Occidental Petroleum DEF 14A 2007
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2007 Annual Meeting of
March 22, 2007
On behalf of the Board of Directors, it is my pleasure to invite you to Occidentals 2007 Annual Meeting of Stockholders, which will be held on Friday, May 4, 2007, at The Starlight Ballroom, The Fairmont Miramar Hotel, Santa Monica, California.
Attached is the Notice of Meeting and the Proxy Statement, which describes in detail the matters on which you are being asked to vote. These matters include electing the directors, ratifying the selection of independent auditors, increasing the number of shares authorized for issuance under the 2005 Long-Term Incentive Plan and transacting any other business that properly comes before the meeting, including any stockholder proposals.
Also enclosed are a Report to Stockholders, in which senior management discusses highlights of the year, and Occidentals Annual Report on Form 10-K. As in the past, at the meeting there will be a report on operations and an opportunity to ask questions.
Whether you plan to attend the meeting or not, I encourage you to vote promptly so that your shares will be represented and properly voted at the meeting.
Ray R. Irani
Chairman, President and Chief Executive Officer
OCCIDENTAL PETROLEUM CORPORATION
10889 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90024
March 22, 2007
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Our Stockholders:
Occidental's 2007 Annual Meeting of Stockholders will be held at 10:30 a.m. on Friday, May 4, 2007, in the Starlight Ballroom, The Fairmont Miramar Hotel, 101 Wilshire Boulevard, Santa Monica, California.
At the meeting, stockholders will act on the following matters:
These matters are described in detail in the Proxy Statement. The Board of Directors recommends a vote FOR Proposals 1, 2 and 3 and AGAINST Proposals 4, 5 and 6.
Stockholders of record at the close of business on March 15, 2007, are entitled to receive notice of, to attend and to vote at the meeting.
Whether you plan to attend or not, it is important that you read the Proxy Statement and follow the instructions on your proxy card to vote by mail, telephone or Internet. This will ensure that your shares are represented and will save Occidental additional expenses of soliciting proxies.
Donald P. de
TABLE OF CONTENTS
This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Occidental Petroleum Corporation, a Delaware corporation, for use at the Annual Meeting of Stockholders on May 4, 2007, and at any adjournment of the meeting. All numbers of shares and prices per share of Occidental common stock have been adjusted to give effect to the two-for-one stock split in August 2006.
ADMISSION TO THE ANNUAL MEETING
Attendance is limited to stockholders and one guest per stockholder. If you plan to attend the meeting in person and you are a stockholder of record, you must bring the admission ticket attached to your proxy or information card. If your shares are held in the name of a bank, broker or other holder of record and an admission ticket is not part of your voting instruction card, you will be admitted only if you have proof of ownership on the record date, such as a bank or brokerage account statement. In addition to your admission ticket or account statement, you may be asked to present valid picture identification, such as a driver's license or passport.
This Proxy Statement and accompanying proxy card are being mailed beginning on or about March 22, 2007, to each stockholder of record as of March 15, 2007, which is the record date for the determination of stockholders entitled to receive notice of, to attend, and to vote at the meeting. As of the record date, Occidental had outstanding and entitled to vote 871,523,461 shares of common stock. A majority of outstanding shares must be represented at the meeting, in person or by proxy, to constitute a quorum and to transact business. You will have one vote for each share of Occidentals common stock you own. You may vote in person at the meeting or by proxy. Proxies may be voted by completing and mailing the proxy card, by telephone or Internet as explained on the proxy card. You may not cumulate your votes.
VOTING OF PROXIES
The Board of Directors has designated Dr. Ray R. Irani, Mr. Aziz D. Syriani and Miss Rosemary Tomich, and each of them, with the full power of substitution, to vote shares represented by all properly executed proxies. The shares will be voted in accordance with the instructions on the proxy card. If no instructions are specified on the proxy card, the shares will be voted:
In the absence of instructions to the contrary, proxies will be voted in accordance with the judgment of the person exercising the proxy on any other matter presented at the meeting in accordance with Occidental's By-laws.
If your shares are held in street name, under New York Stock Exchange Rules, your broker can vote your shares on Proposals 1 and 2 but not Proposal 3 or the stockholder proposals (Proposals 4, 5 and 6). If your broker does not have discretion and you do not give the broker instructions, the votes will be broker nonvotes, which will have the same effect as votes against the proposals.
The vote required to elect directors and to approve each proposal is described with the proposal.
The Report of Inspector of Elections will be published on Occidentals web site, www.oxy.com, within 14 calendar days following the date of the meeting, and the results of the vote will be included in Occidentals Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, and in the Report on the Annual Meeting, both of which may be accessed through www.oxy.com or obtained by writing to Publications Department, Occidental Petroleum Corporation, 10889 Wilshire Boulevard, Los Angeles, California 90024.
All proxies, ballots and other voting materials are kept confidential, unless disclosure is required by applicable law or expressly requested by you, you write comments on your proxy or voting instruction card, or the proxy solicitation is contested. Occidentals confidential voting policy is posted on www.oxy.com and may also be obtained by writing to Occidentals Corporate Secretary, 10889 Wilshire Boulevard, Los Angeles, California 90024.
REVOKING A PROXY
You may revoke your proxy or change your vote before the meeting by filing a revocation with the Corporate Secretary of Occidental, by delivering to Occidental a valid proxy bearing a later date or by attending the meeting and voting in person.
Expense of this solicitation will be paid by Occidental. Morrow & Co., Inc. has been retained to solicit proxies and assist in distribution and collection of proxy material for a fee estimated at $15,000 plus reimbursement of out-of-pocket expenses. Occidental also will reimburse banks, brokers, nominees and related fiduciaries for the expense of forwarding soliciting material to beneficial owners of the common stock. In addition, Occidental's officers, directors and regular employees may solicit proxies but will receive no additional or special compensation for such work.
Directors are elected by a plurality of votes. However, pursuant to Occidentals By-laws, a director who receives a greater number of votes against his or her election than votes for in any election (a Majority Against Vote) must tender his or her resignation. The Corporate Governance, Nominating and Social Responsibility Committee (Nominating Committee) will consider the resignation and possible responses to it based on the relevant facts and circumstances, and make a recommendation to the Board of Directors. The Board of Directors must act on the Nominating Committees recommendation within 90 days following certification of the stockholder vote by the Inspector of Elections. Any director who tenders his or her resignation pursuant to such By-law provision cannot participate in the Nominating Committees recommendation or Board of Directors action regarding whether to accept the resignation. The Board of Directors will disclose promptly its decision-making process and decision whether to accept or reject the directors resignation in a Form 8-K filed with the Securities and Exchange Commission.
Unless you specify differently on the proxy card, proxies received will be voted FOR Spencer Abraham, Ronald W. Burkle, John S. Chalsty, Edward P. Djerejian, R. Chad Dreier, John E. Feick, Dr. Ray R. Irani, Irvin W. Maloney, Rodolfo Segovia, Aziz D. Syriani, Rosemary Tomich and Walter L. Weisman to serve for a one-year term ending at the 2008 Annual Meeting, but in any event, until his or her successor is elected and qualified, unless ended earlier due to his or her death, resignation, disqualification or removal from office. The Nominating Committee and the Board have waived the retirement age requirement with respect to Mr. Maloney and requested that Mr. Maloney serve an additional term. In the event any nominee should be unavailable at the time of the meeting, the proxies may be voted for a substitute nominee selected by the Board of Directors.
The following biographical information is furnished with respect to each of the nominees for election at the 2007 Annual Meeting.
The Board of Directors recommends a vote FOR all of the nominees.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND ITS COMMITTEES
CORPORATE GOVERNANCE: - In 2005, the Board amended and restated its Corporate Governance Policies to reflect regulatory changes as well as the Boards desire to maintain high standards for the governance of the Board and its committees. In 2006, the Board amended Occidentals By-laws to require a director who fails to obtain a majority vote to tender his or her resignation. The Corporate Governance Policies, together with information about Occidentals Code of Business Conduct and other governance measures adopted by the Board, are set forth in Exhibit A and are also available at www.oxy.com or by writing to Occidentals Corporate Secretary, 10889 Wilshire Boulevard, Los Angeles, California 90024.
Pursuant to Occidentals Conflict of Interest Policy, each director and executive officer has an obligation to avoid any activity, agreement, business investment or interest, or other situation that could be construed either as divergent to or in competition to Occidentals interest or as an interference with such persons primary duty to serve Occidental, unless prior written approval has been granted by the Audit Committee of the Board. Each director and executive officer is required to complete an annual questionnaire that requires disclosure of any transaction between Occidental and him or her or any of his or her affiliates or immediate family members.
DIRECTOR EDUCATION - In 2006, four corporate governance training sessions were provided to directors by the University of Southern California Marshall School of Business. All of the directors, except Mr. Abraham, attended at least one of these sessions or director education in connection with service on another public company board. Additional training is scheduled for 2007.
INDEPENDENCE - Each of Miss Tomich and Messrs. Abraham, Burkle, Chalsty, Djerejian, Dreier, Feick, Maloney, Segovia, Syriani and Weisman has been determined by the Board of Directors as meeting the independence standard set forth in Occidentals Corporate Governance Policies (see Exhibit A) and the New York Stock Exchange Listed Company Manual. In making its determination of independence, the Board considered that, as disclosed under Compensation of Directors on page 8, Occidental matched the gifts made by certain of the directors to charitable organizations and paid one director for consulting services. Except for the Executive Committee and the Dividend Committee, all committees of the Board are composed of independent directors.
MEETINGS - The Board of Directors held six regular meetings during 2006, including three executive sessions at which no members of management were present. Mr. Syriani, the Lead Independent Director, presided over the executive sessions. Each director attended at least 75 percent of the meetings of the Board of Directors and the committees of which he or she was a member and all of the directors attended the 2006 Annual Meeting. Attendance at the annual meeting of stockholders is expected of all directors as if it were a regular meeting.
SUCCESSION PLANNING - The Board of Directors annually reviews Occidentals policies and principles for recruiting, developing and selecting the persons to succeed the Chairman and Chief Executive Officer and the other executive officers. The review includes the background, training, qualities and other characteristics that would be desirable in candidates as well as consideration of possible successors.
COMMUNICATIONS WITH BOARD MEMBERS - Stockholders and other interested parties may communicate with any director by sending a letter or facsimile to such directors attention in care of Occidentals Corporate Secretary, 10889 Wilshire Boulevard, Los Angeles, California 90024; facsimile number 310-443-6977. The Corporate Secretary opens, logs and forwards all such correspondence (other than advertisements or other solicitations) to directors unless the director to whom the correspondence is addressed has requested the Corporate Secretary to forward correspondence unopened.
LEAD INDEPENDENT DIRECTOR AND COMMITTEES - The Board of Directors has a Lead Independent Director and seven standing committees: Executive; Audit; Corporate Governance, Nominating and Social Responsibility; Charitable Contributions; Dividend; Executive Compensation and Human Resources; and Environmental, Health and Safety. The Audit Committee Charter, the Executive Compensation and Human Resources Committee Charter and the Corporate Governance, Nominating and Social Responsibility Committee Charter and the enabling resolutions for each of the other committees are available at www.oxy.com or by writing to Occidentals Corporate Secretary, 10889 Wilshire Boulevard, Los Angeles, California 90024. The general duties of the Lead Independent Director and the committees are described below. From time to time, the Board of Directors delegates additional duties to the standing committees.
COMPENSATION OF DIRECTORS
For 2006, each non-employee director was paid a retainer of $60,000 per year, plus $2,000 for each meeting of the Board of Directors or of its committees he or she attended, and received an annual grant of 5,000 shares of common stock, plus an additional 800 shares of common stock for each committee he or she chaired or for serving as lead independent director. Directors are eligible to participate on the same terms as Occidental employees in the Occidental Petroleum Corporation Matching Gift Program, which matches contributions made by employees and directors up to an aggregate of $50,000 per year to institutions of higher learning and arts and cultural organizations. In addition, Occidental reimburses non-employee directors for expenses related to service on the Board, including hotel, airfare, ground transportation and meals for themselves and their significant others, and permits, subject to availability, non-employee directors to make use of company aircraft on the same reimbursement terms applicable to executive officers of Occidental. Occidental does not provide option awards, non-equity incentive awards, deferred compensation or retirement plans for non-employee directors. A table summarizing the total compensation for 2006 for each of the non-employee directors is set forth below.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of 1934 and the rules issued thereunder, Occidental's executive officers, directors and any beneficial owner of more than 10 percent of any class of Occidental's equity securities are required to file, with the Securities and Exchange Commission and the New York Stock Exchange, reports of ownership and changes in ownership of common stock. Copies of such reports are required to be furnished to Occidental. Based solely on its review of the copies of the reports furnished to Occidental or written representations that no reports were required, Occidental believes that, during 2006, all persons required to report complied with the Section 16(a) requirements.
At the close of business on February 28, 2007, the beneficial owner of common stock shown below was the only person known to Occidental to be the beneficial owner of five percent or more of the outstanding voting securities of Occidental.
The following table sets forth certain information regarding the beneficial ownership of common stock as of February 28, 2007, by each of the named executive officers, the directors of Occidental, and all executive officers and directors as a group. The directors are subject to stock ownership guidelines as described in Occidentals Corporate Governance Policies (see Exhibit A). The executive officers are subject to stock ownership guidelines, which range from two to ten times base salary (see Executive Stock Ownership at www.oxy.com). All of the directors and current executive officers were in compliance with the guidelines as of February 28, 2007.
COMPENSATION PHILOSOPHY AND OBJECTIVES
Occidentals executive compensation program emphasizes equity compensation to encourage actions by executives that will drive long-term growth in stockholder value. The Executive Compensation and Human Resources Committee of the Board of Directors ("Compensation Committee") believes that exceptional performance characterized by stockholder returns exceeding those of peers and superior financial results merit exceptional compensation; conversely, below average returns would result in compensation well below peer averages. Exceptional performance is driven by effective capital allocation and investment decisions assessed by industry comparative measures such as return on capital employed, return on equity and income and cash flow per barrel of oil equivalent. Accordingly, the Compensation Committee has structured executive compensation to support the achievement of corporate performance objectives and to attract, reward and retain top quality executives by focusing on three fundamental elements: (1) equity compensation awards, particularly awards that are performance-based and align a very significant portion of each executives net worth with Occidentals long-term growth in stockholder value, (2) cash compensation for short-term performance and the accomplishment of annual goals, and (3) other benefits competitive with the marketplace. To achieve each of these objectives, Occidental designs its incentive awards with different performance measures, including return on equity, total stockholder return and earnings per share, as more fully described below, and with different measurement periods ranging from one to four years. The Compensation Committee believes executive officers with the highest level of responsibility and compensation should have the highest percentage of their total compensation at risk and variable depending upon Occidentals performance. Therefore, the Compensation Committee provides the most significant portion of total compensation for executive officers as incentive-based stock awards to underscore the focus on long-term growth in stockholder value. In addition, the Compensation Committees compensation policy and philosophy encourages executives to hold a significant amount of Occidental stock to maintain an alignment of their interests with those of the stockholders. Over the last two years, the Compensation Committee has taken steps to more closely link the compensation of senior executives to the realization of specific performance standards. For example, the percentage of Dr. Iranis annual equity-based compensation, on a grant date value basis, that is performance-based has risen from 4.3 percent in 2005 to over 60 percent in 2006.
MAJOR COMPENSATION PROGRAM ELEMENTS
EQUITY COMPENSATION rewards the executive for intermediate and long-term accomplishments, through various types of Occidental common stock awards. Stock awards are generally based on the achievement of specific internal or external financial performance goals measured over an intermediate (three to four years) period and stock appreciation rights are granted to reward the executives for growth in the stock price over a longer term. Overall, equity compensation is awarded to align a very significant portion of each executives net worth with Occidentals success in creating stockholder value.
CASH INCENTIVE is designed to reward the executive for current performance. It is an annual compensation award, targeted as a percentage of base salary by the Compensation Committee for each executive officer, near the beginning of the year. The amount received varies with the attainment of Occidentals annual financial goals and achievement of specific individual objectives by the executive, such as operational priorities, organizational development and governance.
SALARY is the base cash compensation. Salary levels take into account job responsibilities, individual performance, experience level and competitive market data. Salary levels may be adjusted periodically.
OTHER COMPENSATION programs cover benefits, such as defined contribution plans, deferred compensation and certain other benefits. Many of these programs are substantially similar to the basic level of cash and non-cash benefits typically provided by major companies in the oil and gas and chemical industries to salaried employees, except that Occidental does not provide a defined benefit pension plan to its salaried employees. Certain benefits apply only to senior executives.
The following chart shows each of these elements as a percentage of the total compensation received by the named executive officers for 2006:
MANAGEMENT'S ROLE IN EXECUTIVE COMPENSATION
Dr. Irani recommends compensation for Messrs. Chazen, de Brier, Morgan and Hallock to the Compensation Committee. Dr. Iranis compensation is set only by the Compensation Committee. Dr. Irani and Mr. Hallock, the Executive Vice President for Human Resources, may be present for a portion of each of the Compensation Committee meetings but are not present when compensation decisions regarding Dr. Irani are discussed and made. Mr. Chazen may be present for a portion of certain meetings to provide the Compensation Committee information regarding Occidentals financial and operating plans and results. Mr. de Brier may be present for a portion of certain meetings to provide legal advice. Occidental prepares materials for each Compensation Committee meeting to assist the Committee in its consideration of executive compensation programs and policies and its administration of plans and programs.
ROLE OF COMPENSATION CONSULTANTS
Neither Occidental nor the Compensation Committee has any standing arrangement with any compensation consultant to determine or recommend the amount or form of senior executive compensation. Each year Occidental participates in compensation surveys conducted by Hewitt Associates LLC, Towers Perrin, Frederic W. Cook & Co. and other compensation consultants in order to better understand external compensation practices. From time to time, Occidental, through its executive compensation department, or the Compensation Committee, will engage a consultant to provide advice on specific compensation issues. For example, in 2006, Hewitt Associates LLC conducted a study to assist the Compensation Committee in its selection of a performance measure for the PRSUs; and in 2007, will be assisting the Compensation Committee with a study of long-term incentives, including the proportion of total compensation that should comprise long-term incentives, the most relevant performance measures and the appropriate type and blend of long-term incentives. In selecting Hewitt, the Compensation Committee was aware that Hewitt has also provided actuarial services to Occidental.
DISCUSSION OF SPECIFIC COMPENSATION PROGRAM ELEMENTS
EQUITY COMPENSATION - Equity awards represent the largest portion of the total compensation value provided to executive officers. Executives may be granted equity incentives, which include performance-based restricted share units and performance stock awards, stock appreciation rights and restricted share units under its stockholder-approved 2005 Long-Term Incentive Plan. Performance-based awards are based on the attainment of specific results, some based only on Occidentals results and some compared to the total stockholder returns of other companies. The Compensation Committee believes that using several types of equity awards with separate, yet complementary, internal or external performance metrics, reinforces managements focus on growth in stockholder value. These awards are granted to encourage executives to view Occidental from the stockholders perspective, to create an ongoing incentive for executives to increase stockholder value and to retain executives who possess the skills and the commitment to ethical business practices that are crucial to Occidentals success.
In addition, while most other major oil companies provide senior executives with a defined benefit pension plan providing a fixed monthly retirement benefit that is typically a major source of their retirement income, Occidental has not had such a plan for over twenty years. The absence of a defined benefit plan is taken into account in determining the amount of equity compensation awards to senior executives.
The following are the types of equity incentive awards the Compensation Committee currently uses to achieve the objectives discussed above. Other types of awards, including those with other performance measures, could be granted under the 2005 Long-Term Incentive Plan if the Compensation Committee deems them appropriate.
STOCK OWNERSHIP GUIDELINES - The Compensation Committee established stock ownership guidelines for Occidentals senior management in 1996 and reviewed and updated the guidelines in February 2005. Stock ownership includes stock owned by the officer directly or through Occidentals Savings Plan, outstanding stock awards under the equity incentive plans, such as RSUs, PRSUs and PSAs, and stock awards earned but deferred under Occidentals 2005 Deferred Stock Program. Under the current guidelines, the cumulative ownership targets are ten times salary for Dr. Irani and five times salary for Messrs. Chazen, de Brier, Morgan and Hallock. As of February 28, 2007, all of the named executive officers were in compliance with the guidelines.
EQUITY GRANT PRACTICES - The Compensation Committee grants equity awards at regularly scheduled meetings normally held the day before regularly scheduled Board meetings. Board meeting dates are set in the prior year. The exercise price for option-type awards or grant date value for RSUs and PRSUs is determined using the closing price on the NYSE on the day the award is made by the Compensation Committee. The grant date value for PSAs is based on the closing price on the NYSE on the trading day immediately preceding the start of the performance period. As specifically authorized by the terms of the 2005 Long-Term Incentive Plan, the Compensation Committee has delegated to the Chairman and Chief Executive Officer the authority to grant awards in the event of hiring a new employee between Compensation Committee meeting dates when an equity award is deemed to be an important element in persuading the employee to join Occidental. In such event, the award is made generally on the date the employee starts work. Any such award is reported to the Compensation Committee. Dr. Irani has not granted any equity awards to the named executive officers.
CASH INCENTIVES - Cash incentives are provided by Occidental to its executives with an annual opportunity to earn non-equity incentive and bonus awards under the Executive Incentive Compensation Plan. Of the total target Executive Incentive Compensation Plan award, 60 percent constitutes the non-equity incentive portion of the award and is based on Occidentals performance as measured against financial targets established in the first quarter of the year. Core, basic earnings per share was chosen as the financial target for all corporate executives because it provides a clear, commonly accepted measure of annual performance and compensates the executives for current operating performance. For a discussion of core earnings, see Managements Discussion and Analysis of Financial Condition and Results of Operations in Occidentals Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission. The remaining 40 percent, which constitutes the bonus portion of the target Executive Incentive Compensation Plan award, is based on a discretionary assessment of an executives achievement of individual performance objectives that focus on Occidentals other key performance areas, as well as the executives response to unanticipated challenges during the year. These other key performance areas include governance and ethical conduct, functional and operating accomplishments, health, environment and safety responsibilities, diversity, and organizational development. Although the incentive target is weighted more heavily on Occidentals annual financial performance, the executives individual performance and accomplishment of individual objectives are also important to Occidental. Therefore, a significant percentage is based on accomplishment of these individual key performance area objectives.
SALARY - Salary is cash-based and constitutes a small portion of the executives total compensation. An adjustment to base salary may be considered on an annual basis.
OTHER COMPENSATION AND BENEFITS - As discussed on page 27, Occidental does not have a defined benefit pension program for its salaried employees that provides a fixed monthly retirement payment. However, Occidental has various defined contribution retirement arrangements, which are discussed below.
CONSIDERATIONS FOR EXECUTIVE OFFICER COMPENSATION FOR 2006
The Compensation Committee discussed the components of the compensation for the named executive officers for 2006 in regularly scheduled Compensation Committee meetings held in December 2005, February, July and December 2006, and in the February 2007 meeting.
In the December 2005 meeting, the Compensation Committee reviewed Dr. Iranis accomplishments for 2005. The Compensation Committee also reviewed Occidentals results, among other factors, as a framework for setting target award levels for PSAs to be granted with a performance period starting January 1, 2006. The Compensation Committee set the target PSA award levels for Dr. Irani and the other individuals who were named as executive officers in the 2005 proxy statement (the 2005 NEOs) at 70 percent to 165 percent of base salary. Data considered included performance metrics for other oil and gas companies such as return on equity, return on capital employed and total stockholder return. Additionally, the elements of total compensation for each of the 2005 NEOs as compared to the total compensation for the top five executives in other oil and gas companies were reviewed as disclosed in those companies respective 2005 proxy statements.1
In the February 2006 meeting, the Compensation Committee set the 2006 core, basic earnings per share targets for the non-equity incentive portion of the Executive Incentive Compensation Plan incentive award, based on an analysis of various forecasted financial-result scenarios, resulting in the award being zero percent if earnings per share fall below $4.50, and increasing ratably thereafter, up to 200 percent of target if earnings per share reach $5.50. The Compensation Committee then reviewed cash incentive information derived from a number of compensation surveys and established individual percentage targets for Executive Incentive Compensation Plan awards ranging from 60 percent to 150 percent of base salary. The surveys reviewed, which are all commercially available to survey participants, were conducted by Frederic W. Cook & Co., Towers Perrin, Hewitt Associates LLC and Hay Group.
In the July 2006 meeting, the Compensation Committee approved the issuance of long-term equity incentive compensation awards consisting of PRSUs, RSUs and SARs. In order to increase the percentage of equity compensation based on performance, the Compensation Committee decided to grant the 2005 NEOs, PRSUs rather than RSUs, which had been issued in prior years, but for which vesting was not based on performance criteria. After reviewing a study conducted for the Compensation Committee by Hewitt Associates LLC, which also provides actuarial and other benefits-related services to Occidental, the Compensation Committee concluded that the performance-based measure for the PRSUs would be based on Occidentals cumulative return on equity over a three-year period. The Compensation Committee believes the measure would further align the objectives of Occidentals senior executives with Occidentals financial goals of achieving top quartile return on equity in the oil and gas industry. In determining the size of all of the awards to the 2005 NEOs, the Compensation Committee took into consideration total direct compensation for senior executives of other oil and gas companies derived from their 2006 proxy statements.2 The Compensation Committee also considered the size and types of equity awards granted in the prior year.
PRSU payment amounts vary from 0 to 200 percent of target for cumulative return on equity over the three-year period. Payout will be at 200 percent of the targeted share units for cumulative return on equity of 60 percent or more over the three-year period. No payout will be made unless cumulative return on equity is at least 33 percent, at which level payout will be 20 percent of target and increase ratably thereafter as the cumulative return increases. Target payout will occur if cumulative return on equity reaches 45 percent. Occidentals cost of equity capital was estimated at 11 percent, therefore, a minimum threshold of 33 percent over three years was selected to ensure that a payout would be made only if total return exceeded Occidentals cost of capital.
In setting the performance criteria, the Compensation Committee took into account that Occidental had achieved record financial performance in 2005 in an environment of record high oil and gas prices. The Compensation Committee also considered that Occidental is operating in a highly competitive environment with rapidly escalating costs and that the equity base was expected to continue increasing, both of which would make future performance targets more difficult to reach. The Compensation Committee set the target return on equity at a level that would require that most of the following occur: (1) successful execution of Occidentals operating strategy; (2) effective allocation and expenditure of capital; (3) continuation of oil and gas prices at approximately 2006 levels; and (4) chemical segment earnings continuing at approximately 2006 levels. The maximum return-on-equity level would require essentially all of the above to occur on a sustained basis. The PRSUs and RSUs are included in the Stock Awards column and the value of the SARs are shown in the Option Awards column of the Summary Compensation Table on page 20. The amounts of the grants and the grant date fair values of the awards are shown in the Grants of Plan-Based Awards Table on page 23.
In the December 2006 meeting, the Compensation Committee reviewed Dr. Iranis accomplishments for 2006. The Compensation Committee also reviewed Occidentals results, among other factors, as a framework for setting the target award levels for PSAs at 70 percent to 165 percent of base salary and granted PSAs with a four-year performance period starting January 1, 2007. The PSAs have a grant date of January 1, 2007 and, accordingly, are not included in the compensation tables below. Data reviewed by the Compensation Committee included performance
metrics for other oil and gas companies such as return on equity, return on capital employed and total stockholder return. Additionally, the elements of total compensation for the top five executives in other oil and gas companies were reviewed as disclosed in those companies respective 2006 proxy statements.3 The Compensation Committee also considered equity information, such as prior award levels, outstanding awards, value realized in 2006 from prior awards and overall Occidental stock ownership.
In the February 2007 meeting, the Compensation Committee approved the total cash incentive compensation to be paid pursuant to the Executive Incentive Compensation Plan for 2006 based on the core, basic earnings per share achieved and the executives accomplishments of their individual performance objectives in the prior year. The 2006 financial results yielded core, basic earnings per share of $5.10, resulting in a 120 percent payout of the non-equity incentive portion of the Executive Incentive Compensation Plan award for the named executive officers. Total cash incentive payments to the named executive officers under the Executive Incentive Compensation Plan for 2006, including the bonus portion, ranged from 109 percent to 144 percent of the total target award amounts. Additionally, the Compensation Committee certified the total stockholder return calculations for the performance period from January 1, 2003 through December 31, 2006 in order to determine the payout for the PSAs that were granted in December 2002. The values of the vested PSAs are not included in the Option Exercises and Stock Vested table on page 26 because certification occurred in 2007. The number of shares earned by Dr. Irani, Mr. Chazen, Mr. de Brier, Mr. Morgan and Mr. Hallock were 274,168, 59,052, 54,232, 45,768 and 39,368, respectively. The Compensation Committee also set the core, basic earnings per share target for 2007 Executive Incentive Compensation Plan awards based on an analysis of various forecasted financial-result scenarios. As a result, the award for 2007 will be zero percent if earnings per share fall below $2.50, and will increase up to 200 percent of the non-equity incentive portion of target for earnings per share of $4.00. The award will pay at 100 percent of target for earnings per share of $3.25. The Compensation Committee then reviewed cash incentive information derived from a number of compensation surveys and established individual Executive Incentive Compensation Plan incentive targets for 2007. The surveys used consisted of those conducted by Frederic W. Cook & Co., Towers Perrin, Hewitt Associates LLC and Hay Group. With a view toward increasing the proportion of performance-based compensation, including performance-based equity awards, the Compensation Committee retained Hewitt Associates LLC to study long-term incentives, including the proportion of total compensation that should comprise long-term incentives, the most relevant performance measures and the appropriate type and blend of such incentives. The Compensation Committee also requested Occidentals executive compensation and benefits department to perform an internal compensation relationship analysis.
The specific considerations for each of the named executives with respect to their 2006 compensation are discussed below. Overall, the Compensation Committee concluded that the senior executive management team has consistently delivered exceptional growth in stockholder value as well as superior financial results both in absolute terms and relative to the performance of other oil and gas companies. The Compensation Committee also believes that this management team is uniquely qualified to continue to achieve superior performance for Occidental, continually growing stockholder value. Consequently, the Compensation Committee has provided these executives exceptional compensation commensurate with their performance to reward them and to encourage them to continue to focus on growth in stockholder value.
DR. IRANI - Dr. Irani is the Chairman, President and Chief Executive Officer of Occidental. Under Dr. Iranis leadership, Occidental has grown to become the 4th largest oil and gas company in the U.S., based on 2005 market capitalization. Dr. Irani sets the strategic direction for Occidental and oversees its implementation.
Under Dr. Iranis leadership, Occidental has achieved leading industry operating results. For example, income and cash flow per barrel of oil equivalent of $19.45 and $16.40, respectively, in 2005 were the highest of a group of twelve oil and gas companies representing a broad cross section of the industry.4 Occidentals finding and development costs per barrel were in the top quartile of this group for the period 2003 - 2005. Average reserve life improved through a successfully executed acquisition and disposition program coupled with a constant emphasis on operating and financial discipline. Other key performance measures the Compensation Committee reviewed in setting award levels for Dr. Irani were Occidentals return on equity and total return to stockholders over the last three-year period compared with other large oil and gas companies. Occidental achieved return on equity and cumulative total return to stockholders of 31.4 percent and 200.4 percent, respectively, for the 2003 2005 period. For those performance measures, Occidental exceeded the results of all major U.S.-based integrated oil and gas companies, including ExxonMobil Corporation, Chevron Corporation and ConocoPhillips Corporation and, for both measures, all other oil and gas companies in the group5, with the exception of one. During the same three-year period, Occidentals return on capital employed was higher than all other U.S.-based oil and gas companies in such group, except ExxonMobil Corporation.
In addition, during his leadership as CEO since December 1990, the strategy set by Dr. Irani has resulted in significant increase in stockholder value. From December 1990 through 2005, Occidentals stock price increased from approximately $9 per share to approximately $40 per share, and its cumulative total stockholder return for this period has been 699 percent. The cumulative total stockholder return reflected by the S&P 500 Index and the S&P 500 Integrated Oil & Gas Index was 413 percent and 521 percent, respectively, during this period. For the period from December 31, 2000 through the end of 2005, Occidentals stock price increased from approximately $12 per share to approximately $40 per share and its total cumulative stockholder return was 279 percent. The cumulative total stockholder return reflected by the S&P 500 Index and the S&P 500 Integrated Oil & Gas Index for this period was 3 percent and 59 percent, respectively. Occidentals peer group cumulative total
stockholder return was 104 percent for the same period. In addition, Occidentals total market capitalization was approximately $5 billion in December 1990, $9 billion in December 2000 and $32 billion in December 2005.
Several years ago, Occidental determined that the Middle East and North Africa should be one of Occidentals core strategic areas. Dr. Irani has developed particularly strong relationships with government leaders in a number of Middle East countries. These personal relationships that have been developed and sustained by Dr. Irani are a competitive advantage for Occidental and have allowed Occidental to establish credibility similar to that enjoyed by significantly larger oil companies in being considered for business opportunities. Additionally, under Dr. Iranis leadership, Occidental has built an effective team that has contributed to Occidentals Middle East success in business development and in operational projects. Dr. Iranis relationships have allowed Occidental to develop insight into the future plans and objectives of these Middle East countries, which Occidental believes will enable it to successfully compete for significant future business opportunities.
Based on the superior operating performance Occidental has achieved, its exceptional growth in stockholder value and its ability to position itself for significant future growth, the Compensation Committee concluded that Dr. Irani has added and is expected to continue to add significant value to Occidental and its stockholders. Accordingly, the Compensation Committee has provided unique and significant compensation opportunities to Dr. Irani to reward him for those contributions to Occidental and to ensure his continued leadership.
The components of Dr. Iranis 2006 compensation include the following:
MR. CHAZEN - Mr. Chazen is Occidentals Senior Executive Vice President and Chief Financial Officer. In that role, he is responsible for implementing Occidentals overall strategy. In addition to his responsibilities as Chief Financial Officer, Mr. Chazen is responsible for Occidentals mergers, acquisitions and dispositions, its worldwide oil and gas marketing, its chemicals division, oil and gas reserves management and reporting and its investor relations.
The components of Mr. Chazens 2006 compensation include the following:
MR. DE BRIER - Mr. de Brier is Executive Vice President, General Counsel and Corporate Secretary. As Executive Vice President and General Counsel, he is responsible for Occidentals worldwide legal and compliance functions.
The components of Mr. de Briers 2006 compensation include the following:
MR. MORGAN - Mr. Morgan is an Executive Vice President of Occidental and President of Oil and Gas Western Hemisphere. As such, he is responsible for all of Occidentals oil and gas operations in the U.S. and Latin America. In addition, Mr. Morgan has worldwide responsibility for the oil and gas segments engineering operations and its Health, Environment, Safety and Security Programs.
The components of Mr. Morgans 2006 compensation include the following:
MR. HALLOCK - Mr. Hallock is the Executive Vice President - Human Resources. As such, he is responsible for Occidentals worldwide human resource functions including sourcing and development of personnel and compensation and benefits program design and administration.
The components of Mr. Hallocks 2006 compensation include the following:
CONSEQUENCES OF MISCONDUCT
Occidentals Board of Directors adopted a Code of Business Conduct in 1997 that makes it a violation of the Code of Business Conduct for any officer, employee or director during the course of his or her employment to violate or circumvent any laws of the United States or a foreign country. The Audit Committee of the Board of Directors oversees compliance with the Code of Business Conduct and has put in place procedures, including a compliance hot line, to assure that all violations or suspected violations of the Code of Business Conduct are reported promptly without fear of retaliation. If a named executive officer were to be found to have violated the Code of Business Conduct, such officer would be subject to disciplinary action, which may include termination, referral for criminal prosecution and reimbursement to Occidental or others for any losses or damages resulting from the violation.
TAX AND ACCOUNTING CONSIDERATIONS
Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, places a limit of $1,000,000 on the amount of compensation that Occidental may deduct in any one year with respect to each of its five most highly paid executive officers. Certain performance-based compensation elements approved by stockholders, such as stock appreciation rights, performance-based restricted share units and performance stock awards, are not subject to the deduction limit. Although tax consequences are considered in its compensation decisions, the Compensation Committee has not adopted a policy that all compensation must be deductible. Rather, the Compensation Committee gives priority to overall compensation objectives discussed above.
It is expected that performance-based awards, unlike RSUs, will not be subject to the deduction limits prescribed by Section 162(m) of the Internal Revenue Code. When the Compensation Committee granted PRSUs to the named executive officers in July 2006, it took into consideration that a tax benefit will be realized based on the distribution date value of the stock for any potential distribution that is made in July 2009.
As noted in the discussion of Nonqualified Deferred Compensation, Occidental amended its deferred compensation plans, which became the Modified Deferred Compensation Plan in 2006. In connection with such amendments, participants were given the option to change distribution elections. Additionally, Occidental terminated the Deferred Stock Program ("DSP") and distributed the balances in that plan. The 2005 Deferred Stock Program ("2005 DSP") was frozen for future deferral elections and participants were given the option of a special one-time distribution election. As a result of the distributions of performance-based stock under the DSP and the prospective distribution under the 2005 DSP, Occidental will be able to reduce its tax payments related to those amounts in the year the distribution is made, rather than in the year in which the participant retires. The amount of this accelerated benefit related to the 2006 distributions was $37 million and included approximately $23 million related to the named executive officers. As a result of the distributions of the deferred non-performance-based stock, Occidental will forego any deductions it could have realized if the distributions were made after the participant retired. Therefore, Occidental wrote off approximately $40 million of the $55 million deferred tax asset that had been recognized in the financial statements prior to the changes.
The amount of the stock distributed pursuant to the terminated plan was reduced by approximately 1.9 million shares, which were withheld to satisfy income taxes related to the distribution. Additionally, the number of shares used in the calculation of earnings per share was reduced by those 1.9 million shares, which has the effect of increasing earnings per share. Dividend equivalents were paid on share units accumulated in the DSP until the distribution. As a result of the net settlement discussed above, Occidental estimates that, based on the current dividend rate, Occidental will avoid paying approximately $1.7 million of dividends annually.
Distributions to be made out of the Modified Deferred Compensation Plan in 2007 are expected to decrease the interest expense for 2007 by approximately $2.7 million and thereafter by approximately $6.0 million per year. The plan modifications made with respect to interest rates will result in interest expense savings on the remaining balances by Occidental in 2009 and in future years.
The Executive Compensation and Human Resources Committee of the Board has reviewed and discussed the Compensation Discussion and Analysis for the year ended December 31, 2006 with management. Based on such reviews and discussions, the Executive Compensation and Human Resources Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Proxy Statement for the 2007 Annual Meeting of Stockholders.
EXECUTIVE COMPENSATION AND
John S. Chalsty (Chair)
Spencer Abraham (Vice Chair)
R. Chad Dreier
Irvin W. Maloney
The following graph compares the yearly percentage change in Occidentals cumulative total return on its common stock with the cumulative total return of the Standard & Poor's 500 Stock Index and with that of Occidentals peer group over the five-year period ended on December 31, 2006. The graph assumes that $100 was invested in Occidental common stock, in the stock of the companies in the Standard & Poor's 500 Index and in a portfolio of the peer group companies, weighted by their relative market values each year and that all dividends received were reinvested. The peer group used in the analysis consists of Anadarko Petroleum Corporation, Apache Corporation, Chevron Corporation, ConocoPhillips, Devon Energy Corporation, ExxonMobil Corporation, Hess Corporation and Occidental. The peer group changed from the prior year's since certain companies which were included in the peer group had been acquired.
Set forth below are tables showing for Dr. Irani, Occidentals principal executive officer, Stephen Chazen, Occidentals principal financial officer, and the three other highest-paid executive officers of Occidental serving as executive officers on December 31, 2006: (1) in summary form, the compensation attributed to such executives for 2006, including the compensation cost related to the portion of stock and option awards granted in 2006 and in prior years that are reported as compensation expense in Occidentals 2006 Consolidated Financial Statements; (2) the equity incentive plan and non-equity incentive awards granted to such executives in 2006; (3) outstanding equity awards held by such executives as of December 31, 2006; (4) options exercised by such executives and their stock awards vested; and (5) the required information related to the nonqualified deferred compensation plans for such executives. The compensation tables should be read in conjunction with the Compensation Discussion and Analysis (see page 10), which explains Occidentals compensation plans and philosophy and provides information about the compensation decisions made with respect to the listed executives for 2006.
The table below and the accompanying footnotes summarize the compensation attributed to such executives for 2006, including the compensation cost related to the stock options and awards granted in 2006 and in prior years that are reported as compensation expense in Occidentals 2006 Consolidated Financial Statements.
The table below and the accompanying narrative summarize the plan-based awards granted by the Compensation Committee to the named executive officers in respect of 2006.
In their December 2005 meeting, the Compensation Committee awarded, effective January 1, 2006, to each of the named executive officers a Performance Stock Award (PSA) pursuant to the 2005 Long-Term Incentive Plan with a four-year performance period beginning January 1, 2006. The number of shares received at the end of the performance period will depend on the attainment of performance objectives based on a peer company comparison of total stockholder return. Depending on Occidental's ranking among its peers and subject to the grantee remaining employed throughout the performance period, the grantee will receive an amount ranging from 0 percent to 200 percent of the target share amount; provided, however, if the grantee dies, becomes disabled, retires or is terminated for the convenience of Occidental during the performance period, then the grantee will forfeit the right to receive a pro rata portion of the payout based on the days remaining in the performance period after such event. However, under the provisions of his employment agreement, any long-term incentive awards granted to Dr. Irani become fully vested immediately in the event of termination by Occidental or his retirement with the consent of Occidental. During the performance period, dividend equivalents are paid to the grantees in cash on the target shares in an amount equal to the dividend declared per share of common stock. In the event of a Change of Control (as defined in the 2005 Long-Term Incentive Plan), the grantee's right to receive the number of target shares becomes nonforfeitable. Awards earned in excess of the target shares will be paid out in cash in an amount equal to the closing price of the common stock on the New York Stock Exchange on the date of certification of the attainment of the performance goals. For additional information on the determination of threshold, target and maximum payouts for these awards, see Compensation Discussion and Analysis beginning on page 10.
In February 2006, the Compensation Committee provided each of the named executive officers with an opportunity to earn annual cash incentive awards under the Executive Incentive Compensation Plan. The awards are tied to the achievement of performance objectives and are expressed as a percentage of base salary. Sixty percent of the planned award is based on Occidentals performance as measured against predetermined financial targets and is included on the table below under the Estimated Future Payouts under Non-Equity Incentive Plan Awards column. For Occidentals five highest paid executives and other corporate executives, the financial performance measure is core, basic earnings per share. The remaining 40 percent of the planned award is based on a discretionary assessment of an executives achievement of predetermined individual performance objectives, as well as the executives response to unanticipated challenges during the plan year and is included in the Bonus column of the Summary Compensation Table. Actual incentive payments (including the bonus portion) may vary from zero percent to 200 percent of the incentive target, based on Company and executive performance, thus directly aligning executive pay with a key financial performance measure. For the 2006 performance period, the Compensation Committee established individual incentive targets for its named executive officers ranging from 60 percent to 150 percent of base salary. For additional information on the earnings per share targets and the determination of threshold, target and maximum for these awards, see Compensation Discussion and Analysis beginning on page 10 and for the actual amounts paid, including the bonus portion, see the Summary Compensation Table on page 20.
In July 2006, Dr. Irani and Messrs. Chazen, de Brier and Morgan received grants of Performance-Based Restricted Share Units (PRSUs) pursuant to the 2005 Long-Term Incentive Plan. The number of shares received at the end of the three-year performance period will depend on the attainment of performance objectives based on Occidentals return on equity between July 1, 2006 through June 30, 2009. Depending on Occidental's return on equity and subject to the grantee remaining employed throughout the performance period, the grantee will receive an amount ranging from zero percent to 200 percent of the target share amount; provided, however, if the grantee dies, becomes disabled, retires or is terminated for the convenience of Occidental during the performance period, then the grantee will forfeit the right to receive a pro rata portion of the payout based on the days remaining in the performance period after such event. However, under the provisions of his employment agreement, any long-term incentive awards granted to Dr. Irani become fully vested immediately in the event of termination by Occidental or his retirement
with the consent of Occidental. During the performance period, dividend equivalents are accrued with respect to the target shares in an amount equal to the dividend declared per share of common stock and cash equal to the dividend equivalent is paid to the grantees at vesting for the number of shares certified for payout. The performance objectives for these grants and the threshold, target and maximum payout for these awards are described in Compensation Discussion and Analysis beginning on page 10.
In July 2006, each of the named executive officers received a grant of stock appreciation rights (SARs). The SARs vest over a three-year vesting period, with approximately one-third of each grant becoming exercisable on each anniversary of the date of grant. The SARs represent the right to receive shares of common stock having a value equal to the excess, if any, of the fair market value at the date and time of exercise of the number of shares of common stock equal to the number of SARs being exercised over the aggregate exercise price. As a result, the number of shares of common stock received upon exercise will always be less than the number of SARs exercised. The vesting and exercisability of the SARs will be accelerated in the event of a Change of Control (as defined in the 2005 Long-Term Incentive Plan). The SARs were granted for a term of 10 years. Upon the termination of the recipients employment, the SARs continue to vest and remain exercisable (depending on the circumstances of the termination) for a period of up to the remaining term of the award. However, under the provisions of his employment agreement, the SARs granted to Dr. Irani become fully vested immediately in the event of termination by Occidental or his retirement with the consent of Occidental and are then exercisable for the remaining term of the award. The exercise price of the SARs is equal to the closing price of the common stock on the New York Stock Exchange on the day of the grant. The exercise price and tax withholding obligations, upon exercise, must be paid by surrender of underlying shares, subject to certain conditions.
In July 2006, Mr. Hallock received Restricted Share Units (RSUs) pursuant to the 2005 Long-Term Incentive Plan, subject to a three-year vesting period, which will be accelerated in the event of a Change of Control (as defined in the 2005 Long-Term Incentive Plan). During the vesting period, dividend equivalents are credited on the RSUs in an amount equal to the dividend declared per share of common stock and cash equal to the dividend equivalent is paid to the grantee.
Following are the plan-based awards listed in the table below: Executive Incentive Compensation Plan EICP, Performance Stock Awards PSA, Performance-Based Restricted Share Units PRSU, Stock Appreciation Rights SAR and Restricted Share Units RSU.
The equity and option awards listed below are the only stock awards that were granted to the named executive officers for 2006.
The following sets forth the outstanding option awards and stock awards that are held by named executive officers as of December 31, 2006. The outstanding option awards and stock awards shown below were granted to the named executives over a period of several years, including in 2006. The FAS 123(R) grant date fair values for the awards that were granted in 2006 are shown in the Grants of Plan-Based Awards table above and the portion of such awards that was reported as compensation expense in Occidentals 2006 Consolidated Financial Statements is a component of the current year total compensation for each of the named executives. The awards issued in prior years to Dr. Irani, Mr. Chazen, Mr. de Brier and Mr. Morgan were reported in the proxy statements applicable to those years, based on the then existing rules. However, the portion of such awards that was reported as compensation expense in Occidentals 2006 Consolidated Financial Statements is included in the Summary Compensation Table on page 20. For a description of the performance criteria for equity plan awards, see Compensation Discussion and Analysis on page 10.