page 61, together with the accompanying narrative disclosures and footnotes, provide information concerning total compensation paid to our Non-Employee Directors. However, further explanation is necessary to transparently show how the programs, processes and decisions described within the foregoing discussion of our Non-Employee Director Compensation programs are reflected in the Non-Employee Director Compensation Table.
SUPPLEMENT TO NON-EMPLOYEE DIRECTOR COMPENSATION TABLE
NON-EMPLOYEE DIRECTOR COMPENSATION TABLE
The following table and accompanying narrative disclosures provide information concerning total compensation paid to the non-employee directors of ConocoPhillips in 2006 (for compensation paid to our sole employee director, Mr. Mulva, please see our Executive Compensation Tables beginning on page 34).