Pepsico DEF 14A 2009
Documents found in this filing:
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant x
Filed by a Party other than the Registrant ¨
Check the appropriate box:
¨ Preliminary Proxy Statement
¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x Definitive Proxy Statement
¨ Definitive additional materials
¨ Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
(Names of Registrant as Specified in Its Charters)
(Names of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (Check the appropriate box):
700 Anderson Hill Road
Purchase, New York 10577-1444
March 24, 2009
Dear Fellow PepsiCo Shareholder:
You are invited to attend our Annual Meeting of Shareholders on Wednesday, May 6, 2009 at 9:00 a.m. Central Daylight Time at the headquarters of Frito-Lay, Inc., 7701 Legacy Drive, Plano, Texas.
At the meeting, we will ask you to elect the Board of Directors, to ratify the appointment of the independent registered public accountants, to approve the PepsiCo, Inc. Executive Incentive Compensation Plan, and to act upon four shareholder proposals. We will also review the progress of the Company during the past year and answer your questions. The attached Proxy Statement describes the business we will conduct and provides information about the Company that you should consider when you vote your shares.
We are pleased to take advantage of the Securities and Exchange Commission rules that allow issuers to furnish proxy materials to their shareholders on the Internet. We believe these rules allow us to provide you with the information you need while lowering the costs of delivery and reducing the environmental impact of our Annual Meeting.
You are cordially invited to attend the Annual Meeting in person. However, to ensure that your vote is counted at the Annual Meeting, please vote as promptly as possible.
Indra K. Nooyi
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
PepsiCo, Inc. will hold its Annual Meeting of Shareholders (Annual Meeting) at the headquarters of Frito-Lay, Inc., 7701 Legacy Drive, Plano, Texas, on Wednesday, May 6, 2009 at 9:00 a.m. Central Daylight Time (C.D.T.) to:
The Annual Meeting will be webcast on www.pepsico.com beginning at 9:00 a.m. C.D.T. on May 6, 2009. Holders of record of the Companys Common and Convertible Preferred Stock as of the close of business on March 6, 2009 (the Record Date) will be entitled to notice of, and to vote, at the Meeting.
Please refer to the General Information page in this Proxy Statement for additional information about the Annual Meeting and voting.
Your vote is very important. Whether or not you plan to attend the Annual Meeting in person, please promptly vote by mail, Internet or telephone or by marking, signing, dating and returning your proxy card or voting instruction card so that your shares will be represented at the Annual Meeting.
March 24, 2009
By order of the Board of Directors,
Larry D. Thompson
Important Notice Regarding the Availability of
Proxy Materials for the Annual Meeting of Shareholders
to Be Held on May 6, 2009
The Notice of Annual Meeting, Proxy Statement and the Annual Report on Form 10-K for the fiscal year ended December 27, 2008 are available at www.pepsico.com/proxy09.
700 Anderson Hill Road
Purchase, New York 10577-1444
March 24, 2009
The Board of Directors of PepsiCo, Inc. (PepsiCo or the Company) is soliciting proxies to be voted at the Annual Meeting of Shareholders to be held on Wednesday, May 6, 2009, and at any adjournment of the Meeting. We are making this Proxy Statement available in connection with the proxy solicitation.
PepsiCos authorized stock includes both Common Stock and Convertible Preferred Stock. As of March 6, 2009, the Record Date, there were 1,556,731,218 shares of PepsiCo Common Stock outstanding and entitled to one vote each at the Annual Meeting and 265,653 shares of PepsiCo Convertible Preferred Stock outstanding and entitled to 1,318,303 votes at the Annual Meeting, which number is equal to the number of shares of Common Stock into which such shares of Convertible Preferred Stock could be converted on the Record Date, rounded to the nearest share. Holders of the Common Stock and the Convertible Preferred Stock vote together on all matters as a single class. As of the Record Date, the outstanding shares of Common Stock were registered in the names of 180,377 shareholders and the outstanding shares of Convertible Preferred Stock were registered in the names of 2,117 shareholders. To our knowledge, as of the Record Date, no person owned beneficially more than 5% of the outstanding Common Stock or Convertible Preferred Stock.
PepsiCo is making this Proxy Statement first available on or about March 24, 2009.
TABLE OF CONTENTS
Why am I receiving these proxy materials?
Our Board of Directors has made these materials available to you on the Internet or has delivered printed versions of these materials to you by mail in connection with the Board of Directors solicitation of proxies for use at our Annual Meeting of Shareholders, which will take place at 9:00 a.m. C.D.T. on Wednesday, May 6, 2009 at the headquarters of Frito-Lay, Inc. (7701 Legacy Drive, Plano, Texas). This Proxy Statement describes matters on which you, as a shareholder, are entitled to vote. It also gives you information on these matters so that you can make an informed decision.
What is included in these materials?
These materials include:
If you received printed versions of these materials by mail, these materials also include the proxy card or vote instruction form for the Annual Meeting.
Why did I receive a one-page Notice in the mail regarding the Internet availability of proxy materials this year instead of printed proxy materials?
In accordance with new rules recently adopted by the Securities and Exchange Commission (SEC), instead of mailing a printed copy of our proxy materials to all of our shareholders, we have elected to furnish such materials to selected shareholders by providing access to these documents over the Internet. Accordingly, on March 24, 2009, we sent a Notice of Internet Availability of Proxy Materials (the Notice) to selected shareholders of record and beneficial owners. These shareholders have the ability to access the proxy materials on a website referred to in the Notice or request to receive a printed set of the proxy materials. The Company encourages you to take advantage of the availability of the proxy materials on the Internet in order to help reduce the environmental impact of the Annual Meeting.
How can I get electronic access to the proxy materials?
The Notice provides you with instructions regarding how to (1) view our proxy materials for the Annual Meeting on the Internet; (2) vote your shares after you have viewed our proxy materials; (3) request a printed copy of the proxy materials; and (4) instruct us to send our future proxy materials to you electronically by email. Copies of the proxy materials are available for viewing at www.pepsico.com/proxy09.
Choosing to receive your future proxy materials by email will lower our costs of delivery and will reduce the environmental impact of our Annual Meeting. If you choose to receive our future proxy materials by email, you will receive an email next year with instructions containing a link to view those proxy materials and a link to the proxy voting site. Your election to receive proxy materials by email will remain in effect until you terminate it.
What items will be voted on at the Annual Meeting?
Shareholders will vote on the following items at the Annual Meeting if each is properly presented at the meeting:
What are the Boards voting recommendations?
The Board recommends that you vote your shares:
Where are the Companys principal executive offices located and what is the Companys main telephone number?
The Companys principal executive offices are located at 700 Anderson Hill Road, Purchase, New York 10577. The Companys main telephone number is (914) 253-2000.
Who may vote at the Annual Meeting?
As of the Record Date of March 6, 2009, there were 1,556,731,218 shares of PepsiCo Common Stock outstanding and entitled to one vote each at the Annual Meeting and 265,653 shares of PepsiCo Convertible Preferred Stock outstanding and entitled to 1,318,303 votes at the Annual Meeting, which number is equal to the number of shares of Common Stock into which such shares of Convertible Preferred Stock could be converted on the Record Date, rounded to the nearest share. As of the Record Date, the outstanding shares of Common Stock were registered in the names of 180,377 shareholders and the outstanding shares of Convertible Preferred Stock were registered in the names of 2,117 shareholders. Only shareholders of record as of the close of business on the Record Date are entitled to receive notice of, to attend, and to vote at the Annual Meeting.
What is the difference between a shareholder of record and a beneficial owner of shares held in street name?
If I am a shareholder of record of the Companys shares, how do I vote?
There are four ways to vote:
If I am a beneficial owner of shares held in street name, how do I vote?
There are four ways to vote:
Can employees who participate in PepsiCos 401(k) plan vote?
Yes, employees who participate in PepsiCos 401(k) plan (a portion of which constitutes an Employee Stock Ownership Plan) can vote the shares they hold in the 401(k) plan as of the close of business on March 6, 2009. To do so, the employee participant must sign and return the proxy card received or vote via internet or telephone, as instructed in the Notice or proxy materials received in connection with the shares they hold in the 401(k) plan. If voting instructions are not provided for the shares held in the 401(k) plan, the 401(k) trustees will not vote those shares for which voting instructions are not received, unless required by law.
What constitutes a quorum in order to hold and transact business at the Annual Meeting?
Under North Carolina law and the Companys By-laws, the presence in person or by proxy of the holders of record of a majority of the votes entitled to be cast at a meeting constitutes a quorum. Votes for and against, abstentions and broker non-votes will all be counted as present to determine whether a quorum has been established. Once a share of the Companys Common Stock or Convertible Preferred Stock is represented for any purpose at a meeting, it is deemed present for
quorum purposes for the remainder of the meeting. If a quorum is not present, the Annual Meeting will be adjourned until a quorum is obtained.
How are proxies voted?
All valid proxies received prior to the Annual Meeting will be voted. All shares represented by a proxy will be voted and, where a shareholder specifies by means of the proxy a choice with respect to any matter to be acted upon, the shares will be voted in accordance with the shareholders instructions.
What happens if I do not give specific voting instructions?
Can I change my vote after I have voted?
You may revoke your proxy and change your vote at any time before the final vote at the Annual Meeting by voting again via the Internet or by telephone (only your latest Internet or telephone proxy submitted prior to the Annual Meeting will be counted), by signing and returning a new proxy card or vote instruction form with a later date, or by attending the Annual Meeting and voting in person. However, your attendance at the Annual Meeting will not automatically revoke your proxy unless you vote again at the Annual Meeting or specifically request that your prior proxy be revoked by delivering to the Companys Corporate Secretary at 700 Anderson Hill Road, Purchase, NY 10577 a written notice of revocation prior to the Annual Meeting.
Is my vote confidential?
Proxy instructions, ballots and voting tabulations that identify individual shareholders are handled in a manner that protects your voting privacy. Your vote will not be disclosed either within the Company or to third parties, except as necessary to meet applicable legal requirements; to allow for the tabulation and certification of votes; and to facilitate a successful proxy solicitation. Occasionally, shareholders provide written comments on their proxy cards, which may be forwarded to the Companys management and the Board.
Which ballot measures are considered routine or non-routine?
Proposal No. 1 (election of directors), Proposal No. 2 (ratification of the appointment of the independent registered public accountants) and Proposal No. 3 (approval of the PepsiCo, Inc. Executive Incentive Compensation Plan) are each matters that the Company believes will be considered routine. A broker or other nominee may generally vote on routine matters, and therefore no broker non-votes are expected to exist in connection with such proposals.
Shareholder proposals (Proposals No. 4 through 7) are matters the Company believes will be considered non-routine. A broker or other nominee cannot vote without instructions on non-routine matters, and therefore there may be broker non-votes on Proposals No. 4 through 7.
What is the voting requirement to approve each of the proposals?
Note on Abstentions. If you abstain from voting on a particular matter, your vote will be counted as present for determining whether a quorum exists but will not be treated as cast either for or against that matter.
Note on Broker Non-Votes. Under New York Stock Exchange rules, a broker may cast a vote on behalf of a beneficial owner on routine matters, such as Proposals 1, 2, and 3, when the broker does not receive specific voting instructions from that beneficial owner. On non-routine Proposals 4 through 7, a broker may not cast a vote absent specific voting instructions from the beneficial owners. If you are a beneficial owner holding shares through a broker, bank or other holder of record and you do not vote on certain matters, your broker may cast a vote on your behalf for Proxy Items No. 1, 2 and 3 but not Proxy Items No. 4, 5, 6 and 7.
Who will serve as the inspector of election?
Representatives from Bank of New York Mellon will serve as the inspectors of election.
Where can I find the voting results of the Annual Meeting?
The final voting results will be tallied by the inspectors of election and published in the Companys Quarterly Report on Form 10-Q for the fiscal quarter ending on June 13, 2009, which the Company will file with the SEC.
Who is paying for the cost of this proxy solicitation?
The Company is paying the costs of the solicitation of proxies. This solicitation is being made on behalf of our Board of Directors, but may also be made without additional compensation by our officers or employees by telephone, facsimile, email or personal interview. In addition, we have retained Georgeson Inc. to assist in obtaining proxies by mail, facsimile or email from brokers, bank nominees and other institutions for the Annual Meeting. The estimated cost of such services is $21,000 plus out-of-pocket expenses. Georgeson Inc. may be contacted at (800) 261-1052.
The Company must also pay brokerage firms and other persons representing beneficial owners of shares held in street name, certain fees associated with forwarding the Notice to beneficial owners, forwarding printed proxy materials by mail to beneficial owners who specifically request them, and obtaining beneficial owners voting instructions. In addition to soliciting proxies by mail, certain of the Companys directors, officers and regular employees, without additional compensation, may solicit proxies personally or by telephone, facsimile or email on the Companys behalf.
How can I attend the Annual Meeting in Person?
Attendance at the Annual Meeting is limited to shareholders. Admission to the Annual Meeting will be on a first-come, first-served basis. Registration will begin at 8:30 a.m. C.D.T., and each shareholder will be asked to present valid picture identification such as a drivers license or passport and proof of stock ownership as of the Record Date. The use of cell phones, PDAs, pagers, recording and photographic equipment and/or computers is not permitted in the meeting rooms at the Annual Meeting. Frito-Lay headquarters is accessible to disabled persons. Upon advance request, we will provide wireless headsets for hearing amplification.
Can I listen to the Annual Meeting on the Internet?
Yes, our Annual Meeting will be webcast on May 6, 2009 at 9:00 a.m. C.D.T. You are invited to visit www.pepsico.com to listen to the live webcast of the Annual Meeting. An archived copy of the webcast will be available on our website for at least 90 days following the date of our Annual Meeting.
ELECTION OF DIRECTORS (PROXY ITEM NO. 1)
The Board of Directors (the Board) proposes the following thirteen nominees for election as directors at the Annual Meeting. The directors will hold office from election until the next Annual Meeting of Shareholders, or until their successors are elected and qualified. If any of these nominees for director becomes unavailable, the persons named in the proxy intend to vote for any alternate designated by the current Board. If all of the thirteen director nominees are elected, the Board will have one vacancy, which may be filled by the Board. Proxies cannot be voted for a greater number of persons than the nominees named.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION OF THE FOLLOWING DIRECTORS.
BY DIRECTORS AND EXECUTIVE OFFICERS
The following table shows, as of March 6, 2009: (1) the shares of PepsiCo Common Stock beneficially owned by each director (including each nominee), by each of the executive officers identified in the 2008 Summary Compensation Table on page 39 of this Proxy Statement (Named Executive Officers) and by all directors and all executive officers as a group; and (2) the number of phantom units of PepsiCo Common Stock held in PepsiCos income deferral programs by each director (including each nominee), by each Named Executive Officer and by all directors and all executive officers as a group. Each phantom unit is intended to be the economic equivalent of one share of PepsiCo Common Stock. The information in this table is based solely on statements in filings with the SEC or other reliable information.
As of March 6, 2009, the directors and executive officers as a group own less than 1% of outstanding PepsiCo Common Stock and less than 1% of outstanding PepsiCo Convertible Preferred Stock. To our knowledge, as of the Record Date, there are currently no beneficial holders of 5% or more of the Companys Common or Convertible Preferred Stock.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934 requires PepsiCos directors and executive officers to file reports of ownership and changes in ownership of PepsiCo Common and Convertible Preferred Stock. We received written representations from each such person who did not file an annual statement with the SEC on Form 5 that no Form 5 was due. To the best of PepsiCos knowledge, in 2008, all required forms were filed on time with the Securities and Exchange Commission.
Board of Directors
Our business and affairs are overseen by our Board of Directors pursuant to the North Carolina Business Corporation Act and our By-laws. Members of the Board of Directors are kept informed of the Companys business through discussions with the Chairman and Chief Executive Officer and with key members of management, by reviewing materials provided to them and by participating in Board and Committee meetings. Members of the Board of Directors are elected annually by the shareholders.
Regular attendance at Board meetings and the Annual Meeting is required of each director. PepsiCos Board held seven meetings during 2008. Average attendance by incumbent directors at Board and standing Committee meetings in 2008 was 95%. No incumbent director attended fewer than 75% of the total number of Board and standing Committee meetings in 2008. The non-management directors met in executive session at six Board meetings in 2008. All incumbent directors except Ian Cook and James Schiro attended the 2008 Annual Meeting of Shareholders.
In 2002, the Board of Directors adopted Corporate Governance Guidelines for the Company. The Guidelines are periodically amended and were most recently amended in November 2008 to reflect a change in a portion of the director independence test in the New York Stock Exchange Corporate Governance Listing Standards. The revised Guidelines are attached to this Proxy Statement as Exhibit A and are also available on the Companys website at www.pepsico.com under InvestorsCorporate Governance and are available in print to any shareholder who requests a copy. The Companys Worldwide Code of Conduct is also available on the Companys website at www.pepsico.com under InvestorsCorporate Governance and is available in print to any shareholder who requests a copy. Annually, all of PepsiCos executive officers, other senior employees and directors complete certifications with respect to their compliance with the Companys Worldwide Code of Conduct.
In making independence determinations, the Board of Directors observes all criteria for independence established by the SEC, the New York Stock Exchange and other governing laws and regulations. The Board has determined that to be considered independent, a director may not have any direct or indirect material relationships with the Company. In making a determination of whether a material relationship exists, the Board considers all relevant facts and circumstances, including but not limited to the directors commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships. In addition to the independence requirements set forth in the Corporate Governance Listing Standards of the New York Stock Exchange, the Board has determined that a director will not be independent if he serves as an executive officer, director or trustee of a tax exempt organization that has received contributions from the Company or any of its consolidated subsidiaries in any of the last three fiscal years that exceeds the greater of $1 million or 2% of the consolidated gross revenues of such tax exempt organization for its last completed fiscal year. These independence standards were recommended by the Nominating and Corporate Governance Committee and adopted by the Board of Directors, and are detailed in full in the Corporate Governance Guidelines attached as Exhibit A to this Proxy Statement.
Consistent with these considerations, the Board has reviewed all relationships and material transactions between the Company and the members of the Board (and their respective affiliated companies) and has affirmatively determined that the non-management directors standing for election listed below are independent within the meaning of the rules of the New York Stock Exchange, based on the application of the Companys independence standards.
In arriving at the foregoing independence finding, the Board of Directors reviewed the following transaction in 2008. After an arms length competitive bid process, the Company secured certain insurance coverage from Zurich American Insurance Company (a member of Zurich Financial Services Group). In 2008, Zurich Financial Services provided the Company with employee-benefit related insurance coverage under policies that carried aggregate premiums of approximately $450,000, and the Company expects to continue such coverage through December 31, 2010. In addition, effective January 1, 2009, the company secured from Zurich Financial a one-year excess casualty policy with a premium of $124,410. James J. Schiro, a member of the Board, is the Chief Executive Officer of Zurich Financial Services. The Board found that such transactions are fair and reasonable and as favorable to the Company as those which could have been obtained from unrelated third parties. Accordingly, such transactions have no impact on the finding of Mr. Schiros independence as the Company does not believe that Mr. Schiro has a direct or indirect material interest in such commercial dealings.
None of the non-management directors receives any fees from the Company other than those received in his or her capacity as a director.
In May 2007, the Board of Directors appointed Sharon Percy Rockefeller as the Presiding Director of the Board. Ms. Rockefeller continued in the role throughout 2008. In her capacity as the Presiding Director, Ms. Rockefeller presides at the regularly-scheduled executive sessions of the Board, at which only non-management directors are present. She also advises the Chairman of the Board and, as appropriate, Committee chairs with respect to agendas and information needs relating to the Board and Committee meetings, and performs other duties that the Board may from time to time delegate to assist the Board in the fulfillment of its responsibilities. Shareholders and other interested parties may communicate with Ms. Rockefeller, or with any non-management directors, by any of the following means:
Communications to the Board of Directors
The PepsiCo Corporate Law Department reviews all communications sent to the Board of Directors relating to the duties and responsibilities of the Board and its Committees. The Corporate Law Department reviews all such communications and regularly provides a summary of communications to the Board that relate to the functions of the Board or a Board Committee or that otherwise require Board attention. Directors may at any time discuss the Board communications received by the Company and request copies or summaries of such communications. In addition, the Corporate Law Department may forward certain communications only to the Presiding Director, the Chair of the relevant Committee or the individual Board member to whom a communication is directed. Concerns relating to PepsiCos accounting, internal control over financial reporting or auditing matters will be referred directly to members of the Audit Committee.
Shareholders and other interested parties may send communications directed to the Board, a Committee of the Board or an individual member of the Board by any of the following means:
Political Contributions Policy
In 2005, the Board of Directors adopted a Political Contributions Policy for the Company. The Political Contributions Policy, together with other policies and procedures, including the Companys Worldwide Code of Conduct, guides the Companys approach to political contributions. In connection with the development of this policy and in keeping with the Companys goals of transparency, the policy and the Companys annual political contributions are posted on our website at www.pepsico.com under Investors Corporate Governance Policies.
Committees of the Board of Directors
The Board of Directors has three standing Committees: Nominating and Corporate Governance, Compensation and Audit. The table below indicates the members of each Board committee during 2008 and through March 20, 2009:
The Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee, which was established in 1997 and renamed in 2002, held four meetings in 2008. The Nominating and Corporate Governance Committee, among other things: (a) identifies and recommends to the Board for election and/or appointment qualified candidates for membership on the Board and the Committees of the Board; (b) develops and recommends to the Board corporate governance principles and the Worldwide Code of Conduct applicable to the Company and its directors and monitors compliance with all such principles and policies; (c) develops and recommends to the Board criteria to assess the independence of members of the Board; (d) makes recommendations to the Board concerning the composition, size, structure and activities of the Board and its Committees; (e) assesses and reports to the Board on the performance and effectiveness of the Board and its Committees; and (f) reviews and reports to the Board with respect to director compensation and benefits. The Nominating and Corporate Governance Committee Charter is available on the Companys website at www.pepsico.com under InvestorsCorporate Governance and is also available in print to any shareholder who requests a copy. The Nominating and Corporate Governance Committee is comprised entirely of directors who meet the independence requirements of the New York Stock Exchange and applicable securities laws.
Director Nomination Process
The Nominating and Corporate Governance Committee does not solicit director nominations, but will consider recommendations for director nominees made by shareholders if the individuals recommended meet certain minimum Board membership criteria. The Committees assessment of Board candidates includes consideration of a candidates: (i) relevant knowledge and diversity of background and experience in areas including business, finance, accounting, technology, marketing, international business and government; (ii) personal qualities of leadership, character, judgment and whether the candidate possesses a reputation in the community at large of integrity, trust, respect, competence and adherence to the highest ethical standards; (iii) roles and contributions valuable to the business community and (iv) whether the candidate is free of conflicts and has the time required for preparation, participation and attendance at all meetings. Shareholder recommendations should be sent to the Secretary of PepsiCo at 700 Anderson Hill Road, Purchase, New York 10577 and must include detailed background information regarding the suggested candidate that demonstrates how the individual meets the Board membership criteria.
Nominations received by the Secretary of the Company from shareholders are reviewed by the Chairman of the Nominating and Corporate Governance Committee to determine whether the candidate possesses the required qualifications, and if so, whether the candidates expertise and particular set of skills and background fit the current needs of the Board. This is done to ensure that the Board includes members with diverse backgrounds, skills and experience, including appropriate financial and other expertise relevant to the business of the Company. If the candidate meets the requirements for a current vacancy on the Board, the submission materials are reviewed with the Nominating and Corporate Governance Committee and are responded to by the Chairman of the Committee or his designee. The process for evaluation of candidates submitted by non-shareholders of the Company is handled similarly.
From time to time, the Nominating and Corporate Governance Committee engages consulting firms to perform searches for director candidates who meet the current needs of the Board. If a consulting firm is retained to assist in the search process for a director, a fee is paid to such firm. A nominee for the 2009 Annual Meeting, Shona L. Brown, was elected by the Board of Directors on March 20, 2009. Prior to her election to the Board, a third party search firm that was paid for its services was used to assist the Nominating and Corporate Governance Committee in identifying potential candidates. The Companys non-management directors recommend Ms. Brown as a nominee.
The Audit Committee
The Audit Committee, which was established in 1967 in accordance with the requirements of the Securities Exchange Act of 1934, held ten meetings in 2008. The Audit Committees primary responsibilities are to retain the Companys independent registered public accountants (subject to shareholder ratification) and to assist the Boards oversight of: (a) the quality and integrity of the Companys financial statements and its related internal controls over financial reporting; (b) the Companys compliance with legal and regulatory requirements; (c) the independent registered public accountants qualifications and independence; (d) the performance of the Companys internal audit function and the independent registered public accountants; and (e) overseeing the accounting and financial reporting practices of the Company and audits of the Companys financial statements. The report of the Audit Committee is set forth on pages 21 and 22 of this Proxy Statement. The Audit Committee Charter is available on the Companys website at www.pepsico.com under InvestorsCorporate Governance and is also available in print to any shareholder who requests a copy.
Financial Expertise and Financial Literacy
The Board of Directors has determined that Dina Dublon and James J. Schiro, members of our Audit Committee, satisfy the criteria adopted by the Securities and Exchange Commission to serve as audit committee financial experts and are independent directors, pursuant to the standards set forth in the Companys Corporate Governance Guidelines and the requirements under the Securities Exchange Act of 1934 and the New York Stock Exchange Listing Standards. In addition, the Board of Directors has determined that Ian M. Cook, Dina Dublon, Alberto Ibargüen, James J. Schiro and Lloyd G. Trotter, constituting all members of our Audit Committee, are independent directors and are financially literate within the meaning of the New York Stock Exchange Corporate Governance Listing Standards.
Directors on Multiple Audit Committees
None of the Companys directors serves on the audit committee of more than three public companies.
The Compensation Committee
The Compensation Committee, which has been active since 1955, held five meetings during 2008. The Compensation Committee: (a) oversees the design of PepsiCos compensation and benefits programs; (b) oversees the policies of the Company relating to compensation of the Companys executives and makes recommendations to the Board regarding the compensation of PepsiCos executive officers and other key executives; (c) produces a report on executive compensation for inclusion in the Companys Proxy Statement; and (d) oversees the development and implementation of succession plans for the Chief Executive Officer and other key executives. Additional information on the roles and responsibilities of the Compensation Committee is provided in the Compensation Discussion and Analysis on page 23 of this Proxy Statement.
The Compensation Committee is composed entirely of independent members of the Board who are outside directors for purposes of Section 162(m) of the Internal Revenue Code and non-employee directors for purposes of Section 16 of the Securities Exchange Act of 1934. The Compensation Committee Report is set forth on page 38 of this Proxy Statement. The Compensation Committee Charter is available on the Companys website at www.pepsico.com under InvestorsCorporate Governance and is also available in print to any shareholder who requests a copy.
Review and Approval of Transactions with Related Persons
On an annual basis, each director and executive officer is required to complete a questionnaire, which requires disclosure of any transactions the director or executive officer, or their immediate family members, may have with the Company in which the director or executive officer, or their immediate family members, has a direct or indirect material interest. The Audit Committee, which is responsible for reviewing and approving any related party transactions, considers the responses in the questionnaires and other information regarding potential relationships between the Company and the directors and executive officers. In determining whether to approve or disapprove a related-person transaction, our Audit Committee considers all transactions on a case-by-case basis and weighs all material factors, including but not limited to, the extent of the related persons interest in the transaction, the availability (if applicable) of other sources of comparable products or services, the terms of the transaction compared to the terms of a similar unaffiliated transaction, the benefit to the Company or the best interests of the Companys shareholders, whether the transaction would interfere with the objectivity and independence of any related persons judgment or conduct in fulfilling his/her duties to the Company, and the aggregate value of the transaction.
In 2008, the Board of Directors reviewed and ratified the transactions with Zurich Financial described on page 16 of this Proxy Statement.
The Audit Committee has determined that there are no other related party transactions to report.
Compensation Committee Interlocks and Insider Participation
No member of PepsiCos Compensation Committee is now, or was during 2008 or any time prior thereto, an officer or employee of the Company. No member of the Compensation Committee had any relationship with the Company or any of its subsidiaries during 2008 pursuant to which disclosure would be required under applicable rules of the Securities and Exchange Commission pertaining to the disclosure of transactions with related persons. None of the executive officers of the Company currently serves or has served in the past on the board of directors or compensation committee of another company at any time during which an executive officer of such other company served on the Companys Board of Directors or Compensation Committee.
AUDIT COMMITTEE REPORT
PepsiCos Audit Committee reports to and acts on behalf of the Board of Directors by providing oversight of the Companys independent auditors and the Companys financial management and financial reporting procedures. The Audit Committee is comprised entirely of directors who meet the independence, financial experience and other qualification requirements of the New York Stock Exchange and applicable securities laws. The Audit Committee is a separately designated standing audit committee established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934. The names of the Audit Committee members are included at the end of this Audit Committee Report. The Audit Committee operates under a written charter adopted by the Board of Directors, which is reviewed annually and is available on the Companys website at www.pepsico.com under InvestorsCorporate Governance.
The Companys management has responsibility for preparing the Companys financial statements and the Companys independent auditors (independent registered public accountants), KPMG LLP (KPMG), is responsible for auditing those financial statements. In this context, the Audit Committee has met with management and KPMG to review and discuss the Companys audited financial statements. The Audit Committee discussed with Company management and KPMG the critical accounting policies applied by the Company in the preparation of its financial statements. These policies arise in connection with: revenue recognition and related trade spending; brand and goodwill valuations; income tax expense and accruals; and pension and retiree medical plans. The Companys management has represented to the Audit Committee that the financial statements were prepared in accordance with generally accepted accounting principles. The Audit Committee discussed with KPMG the matters required to be discussed by the Statement on Auditing Standards No. 61 (Communications with Audit Committees), as amended, and the Sarbanes-Oxley Act of 2002, and had the opportunity to ask KPMG questions relating to such matters. The discussions included the quality, and not just the acceptability, of the accounting principles utilized, the reasonableness of significant accounting judgments, and the clarity of disclosures in the financial statements. The Audit Committee also discussed with Company management the process for certifications by the Companys Chief Executive Officer and Chief Financial Officer, which is required by the Securities and Exchange Commission and the Sarbanes-Oxley Act of 2002 for certain of the Companys filings with the Securities and Exchange Commission.
The Audit Committee reviewed with the Companys internal and independent registered public accountants the overall scope and plans for their respective audits for 2008. The Audit Committee also received regular updates from the Companys General Auditor on internal control and business risks and the Companys senior officer for compliance and business practices on compliance and ethics issues. The Audit Committee also received an update on the Company Law Departments compliance with Part 205 of Section 307 of the Sarbanes-Oxley Act of 2002 regarding standards of professional conduct for attorneys. The Audit Committee meets with the internal and independent registered public accountants, with and without management present, to discuss their evaluations of the Companys internal controls and the overall quality of the Companys financial reporting. The Audit Committee also meets with the Companys General Counsel, with and without other members of management present, to discuss the Companys compliance with laws and regulations.
The Audit Committee reviewed and discussed with KPMG, KPMGs independence and, as part of that review, received the written disclosures required by applicable professional and regulatory standards relating to KPMGs independence from the Company, including the Public Company Accounting Oversight Board pertaining to the independent accountants communications with the Audit Committee concerning independence. The Audit Committee also reviewed and pre-approved all fees paid to the independent registered public accountants. These fees are described in the next section of this Proxy Statement. The Audit Committee also considered whether KPMGs provision of non-audit services to the Company was compatible with the independence of the independent registered public accountants. The Committee has adopted a formal policy on Audit, Audit-Related and Non-Audit Services, which is published on the Companys website and which is briefly described in the next section of this Proxy Statement. The Audit Committee concluded that the independent registered public accountants are independent from the Company and its management.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors, and the Board has approved, that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 27, 2008, for filing with the Securities and Exchange Commission. The Audit Committee has also retained KPMG as the Companys independent registered public accountants for the fiscal year 2009, and the Audit Committee and the Board have recommended that shareholders ratify the appointment of KPMG as the Companys independent registered public accountants for the fiscal year 2009.
Messrs. Ian M. Cook and Lloyd G. Trotter joined the Audit Committee on March 14, 2008.
THE AUDIT COMMITTEE
IAN M. COOK
JAMES J. SCHIRO, CHAIRMAN
LLOYD G. TROTTER
AUDIT AND NON-AUDIT FEES
The following table presents fees for professional audit services rendered by KPMG LLP, the Companys independent registered public accountants, for the audit of the Companys annual financial statements for 2007 and 2008, and fees billed for other services rendered by KPMG LLP.
We understand the need for the independent registered public accountants to maintain their objectivity and independence, both in appearance and in fact, in their audit of the Companys financial statements. Accordingly, the Audit Committee has adopted the PepsiCo Policy for Audit, Audit Related and Non-Audit Services. The policy provides that the Audit Committee will engage the independent registered public accountants for the audit of the Companys consolidated financial statements and other audit-related work. The independent registered public accountants may also be engaged for tax and other non-audit related work if those services: enhance and support the attest function of the audit; are an extension to the audit or audit-related services; or are services with respect to which, under the circumstances, KPMG offers unique qualification and there is clearly no question regarding their independence in providing such service. The policy further provides that on an annual basis the independent registered public accountants Global Lead Audit Partner will review with the Audit Committee the services the independent registered public accountants expects to provide in the coming year and the related fee estimates. In addition, PepsiCo will provide the Audit Committee with a quarterly status report regarding the Committees pre-approval of audit-related, tax or other non-audit services that the independent registered public accountants have been pre-approved to perform, have been asked to provide or may be expected to provide during the balance of the year. PepsiCos Policy for Audit, Audit Related and Non-Audit Services is available on the Companys website at www.pepsico.com under InvestorsCorporate Governance.
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis provides information regarding the compensation paid to our executive officers who are identified as Named Executive Officers in the 2008 Summary Compensation Table on page 39 of this Proxy Statement.
It is critical to our long-term success and growth that our businesses are managed by highly capable leaders with the experience, skills and dedication to oversee a growing and changing global organization. To achieve this objective, we have designed our compensation programs to help recruit, retain and motivate a large group of talented and diverse domestic and international employees. Our programs are highly incentive-based and competitive in the marketplace, with Company performance determining a significant portion of total compensation. As a result, it is our objective that, when PepsiCos financial performance exceeds that of our peer group median, our executives receive total compensation above the peer group median. Likewise if PepsiCos financial performance were to fall below the peer group median, our executives would receive total compensation below the peer group median.
Our executive compensation philosophy is based on the principle that PepsiCo will achieve its best results when its employees act and are rewarded as business owners. Ownership is not only about owning stock, but it is also about being accountable for business results, in good times and bad. Owners act with the conviction that their business is personal and that they can make a difference. Owners take initiative and responsibility for the assets of the business and its employees. As executives progress to higher levels at PepsiCo, their responsibilities and rewards progress as well.
How We Determine Compensation
Role of the Compensation Committee. The Compensation Committee oversees the design and administration of PepsiCos compensation programs and evaluates these programs against competitive practices, legal and regulatory developments and corporate governance trends. The Compensation Committee approves, and recommends to the Board of Directors, the total compensation for each executive officer. The independent members of the Board approve the compensation for the Chairman & CEO and other executive officers. As part of its processes and procedures for determining executive compensation, the Compensation Committee annually:
Each year, actual annual incentive awards, long-term incentive awards and pay actions for the executive officers are approved by the independent members of the Board on the recommendation of the Compensation Committee. The Compensation Committee bases its recommendations on an analysis of PepsiCos actual performance relative to financial goals established in advance by the Compensation Committee and an analysis of each executive officers individual performance and contributions to PepsiCos strategic goals.
Role of Management. The Compensation Committee and Board of Directors determine the compensation of the Chairman & CEO without management input. The Compensation Committee and the Board solicit input from the Chairman & CEO to obtain her evaluation of performance and her recommendation in determining pay for other executive officers. No executive officer is present when his or her compensation is discussed by the Committee or the Board of Directors.
In addition, the Companys human resources department prepares materials for review by the Compensation Committee and provides data, analysis and recommendations for the Committees consideration regarding the Companys compensation programs and policies, as well as pay levels for non-executive officers. The human resources department also administers PepsiCos compensation and benefits programs and policies based on the direction of the Compensation Committee.
Role of the External Consultant. The Compensation Committee considers analysis and advice from its external consultant when making compensation decisions for the Chairman & CEO and other executive officers. The external consultant assists in evaluating the Companys compensation objectives, provides market information in order to assist the Committee and the Board in making pay decisions and verifies the alignment between executive officer pay and PepsiCos financial performance relative to the peer group approved by the Compensation Committee. The external consultant attends Committee meetings, and Committee members have direct access to the consultant without management involvement. While the external consultant works directly for the Compensation Committee, and the Committee has the sole authority to hire and fire the external consultant, the consultant sometimes obtains input from management to ensure that the consultants recommendations and advice reinforce PepsiCos business strategy, principles and values.
During 2008, the Compensation Committee engaged Frederic W. Cook & Co. as its external consultant. The services performed by Frederic W. Cook & Co. have been exclusively limited to executive compensation consulting for the Compensation Committee. Frederic W. Cook & Co. is prohibited from undertaking any work with PepsiCo management or employees. Frederic W. Cook & Co. provides recommendations on CEO pay directly to the Compensation Committee without consulting PepsiCos Chairman & CEO or management.
Peer Group. The Compensation Committee utilizes the same peer group to annually evaluate both executive officer pay levels and Company performance. The Compensation Committee annually reviews and validates the peer group with the assistance of its external consultant to ensure all peer companies remain an appropriate basis for comparison. The Compensation Committee approves any changes to the peer group. For pay decisions made by the Compensation Committee in February 2008 (to reward 2007 performance), the peer group consisted of 14 large public consumer products companies with a strong brand focus that PepsiCo competes with for executive officer talent.
In July 2008, the Compensation Committee approved the addition of nine companies to the peer group. The peer group was expanded for two reasons. First, the number of peer group companies had declined over time due to mergers and acquisitions (including the removal of Anheuser-Busch Companies, Inc. in 2008). Second, because PepsiCos revenue growth exceeded that of the peer group median over the past few years, the Committee determined that the addition of nine companies would better align the peer groups median revenue and market capitalization with PepsiCos.
The additional peer companies were selected based on several criteria:
The Compensation Committee approved the following twenty-two peer companies, which are listed in order of 2008 revenue size (from largest to smallest):
PepsiCo is the fifth largest company in the new peer group in terms of 2008 revenue and 2008 fiscal year-end market capitalization. PepsiCos 2008 revenue was $43.3 billion compared to the peer group median of $24.4 billion and 75th percentile of $37.8 billion, and PepsiCos 2008 fiscal year-end market capitalization was $84.7 billion compared to the peer group median of $38.9 billion and 75th percentile of $78.2 billion.
During the fall of 2008, the Compensation Committees external advisor benchmarked executive officer compensation and Company financial performance using the new peer group for purposes of determining February 2009 pay actions to reward 2008 performance.
In addition to utilizing data from the peer group, the Compensation Committee also relies on data from Towers Perrins published executive compensation survey, as well as pay data collected from the full Fortune 100, as secondary reference points to help the Committee obtain a general understanding of current pay practices for executive officers other than the Chairman & CEO.
Executive Compensation Policies. Pay levels for executive officers are designed to be competitive relative to our peer group companies and, most importantly, align with the Companys performance. Pay-for-performance is a critical policy in designing our executive officer compensation. As a result, our pay mix, defined as the amount of cash and equity-based incentive awards relative to total compensation, places the greatest emphasis on performance-based incentives. As illustrated in the following charts, consistent with market practice, 90% of our Chairman & CEOs target total compensation (excluding change in pension value, benefits and perquisites) is variable, and approximately 80% of the target total compensation (excluding change in pension value, benefits, and perquisites) for our other Named Executive Officers is variable:
To sustain PepsiCos long-term performance, we set stretch financial goals that are generally set to meet our peer groups 75th percentile performance (i.e., the top 25% of peer companies). Our objective is to compensate at the 75th percentile relative to our peer group when we achieve performance at or above the 75th percentile of our peer group. To accomplish this, we annually review compensation (base salary, annual incentive awards and long-term incentive awards) provided by our peer group to set target total compensation levels for our executive officers between the peer group median and 75th percentile for similar positions. We then utilize variable pay incentives to award pay in line with our performance. Our design is set to ensure that our pay-for-performance programs deliver total compensation at the 75th percentile when financial performance is at or above the peer group 75th percentile. If financial performance were to be below the peer group 75th percentile, total compensation awarded would be below the 75th percentile.
Risk Mitigation. PepsiCos compensation programs have been designed with features that discourage executives from taking unnecessary and excessive risks that would threaten the health and viability of the Company.
In determining annual incentive awards, the portion of the award earned based on Company-wide, business unit or division financial performance includes top-line, bottom-line and market share financial metrics to ensure balanced growth. Furthermore, executives cannot receive a revenue score above target and cannot receive the portion of their annual incentive based on market share unless they achieve their profit target. This profit gate-keeper on revenue and market share creates a strong incentive to sell profitable product. The Companys annual incentive program has several governance features to discourage executives from taking excessive risks:
Long-term equity incentive awards represent the most significant element of executive officer pay to ensure that executives have a strong incentive to create long-term shareholder value. In particular, equity awards to executive officers are balanced equally between stock options and performance-based restricted stock units (PSUs). PSUs are paid only if PepsiCo meets Compensation Committee-approved financial targets during a three-year period, and the Compensation Committee determines the award that should be paid at the end of the performance period.
The Companys long-term incentive program also has several governance features to further support executives long-term focus:
To ensure continued personal commitment to PepsiCos stock performance and to maintain a long-term perspective, the Board increased the stock ownership guidelines in 2008. In addition, the Board adopted a policy requiring that 100% of the shares held under the ownership guidelines must be retained for a minimum of six months after retirement or termination, and 50% must be retained for a minimum of one year after retirement or termination.
Components of PepsiCos Compensation and Benefits Programs
For 2008, the primary components of our compensation and benefits programs for executive officers were (1) base salary, (2) annual incentive awards, (3) performance-based long-term cash awards, (4) long-term equity incentive awards, (5) retirement programs and (6) benefits and perquisites. These components promote the compensation objectives described in the Compensation Philosophy section of this Compensation Discussion and Analysis and are underpinned by the governance features highlighted at the end of this Compensation Discussion and Analysis (beginning on page 36 of this Proxy Statement).
1. Base Salary. Base salary is the fixed component of executive compensation intended to meet the objective of attracting and retaining the executive officers necessary to lead the Company. The relative levels of base salary for the Chairman & CEO and the other executive officers are based on the underlying accountabilities of each executive officers position and reflect each executive officers scope of responsibility. The Compensation Committee annually reviews executive officer salaries and benchmarks them against data with respect to similar positions among the peer group companies and in the Fortune 100 and Towers Perrin executive compensation survey. In addition, executive officer salaries are analyzed relative to internal positions to ensure equity and alignment of our pay within PepsiCo. Base salaries paid to our Named Executive Officers in 2008 are presented under column (c) in the 2008 Summary Compensation Table (page 39 of this Proxy Statement).
During 2008, the Compensation Committee did not change the base salaries of Ms. Nooyi, Mr. White, Mr. Compton and Mr. Goodman, as the Committee determined that their salaries were market competitive. The Committee increased Mr. Careys salary by 3.9% in February 2008 to align with market competitive salaries of comparable positions.
2. Annual Incentive Compensation. We provide performance-related annual incentive compensation opportunities to our executive officers under the shareholder-approved PepsiCo, Inc. 2004 Executive Incentive Compensation Plan (2004 EICP). Awards under the 2004 EICP are designed to provide annual incentives to drive Company, business unit and individual performance.
Setting the Maximum Award for Tax Deductibility: We intend awards to be fully deductible for federal income tax purposes under Section 162(m) of the Internal Revenue Code. To achieve this, we establish each executive officers maximum award, within the shareholder-approved limits set forth in the 2004 EICP, based on pre-approved financial performance targets. In 2008, the Compensation Committee approved Core Earnings Per Share (Core EPS)1 growth as the financial performance target for all executive officers. After the Compensation Committee determines the degree to which the financial performance target has been met, the Committee approves the maximum award payable under the 2004 EICP and then exercises discretion to reduce, but not to increase, the amount of the actual award payable under the 2004 EICP based on performance against the Company and individual objectives described below.
In 2008, PepsiCos actual Core EPS growth of 9% was below the target Core EPS growth of ~10%. This level of performance funded individual awards for each Named Executive Officer at 90% of the shareholder-approved limit, and resulted in the maximum award for each executive officer being capped at $8.1 million. The Committee then exercised its discretion in determining the amount of the actual incentive awards provided to all Named Executive Officers. The description below outlines how actual annual incentives are determined.
Determining the Actual Award: Once the maximum award is determined based on the pre-approved financial performance target, the Compensation Committee considers both Company financial performance and individual performance to determine the actual incentive award payable to each executive officer. In no event will the actual award exceed the maximum award determined under the 2004 EICP. For our Chairman & CEO, performance is evaluated in a non-formulaic manner with no specific weighting given to the performance measures. For our other executive officers, Company performance is weighted approximately two-thirds and individual performance is weighted approximately one-third.
The range of potential incentive awards for each Named Executive Officer for 2008 is listed under columns (c), (d) and (e) in the 2008 Grants of Plan-Based Awards table on page 42 of this Proxy Statement. The actual payout can range from 0% to 200% of a Named Executive Officers target incentive opportunity. If financial performance with respect to a specific measure is above or below target, actual payout will be leveraged above or below the target incentive opportunity.
Individual Performance Measures: The Compensation Committee evaluates individual performance based on measures related to an individuals contribution to PepsiCos strategic business imperatives, such as improved operating efficiencies and driving PepsiCos Performance with Purpose priorities in the areas of human sustainability, environmental sustainability and talent sustainability. The strategic business imperatives are intended to be challenging. They can be both qualitative and quantitative and vary for each executive officer. The Compensation Committee gives no specific weighting to the various strategic imperatives and evaluates individual performance in a non-formulaic manner.
Company Performance Measures: Our annual incentive plan utilizes Company performance measures that executives directly influence to ensure a direct link between performance and actual incentive awards. The specific 2008 Company performance measures used by the Committee when applying negative discretion to the maximum award for PepsiCos Named Executive Officers under the 2004 EICP are listed in the table below. These performance measures relate to corporate-wide (PepsiCo) performance, business unit (such as PepsiCo International) performance and division (such as Frito-Lay North America) performance depending on the Named Executive Officers position and scope of responsibility. If an executive officer assumes a leadership position of a different business unit, the annual incentive award is determined based 50% on the prior business unit and 50% on the current business unit. This practice ensures that executive officers are held accountable for results in the prior business unit in which they established the subsequent years business priorities and long-term strategies.
Our corporate-wide financial performance objectives include Core EPS growth and net revenue growth. Similar objectives for business units and divisions are net operating profit before tax (NOPBT) growth and net revenue growth. In addition to these objectives, a market share growth target for each division is established. Achievement of the market share growth target can raise a Named Executive Officers Company performance score by up to 25%. These financial performance objectives may be subject to adjustments for a number of items not in an executives control, such as currency fluctuations, merger and acquisition activity and changes in generally accepted accounting principles (GAAP), as we believe that ongoing results are more reflective of performance than reported financial performance calculated under GAAP.
Results: After the end of 2008, the Compensation Committee evaluated PepsiCos performance against the 2008 performance measures described above and determined each Named Executive Officers actual incentive award. In determining annual incentive awards for the Chairman & CEO and the Chief Financial Officer in 2008, the Compensation Committee considered actual Company performance against the corresponding pre-established performance targets noted in the following table.
For the CEOs of PepsiCos business units and divisions, NOPBT and net revenue growth targets were challenging and were set to approximate the 75th percentile of our peer group, meaning that targets were set to fall within the top 25% of peer companies. The actual annual incentive awards determined by the Compensation Committee for each Named Executive Officer are included in column (g) in the 2008 Summary Compensation Table on page 39 of this Proxy Statement.
For all Named Executive Officers except Al Carey, the annual incentive awards provided in March 2009 reflecting 2008 performance were less than annual incentive awards provided in March
2008 reflecting 2007 performance. Mr. Careys annual incentive award increased by approximately 4% due to strong Frito-Lay North America performance in 2008. Ms. Nooyis actual annual incentive award is discussed on pages 34 and 35 of this Compensation Discussion and Analysis.
3. Performance-Based Long-Term Cash Compensation. Through 2008, executive officers, with the exception of the Chairman & CEO, had a performance-based long-term cash award opportunity that was expressed as a percent of salary. The Chairman & CEO was not eligible because a competitive performance-based long-term cash opportunity would not have provided meaningful retention in relation to the market-based equity opportunity. Beginning in 2009, all other executive officers will also no longer receive performance-based long-term cash awards, with the value allocated to the executive officers annual incentive and equity opportunity. This change better aligns the pay mix for PepsiCos executive officers with the market.
Through 2008, the Compensation Committee determined the amount of the actual award (as a percent of target) based on achievement of the same annual performance goals used for annual incentive compensation (see Annual Incentive Compensation discussion on pages 28 and 29 of this Proxy Statement for details). However, the long-term cash award vests and pays out in equal installments over three years, with the first installment paid out the calendar quarter following the performance year. The executive officers only receive the full value of these awards if they remain employed through the vesting period. Executive officers who retire from the Company are eligible to receive the full value of their unvested performance-based long-term cash awards. The value of the 2008 performance-based long-term cash awards to our Named Executive Officers is included under column (g) in the 2008 Summary Compensation Table on page 39 of this Proxy Statement. The value of performance-based long-term cash awards earned in 2006 and 2007, but paid in 2008, is included in footnote (8) to the 2008 Summary Compensation Table.
4. Long-Term Equity Incentive Compensation. Consistent with our compensation philosophy, we believe that stock ownership and stock-based incentive awards are the best way to align the interests of the executive officers with those of PepsiCos shareholders. We have a long history of linking pay to our long-term stock performance for all employees, not just executives. This is best demonstrated by the fact that, since 1989, we have provided an annual grant of stock options to virtually all full-time U.S. employees under SharePower, our broad-based stock option program.
Executive officers long-term equity incentives are comprised of:
The annual executive officer long-term incentive program is designed to deliver a mix of approximately 50% stock options and 50% PSUs. Most executives are provided with a choice between stock options and restricted stock units (RSUs) that vest after three years of service. However, PepsiCos executive officers, including the Chairman & CEO and the other Named Executive Officers, are not provided with this choice. The value of the annual equity award for these executive officers is balanced equally between stock options and PSUs.
Target grant levels for executive officers vary by position and are based on competitive benchmarking. Target grant levels are expressed in dollars (rather than as a percent of salary) and are set to approximate the peer group median. The actual size of grants awarded to executive officers can range from 0% to 150% of target and are determined based on Company and individual performance. We require that annual option and PSU awards made under the long-term incentive plans include vesting terms that encourage an executive officer to remain with PepsiCo for a number of years.
Upon recommendation by the Compensation Committee, the independent members of the Board directly approve individual awards to executive officers. Stock option and PSU grants are
awarded under our shareholder-approved long-term incentive plans at Fair Market Value, defined as the average of the high and low stock prices rounded up to the nearest quarter on the date of grant. This formula mitigates the impact of our stock prices intra-day volatility when setting the grant price of equity awards. PepsiCo does not backdate, reprice or grant equity awards retroactively. Repricing of awards would require shareholder approval under the shareholder-approved 2003 and 2007 Long-Term Incentive Plans. PepsiCos grant practices ensure all grants are made on fixed grant dates and at exercise prices or grant prices equal to the Fair Market Value on such dates. Our annual grant, if approved by the Board, is provided on the later of February 1st or the regularly scheduled January/February Board meeting. On February 1, 2008, the Board granted stock options and PSUs to all executive officers with a grant price of $68.75 (the average of the low and high price on the date of grant, rounded up to the nearest quarter).
4(a). Stock Options. We believe that stock options are motivational and represent performance-based compensation, as they have no intrinsic value to recipients on the date of grant and they only deliver meaningful value if PepsiCo achieves sustained, long-term stock price growth. The number of stock options an executive officer receives each year can vary from 0% to 150% of target based on Company and individual performance as described earlier. Subject to Compensation Committee and Board approval, executive officers receive annual grants of stock options each February that generally vest after three years of service and expire after ten years. Executive officers who retire from the Company at age 55 through age 61 with at least 10 years of service are eligible to vest in a pro-rata portion of their stock option grants based on the length of time served in proportion to the full vesting period. Executive officers who retire from the Company at or after age 62 are eligible to vest in the full stock option grant. Dividends are not earned on stock option grants. The 2008 grant date fair value of stock option awards to our Named Executive Officers is presented under column (m) in the 2008 Grants of Plan-Based Awards table on page 42 of this Proxy Statement.
4(b). Performance-Based Restricted Stock Units (PSUs). Subject to Compensation Committee and Board approval, grants of PSUs are provided to executive officers annually from 0% to 150% of target based on Company and individual performance as described earlier. PSUs vest based on PepsiCo achieving pre-established annual financial performance targets for each year in a three-year performance period. The Compensation Committee establishes these financial performance targets each year. Financial performance targets for the PSUs have never been adjusted or reset, and management does not have the authority to do so.
Annual financial performance targets are set at the beginning of each year during the three-year performance period to achieve approximately 75th percentile financial performance relative to the peer group. When PepsiCo achieves these financial performance targets for each of the years in the three-year performance period, executive officers are eligible to receive the full number of shares subject to the award. If PepsiCo were to perform below the pre-established annual financial performance target in any of the three years during the performance period, the number of shares earned for that performance year would be proportionately reduced. No shares would be earned for a performance year if PepsiCo were to perform below the threshold set by the Committee for the performance year. For awards granted prior to 2009, the number of shares earned cannot exceed the number of PSUs awarded, even if PepsiCo were to exceed the financial performance targets in each performance year. Beginning with the 2009 award, the Board approved the ability to earn above-target PSU awards in order to reward performance that exceeds target. This change will allow executives to earn a number of shares up to 125% of the PSUs granted if PepsiCo exceeds its performance targets in each year during the three-year performance period.
Notwithstanding the attainment of the financial performance targets over the three-year performance period, the Board and Compensation Committee retain the right to reduce, but not increase, the size of the award that would otherwise be paid. Executive officers forfeit all PSUs if they leave PepsiCo prior to the completion of the three-year performance period. Executive officers who retire from the Company at age 55 through age 61 with at least 10 years of service are eligible to vest in a pro-rata portion of their PSU grants based on the length of time served in proportion to the full vesting period. Executive officers who retire from the Company at or after age 62 are eligible to vest in
the full PSU grant. However, payment of the final award remains contingent on achieving the 3-year performance targets.
In February 2008, the Compensation Committee set ~10% Core EPS growth as the financial performance level necessary for executive officers to earn the full PSU award for the 2008 performance year. PepsiCos 2008 actual Core EPS growth of 9% was lower than the ~10% Core EPS growth target. Based on the 2008 PSU performance scale previously established by the Compensation Committee, the Committee certified that executive officers had earned 50% of the PSU shares for (i) the final third of the PSUs granted in 2006, (ii) the second third of the PSUs granted in 2007 and (iii) the first third of the PSUs granted in 2008. As a result of PepsiCos meeting 100% of the Core EPS growth targets for 2006 and 2007 and 50% of the Core EPS growth target for 2008, 83% of the PSUs awarded to executive officers in 2006 vested in February 2009 and 17% of those PSUs were forfeited, as outlined in the following table:
The 2008 grant date fair value of PSUs to our Named Executive Officers is included under column (m) in the 2008 Grants of Plan-Based Awards table on page 42 of this Proxy Statement. Executive officers earn dividend equivalents on their PSUs and RSUs during the vesting period that are paid out (without interest) only if and when the corresponding PSUs and RSUs vest.
5. Retirement Programs. Our U.S. retirement programs consist of defined benefit pension plans, retiree medical coverage, retiree life insurance, and a 401(k) plan. Our defined benefit pension plans are designed to facilitate the retirement of employees who have performed at PepsiCo over the long term. Pension benefits are calculated based on years of service and pay (i.e., base salary and annual incentive compensation). Awards of stock options, PSUs, RSUs and performance-based long-term cash are not considered when determining pension benefits. Executive pension benefits are calculated using the same formula as other salaried employees; however, because of IRS compensation and benefit limits applicable to PepsiCos qualified pension plan, a significant portion of an executive officers pension is typically provided by a non-qualified, unfunded pension plan. As a result, pension benefits are provided to Named Executive Officers under two plans, a qualified and a non-qualified plan. The present value of each Named Executive Officers accumulated benefit under the qualified and non-qualified pension plans is set forth in the 2008 Pension Benefits table on page 46 of this Proxy Statement. The narrative following the 2008 Pension Benefits table describes the plans material features.
Named Executive Officers are eligible for retiree medical coverage. This benefit is available to all salaried employees based on age and service, and our executives who enroll for coverage are required to pay twice as much for their coverage as other retirees. Named Executive Officers are also eligible for retiree life insurance equal to 100% of eligible pay (i.e., base salary and annual incentive award) upon death in retirement at age 55, declining by 10% per year thereafter, with a $5,000 maximum benefit beginning at age 65.
Executive deferrals into the 401(k) plan and Company matching contributions are also limited by IRS regulations. While the Company does permit most executives to defer their base salary and annual incentive compensation, PepsiCo does not provide an excess plan to offset 401(k) limitations. PepsiCo also does not provide to executives other special benefit plans such as executive life insurance.
6. Benefits and Perquisites
6(a). Benefits. Executives generally receive the same healthcare benefits as other employees. U.S.-based medical benefits are the same for all participants in the Companys healthcare program; however, our executives are required to pay twice as much for their coverage. All of our employees, including executive officers, are eligible to participate in HealthRoads, PepsiCos broad-based wellness program. HealthRoads provides our employees with personal health coaching recommendations and encouragement to reach exercise, weight management, nutrition, smoking cessation and stress management goals. In addition, executive officers who relocate at PepsiCos request are supported under the relocation program available to all PepsiCo employees. The program covers relocation expenses and applicable reimbursement of taxes associated with moving.
6(b). Perquisites. Consistent with our philosophy of making compensation primarily performance-based, we limit executive perquisites to a company car, an annual physical and selective personal use of company aircraft and ground transportation. As part of the company car program, executive officers (with the exception of the Chairman & CEO) have the option of receiving a low emission, fuel efficient automobile (as designated by the Environmental Protection Agencys SmartWay program) supplied through the Company (including insurance, maintenance and fuel) or a monthly payment in lieu of the automobile benefit. For Ms. Nooyi, the Compensation Committee has authorized personal use of the Companys ground transportation in lieu of a company car along with personal use of the company aircraft. Ms. Nooyis use of a car and driver for commuting and business, as well as personal use of company aircraft, enhances security and personal safety and increases her time available for business purposes. Ms. Nooyi is fully responsible for any tax liability associated with these perquisites.
Personal use of company ground transportation is utilized by other executive officers on a limited and selective basis. Executives are fully responsible for their tax liability associated with any personal use of company ground transportation. In addition, during 2008, personal use of company aircraft was available and utilized by other executive officers on a selective basis. Beginning in 2009, all executive officers, other than Ms. Nooyi, must reimburse PepsiCo for the full variable operating cost of personal flights in excess of a certain number of hours per year as established by the Compensation Committee. All executives are fully responsible for any tax liability associated with personal use of aircraft.
We do not provide executive officers other perquisites such as country club memberships, financial planning or company-paid apartments.
6(c). Change-in-Control Provisions. All employees, including Named Executive Officers, and non-employee directors are provided change-in-control protections for their equity awards under our shareholder-approved long-term incentive plans. For all grants in 2007 and thereafter, stock options vest and RSUs and PSUs are paid at target if the participant is terminated without cause or resigns for good reason within two years following a change in control of PepsiCo or if the acquiring entity fails to assume the awards (double trigger). We adopted double trigger vesting to ensure management talent would be available to assist in the successful integration following a change-in-control and to align with emerging governance trends.
For all grants prior to 2007, stock options vest and RSUs and PSUs are paid upon a change in control of PepsiCo. In the event a participant is terminated without cause within two years following the change in control or the participants options are adversely modified, the participant receives a payment up to the present value of his or her outstanding pre-2007 options at the time of such event calculated using the Black-Scholes formula.
Named Executive Officers are not eligible to receive any cash severance, continued health and welfare benefits, pension service credit, tax gross-ups or any other change-in-control benefits other than the change-in-control protections under our long-term incentive plans described earlier.
6(d). Executive Deferral. Under the PepsiCo Executive Income Deferral Program, most U.S.-paid executives can elect to defer up to 85% of their base salary and up to 100% of their annual cash incentive awards into phantom investment funds which grow on a tax-deferred basis. Prior to 2004, stock option gains and performance-based long-term cash awards were also eligible for deferral. If stock options were deferred, they were required to have been exercised within one month of expiration and the gains were required to have been deferred into the PepsiCo Common Stock Fund.
Executives have the opportunity to invest their deferrals into nine market-based funds, including the PepsiCo Common Stock Fund and an investment fund that earns interest at 120% of the Long-term Applicable Federal Rate. The executive deferral program does not guarantee a rate of return, and none of the funds provides above market earnings.
PepsiCo does not match an executives deferrals. The PepsiCo Executive Income Deferral Program is a non-qualified and unfunded program in which account balances are unsecured and at-risk, meaning the balances may be forfeited in the event of the Companys bankruptcy. The narrative accompanying the 2008 Non-Qualified Deferred Compensation table on page 48 of this Proxy Statement describes the executive deferral programs material features.
Determining Chairman & CEO Compensation for 2008 Performance
As discussed earlier, the compensation provided to PepsiCos Chairman & CEO is based on a pay-for-performance philosophy that is aligned with shareholder returns over the long-term; specifically:
As Chairman & CEO of PepsiCo, Ms. Nooyis compensation for 2008 performance recognized the Companys performance against pre-established Company financial targets, as well as Ms. Nooyis performance against pre-established strategic imperatives. Based on 2008 performance, the Board of Directors approved for Ms. Nooyi a $13.98 million total compensation package (defined as base salary, annual incentive and long-term incentive equity awards). This total compensation package is 9% lower than her compensation for 2007 performance as outlined in the following table:
The above table is presented to show compensation actions for Ms. Nooyi based on 2007 and 2008 performance. It differs from the 2008 Summary Compensation Table which is required by the SEC to follow the Statement of Financial Accounting Standards 123R, Share-Based Payment (FAS 123R) methodology for expensing equity awards over the vesting period.
At its February 2009 meeting, the Board of Directors approved Ms. Nooyis $2.6 million annual cash incentive award based on 2008 performance. This award is significantly below the maximum award of $8.1 million and is a 19% decrease from her $3.2 million annual incentive award for 2007 performance. Further, the Board of Directors also approved at its February 2009 meeting Ms. Nooyis long-term incentive award with an estimated FAS 123R grant date present value of $10.1 million (consisting of the PSU award and option award included in the table on the previous page). This amount represents a 7% decrease from her prior year long-term incentive award of $10.8 million.
In determining Ms. Nooyis annual and long-term incentive awards, the Committee considered PepsiCos performance against pre-established Company-wide financial performance targets (specified on page 29 of this Compensation Discussion & Analysis), as well as the following results against financial and individual strategic imperatives:
Finally, the Board of Directors left Ms. Nooyis base salary unchanged at $1.3 million through 2009 as her salary is appropriately positioned at the peer group median.
Effect of Recent Economic Volatility on Executive Pay
Despite the challenging economic environment that has impacted the Companys business, the Compensation Committee did not lower or otherwise adjust the financial performance targets for the annual or long-term incentive awards. In addition, other than a 3.9% increase for Mr. Carey approved in February 2008, the Compensation Committee did not increase salaries for the Named Executive Officers for 2008 or 2009. For all Named Executive Officers, other than Mr. Carey, the annual incentive awards approved in February 2009 for 2008 performance decreased versus awards approved in February 2008 for 2007 performance due to lower performance relative to pre-established financial targets.
Furthermore, as PepsiCos actual Core EPS growth of 9% was lower than the Compensation Committees previously established 2008 Core EPS growth target of ~10%, executive officers earned 50% of the PSU shares for (i) the final third of the PSUs granted in 2006, (ii) the second third of the PSUs granted in 2007 and (iii) the first third of the PSUs granted in 2008. As a result of PepsiCos meeting 100% of the Core EPS growth targets for 2006 and 2007 and 50% of the Core EPS growth target for 2008, 83% of the PSUs awarded to executive officers in 2006 vested in February 2009 and 17% of those PSUs were forfeited.
Additional Features of our Executive Compensation Programs
Our compensation and benefit programs operate with the following governance features:
Stock Ownership. To reinforce our ownership philosophy, the Board has established stock ownership guidelines for executive officers. Under those guidelines, executive officers are required to own shares of PepsiCo stock equal to a specified multiple of their annual base salary. The multiples applicable to the executive officers through 2008 varied from between two and eight times base salary based on an executive officers position. In 2008, the Board significantly increased the stock ownership levels. The new levels applicable to executive officers beginning in 2009 range from between four and ten times annual base salary:
PepsiCo shares or equivalents held directly by the executive officer (or immediate family members), in the 401(k) plan, deferred compensation account, or in a trust for the benefit of immediate family members, count towards satisfying the requirement. Unexercised stock options, unvested PSUs and RSUs do not count towards satisfying the requirement.
Executive officers have five years from the date they first become subject to a particular level of the stock ownership guidelines to meet the ownership level. All of our executive officers have met or are on track to meet their objectives within the five-year time requirement. In 2008, the Board approved an additional change to the stock ownership guidelines requiring executive officers to continue to hold 100% of the shares needed to meet the applicable level of stock ownership until at least six months after termination or retirement and to continue to hold 50% of the shares needed to meet the applicable level of stock ownership until at least one year after termination or retirement. The Board believes that this change further aligns the interests of PepsiCos executive officers with those of shareholders.
Exercise and Hold Policy. To ensure that our executive officers exhibit a strong commitment to PepsiCo share ownership, the Board of Directors adopted an Exercise and Hold Policy in 2002. This policy limits the proceeds that an executive officer may receive in cash upon exercise of options during each calendar year to 20% of the aggregate value of all the executive officers in-the-money vested options as of the annual equity grant date for that year. Any proceeds in excess of this 20% limit must be held in PepsiCo shares for at least one year after the date of exercise. Beginning in 2009, executive officers who meet their recently increased ownership level are exempt from this requirement, as long as they continue to meet their ownership guideline.
Employment Contracts and Separation Agreements. Named Executive Officers, including the Chairman & CEO, do not have employment contracts. Consistent with our approach of rewarding performance, employment is not guaranteed; thus the Company or the Named Executive Officer may terminate the employment relationship at any time. In some cases, the Compensation Committee or Board of Directors may agree to provide separation payments to departing executives upon their termination to obtain an extended non-compete, non-solicitation and non-disclosure agreement and a release of claims.
Clawback Provision. Under the terms of our long-term incentive plans and our executive deferral program, employees, including Named Executive Officers, who violate PepsiCos Worldwide Code of Conduct, who violate our non-compete, non-solicitation and non-disclosure policies or who engage in gross misconduct may be subject to financial consequences. Our long-term incentive plans permit PepsiCo to cancel an executives outstanding equity awards, including both vested and unvested awards, if PepsiCo determines that the executive has committed any such violation. Our long-term incentive plans and the PepsiCo Executive Income Deferral Program also permit PepsiCo to recover all gains from exercised stock options and vested RSUs and PSUs as well as any gains earned on contributions to the PepsiCo Executive Income Deferral Program. The PepsiCo, Inc. Executive Incentive Compensation Plan that is being presented to shareholders for their approval at the Annual Meeting includes similar clawback provisions that would be applicable to annual incentive payments.
Hedging. Our insider trading policy prohibits executive officers from using any strategies or products (such as derivative securities or short-selling techniques) to hedge against the potential changes in the value of PepsiCo stock.
Trading Windows. Executive officers can only purchase and sell PepsiCo stock and exercise stock options during approved trading windows, which generally open two days after PepsiCo issues its quarterly earnings release. Trading windows typically close one month after the opening of the window.
In establishing total compensation for the executive officers, the Compensation Committee considers the effect of Section 162(m) of the Internal Revenue Code. Section 162(m) generally disallows a tax deduction for compensation over $1,000,000 paid for any fiscal year to the Chief Executive Officer and the three other highest paid executive officers other than the Chief Financial Officer unless the compensation qualifies as performance-based. While the Compensation Committee generally seeks to preserve the deductibility of most compensation paid to executive officers, it believes that the primary objective of the compensation program is to support the Companys business strategy. Thus, the Committee believes it should have flexibility in awarding compensation, even though some compensation awards may result in non-deductible compensation expenses.
For compensation awarded in 2008, PepsiCo expects that the executive compensation programs will have the following implications under Section 162(m):
PepsiCos compensation practices and compensation philosophy are designed to align executive interests with those of shareholders. We believe our pay programs have a strong pay-for-performance orientation, foster appropriate risk-taking, are properly designed to assist the Company in attracting, retaining and motivating the key talent PepsiCo needs to continue to compete and provide strong return to shareholders, and offer a competitive advantage to the Company and its shareholders.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference into the Companys Annual Report on Form 10-K for the fiscal year ended December 27, 2008.
Shona L. Brown joined the Compensation Committee on March 20, 2009.
THE COMPENSATION COMMITTEE
2008 SUMMARY COMPENSATION TABLE
The following table summarizes the compensation of the Named Executive Officers for the fiscal year ended December 27, 2008. The Named Executive Officers are the Companys Chief Executive Officer, Chief Financial Officer and certain other executive officers who were most highly compensated in fiscal year 2008, by reference to their total compensation in the table below (excluding amounts disclosed in the Change in Pension Value and Non-Qualified Deferred Compensation Earnings column).
2008 GRANTS OF PLAN-BASED AWARDS
The following table summarizes grants of stock options and PSUs as well as target annual and long-term cash incentive opportunities provided to Named Executive Officers in 2008. Stock option and PSU awards granted in 2008, which are included in the following table, rewarded 2007 performance. Details on PepsiCos annual and long-term incentive programs are described in the Compensation Discussion and Analysis. Stock option and PSU awards were granted on the date of Board approval.
2008 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table lists all outstanding stock option, PSU and RSU grants as of December 27, 2008 for Named Executive Officers. Details on the material terms and conditions of the equity awards reported in this table are described in the Long-Term Equity Incentive Compensation section of the Compensation Discussion and Analysis beginning on page 30 of this Proxy Statement. No stock options, PSUs or RSUs granted to a Named Executive Officer have been transferred to any other person, trust or entity. With the exception of the retention grants discussed in footnote (1) below, each of the stock option, PSU, and RSU awards listed in the table vest three years after the grant date subject to continued service with PepsiCo through the vesting date and, in the case of PSUs, achievement of applicable performance targets. For retirement eligible Named Executive Officers, each of the stock option, PSU, and RSU awards that are not retention related would vest pro-rata at retirement, although the PSUs would remain subject to achievement of applicable performance targets.
2008 OPTION EXERCISES AND STOCK VESTED
2008 PENSION BENEFITS
The Named Executive Officers participate in two pension plans: the PepsiCo Salaried Employees Retirement Plan (Salaried Plan), which is qualified under the Internal Revenue Code, and the Pension Equalization Plan (PEP), which is an unfunded, non-tax-qualified restoration plan. The Salaried Plan provides retirement benefits to essentially all U.S. salaried employees of the Company. The PEP restores benefits that may not be paid from the Salaried Plan due to limitations imposed by the Internal Revenue Code on qualified plan compensation or benefits. PEP benefits are payable to any salaried employee whose benefits are affected by these limits.
Both the Salaried Plan and the PEP have the same requirements for participation, benefits eligibility and vesting at five years of service. Benefits are determined using the same formula in both plans. Named Executive Officers do not receive any additional service or other enhancements in determining the form, timing or amount of their benefits.
Normal retirement benefits are payable at age 65 with five years of service. Unreduced early retirement benefits are payable as early as age 62 with 10 years of service. Reduced early retirement benefits are payable as early as age 55 with 10 years of service and are determined by reducing the normal retirement benefit by 4% for each year prior to age 62. Currently, Richard Goodman, Mike White and Al Carey have met the eligibility requirements for early retirement.
Upon retirement, pension plan benefits are payable as a single life annuity, a single lump sum distribution, a joint and survivor annuity, or a 10-year certain annuity. The value of the single life annuity beginning at a Named Executive Officers normal retirement date is determined by the following formula:
Amounts accrued and vested under the PEP after December 31, 2004 are automatically paid in the form of a single lump sum distribution upon retirement. The lump sum distribution to key employees is delayed six months after retirement to comply with Section 409A of the Internal Revenue Code. Pensionable earnings include base salary and annual incentive awards. Awards of stock options, RSUs, PSUs and performance-based long-term cash are not considered when determining pension benefits.
All salaried employees of the Company, including Named Executive Officers, who become disabled after 10 years of service and remain disabled until retirement, will receive service credit under the pension plan for their period of disability.
All salaried employees of the Company, including Named Executive Officers, are entitled to the following benefits if they die before payments are scheduled to begin:
A participant with five or more years of service who terminates employment prior to attaining age 55 and completing ten years of service is entitled to a deferred vested pension benefit. The deferred vested benefit is equal to the basic formula prorated by a fraction, the numerator of which is the participants credited years of service at termination of employment and the denominator of which is the participants potential years of credited service had the participant remained employed to age 65. Deferred vested benefits are payable commencing at age 65. However, a participant may elect to commence benefits as early as age 55 on an actuarially reduced basis to reflect the longer payment period. Deferred vested benefits accrued and vested under the PEP after December 31, 2004 are automatically paid in the form of an annuity at the later of age 55 or termination of employment.
The present value of the accumulated retirement benefits reported in column (d) of the 2008 Pension Benefits table represents the accumulated benefit obligation for benefits earned to date, based on age, service and earnings through the plans measurement date of December 31, 2008. Prior to 2008, the plans measurement date was September 30. In 2008, the measurement date was changed to the year end balance sheet date as required by Statement of Financial Accounting Standards No. 158 (Employers Accounting for Defined Benefit Pension and Other Post-Retirement Plans).
These amounts have been calculated using actuarial methods and assumptions (as shown below) in the fiscal year-end valuation under Statement of Financial Accounting Standards No. 87, Employers Accounting for Pensions with the assumption, required by the Securities and Exchange Commissions disclosure rules, that each Named Executive Officer remains in service until retiring at the earliest date when unreduced retirement benefits are available (i.e., age 62):
2008 NON-QUALIFIED DEFERRED COMPENSATION
The following table summarizes the deferred compensation balances of the Named Executive Officers under the PepsiCo Executive Income Deferral Program. These balances represent compensation that Named Executive Officers previously earned and chose to defer into the executive deferral program. The executive deferral program is a non-qualified and unfunded program. This means that a participants balances may be lost in the event of the Companys bankruptcy. At the time of election to defer, executives are required to choose to receive future payments on either a specific date or upon separation from service (i.e., termination or retirement). Executives earn a return based on investments in the phantom funds selected by the executives (listed in footnote (1) below) from a list of phantom funds made available by the Company. The Company does not provide a matching contribution on any deferrals or guarantee a return.
Payments are made in cash and may be received as a lump sum or in installments (quarterly, semi-annually or annually) over a period up to 20 years. Notwithstanding a participants payment election, deferrals made after 2000 are paid in a lump sum at the time of employment termination in cases when termination (other than retirement) occurs prior to the elected payment date. Payments of deferrals made after 2004 to executives who are key employees under Section 409A of the Internal Revenue Code are delayed six months following termination. Executives have one opportunity to voluntarily delay their original payment date, provided payment of amounts subject to Section 409A is delayed for at least five years. For additional detail on the PepsiCo Executive Income Deferral Program, refer to the Executive Deferral section of the Compensation Discussion and Analysis on page 34 of this Proxy Statement.
Termination of Employment/Retirement
None of our Named Executive Officers has any arrangement that provides for severance payments or benefits. In the event a Named Executive Officer retires, terminates or resigns from PepsiCo for any reason as of the fiscal year end, he or she would be entitled to:
In addition, our performance-based long-term cash awards fully vest upon retirement (at least age 55 with 10 or more years of service or at least age 65 with 5 or more years of service). Our long-term incentive equity awards contain provisions that accelerate vesting of option, PSU and RSU awards on a pro-rata basis upon retirement from age 55 through age 61 and that fully accelerate vesting of option, PSU and RSU awards upon death, disability or retirement on or after age 62. Even after vesting, PSUs remain subject to achievement of pre-established performance targets. In contrast, for retention grants, no accelerated vesting occurs upon retirement and only a pro-rata portion would have accelerated vesting in the event of death or long-term disability.
The following table sets forth, for each Named Executive Officer, the value of the unvested options, PSUs, RSUs, accrued dividend equivalents on PSUs and RSUs, and performance-based long-term cash awards that would vest if his or her employment terminated on December 26, 2008, the last business day of the 2008 fiscal year, due to termination, retirement, death or long-term disability:
Change in Control
As described in the Compensation Discussion and Analysis beginning on page 33 of this Proxy Statement, for all grants prior to 2007, stock options vest and RSUs and PSUs are paid upon a change in control of PepsiCo. In the event a participant is terminated without cause within two years following the change in control or the participants options are adversely modified, the participant receives a payment up to the present value of his or her outstanding pre-2007 options at the time of such event calculated using the Black-Scholes formula. For all grants beginning in 2007, PepsiCo implemented double trigger vesting, meaning unvested options and RSUs only vest if the participant is terminated without cause or resigns for good reason within two years following a change in control of PepsiCo or if the acquirer fails to assume or replace the outstanding awards.
The following table shows (i) the value of stock options, PSUs, RSUs and accrued dividend equivalents on PSUs and RSUs that would vest upon a change in control of PepsiCo without termination of employment and (ii) the incremental value of the stock options, PSUs, RSUs and accrued dividend equivalents on PSUs and RSUs that would vest upon a Named Executive Officers termination without cause or resignation for good reason at the time of the change in control plus the excess of the Black-Scholes value above the intrinsic value of already vested options that would become payable at that time. The combination of columns (i) and (ii) below results in a total change in control benefit listed in column (iii).
2008 DIRECTOR COMPENSATION
Directors who are employees of the Company receive no additional compensation for serving as directors. Non-employee directors receive the compensation described below.
Annual Compensation. On October 1, 2008, all active non-employee directors received an annual cash retainer of $100,000 and an annual equity award of $150,000. To reflect their additional responsibilities, the Audit Committee chair received an additional $40,000 annual retainer and the Compensation Committee chair, Nominating & Corporate Governance Committee chair and Presiding Director each received an additional $30,000 annual retainer. At its September 2008 meeting, an increase was recommended in the Audit Committee chairs additional annual retainer from $20,000 to $40,000 and an increase was recommended in the additional retainer of the other committee chairs and Presiding Director from $20,000 to $30,000 in order to keep the directors compensation competitive with the market. The Board of Directors approved these increases, and they are reflected in the October 1, 2008 retainers.
Directors may elect to receive their retainer in cash or defer their retainer into phantom units of PepsiCo Common Stock that are payable at the end of the deferral period selected by the directors. The $150,000 annual equity award consists of phantom units of PepsiCo Common Stock that are payable on the first day of the calendar quarter following the first anniversary of the directors retirement or resignation from PepsiCos Board of Directors. The number of phantom units of PepsiCo Common Stock granted to each director on October 1, 2008 was determined by dividing the $150,000 equity award value by the closing price of PepsiCo Common Stock on the date of grant. As such, each active director was granted 2,094 phantom stock units. Each phantom unit represents the right to receive one share of PepsiCo Common Stock and dividend equivalents are reinvested in additional phantom stock units. Beginning September 12, 2008, all outstanding phantom stock units are payable in shares of PepsiCo Common Stock. Phantom stock units were previously payable in cash.
Directors are reimbursed for expenses incurred to attend Board and committee meetings. Directors do not receive any meeting fees, nor do they have a retirement plan or receive any benefits such as life or medical insurance. Directors do receive business travel and accident insurance coverage. Directors are eligible for PepsiCo Foundation gifts to charity and matching of charitable contributions, both of which are generally available to all PepsiCo employees.
Initial Share Grant. All newly appointed non-employee directors receive a one-time grant of 1,000 shares of PepsiCo Common Stock when they join the Board. These shares must be held until they leave the Board.
Governance Features. Our compensation program for non-employee directors operates with the following governance features which are similar to programs for executive officers as described beginning on page 36 of the Compensation Discussion and Analysis section of this Proxy Statement:
Stock Ownership. To reinforce our ownership philosophy, non-employee directors are currently required to own shares of PepsiCo stock equal to $500,000. At its September 2008 meeting, the Nominating & Corporate Governance Committee recommended an increase in the stock ownership requirement from $200,000 to $500,000. The Board of Directors approved the increased stock ownership requirement effective October 1, 2008. Shares or phantom units of PepsiCo Common Stock held either directly by the non-employee director (or immediate family members), in the directors deferred compensation account, or in a trust for the benefit of immediate family members count towards satisfying the requirement. Unexercised stock options do not count towards satisfying the requirement. Non-employee directors have five years from their appointment or the date the increased ownership requirement became effective to meet their ownership guideline requirement. All of our non-employee directors have met or are on track to meet their objectives within the five-year time requirement.
Exercise and Hold Policy. To ensure that non-employee directors exhibit a strong commitment to PepsiCo share ownership, the Board of Directors adopted an Exercise and Hold Policy. This policy limits the aggregate amount of proceeds that a director may receive in cash upon exercise of options during each calendar year to 20% of the aggregate value of all the directors in-the-money vested options as of February 1 of that year. Any proceeds in excess of this 20% limit must be held in PepsiCo shares for at least one year after the date of exercise. This 20% limit is applied to the proceeds remaining after payment of taxes and the exercise price for the option. The Exercise and Hold Policy for directors is suspended once ownership guidelines are met.
Clawback Provision. Under the terms of our long-term incentive plans, non-employee directors who violate PepsiCos Worldwide Code of Conduct, our non-compete, non-solicitation and non-disclosure policies or who engage in gross misconduct may be subject to financial consequences. Our long-term incentive plans permit PepsiCo to cancel a non-employee directors outstanding equity awards, including both vested and unvested awards, if PepsiCo determines that the non-employee director has committed any such violation. The long-term incentive plans also permit PepsiCo to claw back all gains from exercised stock options and vested RSUs received within the 12 months preceding the violation.
Hedging. Our insider trading policy prohibits non-employee directors from using any strategies or products (such as derivative securities or short-selling techniques) to hedge against the potential changes in the value of PepsiCo stock.
Trading Windows. Non-employee directors can only purchase and sell PepsiCo stock and exercise stock options during approved trading windows.
2008 Non-Employee Director Compensation. The following table summarizes the compensation of the non-employee directors for the fiscal year ended December 27, 2008.
The number of vested and unvested stock options held by each non-employee director at fiscal year end 2008 is shown below:
EQUITY COMPENSATION PLANS
The following table provides information as of December 27, 2008 with respect to the shares of PepsiCo Common Stock that may be issued under our equity compensation plans.
Material Features of Plans Not Approved by Shareholders
1995 Stock Option Incentive Plan (the SOIP). The SOIP was adopted by the Board of Directors on July 27, 1995. Under the SOIP, stock options were granted to middle management employees generally based on a multiple of base salary. SOIP options were granted with an exercise price equal to the fair market value of PepsiCo Common Stock on the date of grant. SOIP options generally become exercisable at the end of three years and have a ten-year term. At year-end 2008, options covering 19,393,659 shares of PepsiCo Common Stock were outstanding under the SOIP. As of May 7, 2003, no further awards were made under the SOIP. The SOIP is included as Exhibit 10.14 in our 2002 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 7, 2003.
SharePower Stock Option Plan (the SharePower Plan). The SharePower Plan was adopted by the Board of Directors on July 1, 1989. Under the SharePower Plan, options were generally granted each year to virtually all of our full-time employees based on a formula tied to annual earnings and tenure. Each year, the Board of Directors authorized the number of shares required to grant options under the SharePower formula. SharePower options were granted with an exercise price equal to the fair market value of PepsiCo Common Stock on the date of grant. SharePower options generally become exercisable after three years and have a ten-year term. At year-end 2008, options covering 11,100,648 shares of PepsiCo Common Stock were outstanding under the SharePower Plan. As of May 7, 2003, no further awards were made under the SharePower Plan and it was superseded by the 2003 LTIP. SharePower awards are currently made under the 2007 LTIP. The SharePower Plan is included as Exhibit 10.13 in our 2002 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 7, 2003.
Director Stock Plan. The Director Stock Plan was adopted by the disinterested members of the Board of Directors on July 28, 1988. Under the Director Stock Plan, stock options were granted and shares of PepsiCo Common Stock were issued to non-management directors. Options granted under the plan were immediately exercisable and have a ten-year term. As of year-end 2008, options covering 343,178 shares of PepsiCo Common Stock were outstanding under the Director Stock Plan. As of May 7, 2003, no further awards were made under the Director Stock Plan and it was superseded by the 2003 LTIP. The Director Stock Plan is included as Exhibit 4.3 in Post-Effective Amendment No. 6 to the Form S-8 related to such plan, filed with the Securities and Exchange Commission on September 4, 2002.
PUBLIC ACCOUNTANTS (PROXY ITEM NO. 2)
The Audit Committee has appointed KPMG LLP (KPMG) as PepsiCos independent registered public accountants for 2009, subject to ratification by shareholders. KPMG has served as PepsiCos independent registered public accountants since 1990.
Representatives of KPMG will be available to answer appropriate questions at the Annual Meeting and are free to make statements during the meeting.
The Board of Directors recommends that shareholders vote FOR the ratification of the appointment of KPMG as PepsiCos independent registered public accountants for 2009.
COMPENSATION PLAN (PROXY ITEM NO. 3)
We are asking shareholders to approve the PepsiCo, Inc. Executive Incentive Compensation Plan (the EICP), as amended and restated. The Compensation Committee and Board of Directors previously approved the amended and restated EICP in March 2009, subject to shareholder approval.
The EICP is being submitted to you for approval to preserve the tax deductibility of cash incentive awards to executive officers under Section 162(m) of the Internal Revenue Code. Section 162(m) limits to $1 million per year the deductibility of compensation to the Chief Executive Officer and the next three most highly compensated executive officers other than the Chief Financial Officer. This limit does not apply to compensation defined in Section 162(m) as qualified performance-based compensation. In order for awards under the EICP to constitute qualified performance-based compensation, shareholders must approve the EICP every five years. The material terms of the EICP, formerly called the 2004 Executive Incentive Plan (the 2004 EICP), were last approved by
shareholders in 2004, and the material terms of the performance goals of the EICP are now being resubmitted for shareholder approval at this Annual Meeting to satisfy this Section 162(m) requirement. If shareholders do not re-approve the material terms of the EICP, it will be cancelled and the bonuses awarded to our Chief Executive Officer and the next three most highly compensated executive officers other than the Chief Financial Officer will not be fully deductible for tax purposes pursuant to Section 162(m).
For purposes of Section 162(m), the material terms of the performance goals that must be approved include: (i) the employees eligible to receive compensation under the EICP, (ii) a description of the business criteria on which the performance goal is based and (iii) either the maximum amount of compensation that can be paid to a covered employee under the performance goal or the formula used to calculate the amount of compensation that could be paid if the performance goal is satisfied. The material terms of the EICP are discussed in the pages that follow.
The EICP provides performance-related incentive compensation opportunities to our executive officers and other participating employees. Awards under the EICP are designed to provide annual incentives that drive Company-wide and business unit performance. The EICP rewards outstanding performance by those individuals whose decisions and actions affect the sustainable growth and profitability of the Company. The performance criteria set forth in the EICP are intended to align the interests of participating employees with the interests of shareholders.
The terms of the EICP are substantially similar to the 2004 EICP with the following material exceptions:
The summary of the EICP below also notes additional changes from the 2004 EICP.
Summary of the Executive Incentive Compensation Plan
We have summarized below the principal features of the EICP. This summary is qualified in its entirety by reference to the complete text of the EICP set forth in Exhibit B to this Proxy Statement.
Administration. The EICP is administered by the Compensation Committee, which is composed entirely of independent directors who meet the criteria of outside director under Section 162(m) of the Internal Revenue Code and non-employee director under Section 16 of the Securities Exchange Act of 1934. The Compensation Committee selects the participants, determines the time when awards will be granted, sets the performance goals, performance measures, target awards and other terms and conditions of awards, certifies the degree to which the performance goals for earning awards have been met, and determines whether an award should be reduced or eliminated.
Eligibility and Participation. For each performance period, the Compensation Committee selects the executives who are eligible for participation in the EICP. The performance period is one fiscal year unless otherwise established by the Compensation Committee. Generally, all executive officers and other key executives of PepsiCo who are within the Compensation Committees purview are eligible to participate in the EICP. For 2009, our 11 executive officers will participate in the EICP. PepsiCo had approximately 3,400 executives worldwide at 2008 year-end. The Compensation Committee selects eligible participants no later than 90 days after the beginning of the year (or, if shorter, before 25 percent of the performance period has elapsed).
Performance Goals. The amount of awards payable to participants under the EICP is based on the degree of achievement of objective performance goals that the Compensation Committee establishes within 90 days after commencement of the performance period (or, if shorter, before 25 percent of the performance period has elapsed). Under the EICP, the performance goals may be based upon one or more of the following performance measures:
Performance goals may be based upon the performance of PepsiCo as a whole, an individual participant, or a subsidiary, division, department, region, function or business unit of the Company. Performance goals may be absolute or may be relative to a peer group or index. Performance goals need not be the same for all participants and different performance measures may be given different weights. For purposes of exercising negative discretion in reducing the amount of any award, the Compensation Committee may establish other subjective or objective performance goals, including individual performance goals, for awards to the extent permissible for awards to still be qualified performance-based compensation under Section 162(m).
The Compensation Committee may appropriately adjust the performance goals, or the manner in which performance will be measured against the performance goals, based on qualifying criteria selected by the Compensation Committee to the extent permissible for awards to still be qualified performance-based compensation under Section 162(m). Such criteria may include acquisition-related charges; litigation, claim judgments, settlements or tax settlements; the effect of changes in tax law, changes in accounting principles or other such laws or provisions affecting reported results; accruals for reorganization and restructuring programs; gains or losses from discontinued operations; consolidated operating results attributable to acquisitions; and any extraordinary non-recurring items as described in Accounting Principles Board Opinion No. 30 and/or in managements discussion and analysis of financial condition and results of operations appearing in the annual report to shareholders for the applicable year.
Determination of Awards. Following the conclusion of the performance period, the Compensation Committee will review actual performance and certify the degree to which the performance goals applicable to the awards have been met. Notwithstanding attainment of performance goals, the Compensation Committee has the discretion to reduce, but not increase, some or all of an award that would otherwise be paid.
Payment of Awards. Awards are payable in cash as soon as practicable following the conclusion of the performance period and the Compensation Committees determination of the award amounts. The Compensation Committee may permit or require the deferral of award amounts and may also subject the payout of awards to vesting conditions. In addition, the amendments to the EICP provide the Compensation Committee the discretion to pay awards in stock, restricted stock, stock options or other equity-based awards under the shareholder-approved 2007 Long-Term Incentive Plan or successor plan.
Award Maximum. No participant may receive an aggregate award of more than $9 million under the EICP in any year. This limitation is unchanged from the 2004 EICP.
Amendment and Termination. The Compensation Committee may amend or terminate the EICP so long as such action does not adversely affect any rights or obligations with respect to awards already outstanding under the EICP. Shareholder approval is required for any amendment that (i) increases the maximum amount per year which can be paid to any one participant under the EICP, (ii) changes the performance measures on which the performance goals may be based, or (iii) modifies the class of persons eligible for participation in the EICP. The EICP will continue in effect until terminated by the Compensation Committee.
U.S. Federal Income Tax Consequences. Under the Internal Revenue Code, a grant of an award under the EICP would have no federal income tax consequences. The payment of the award is taxable to a participant as ordinary income in the year of receipt. PepsiCo will generally be entitled to a corresponding U.S. federal income tax deduction for the amounts constituting ordinary income to the participant as long as the EICP and the award satisfy the requirements of Section 162(m) of the Internal Revenue Code. It is intended that awards payable under the EICP to participants covered by Section 162(m) will be qualified performance-based compensation.
Awards under the EICP are determined based on actual future performance. Therefore, future actual awards cannot now be determined. Set forth below is a table that shows amounts that were earned under the 2004 EICP based on 2008 performance. These amounts reflect both the 2008 annual incentive awards and, for all executive officers other than Ms. Nooyi, the 2008 long-term cash award that is paid out in three equal annual installments subject to continued service. Ms. Nooyi is not eligible for a long-term cash award. Please see the Compensation Discussion and Analysis and 2008 Summary Compensation Table for additional detail.
The Board of Directors recommends that shareholders vote FOR the approval of the PepsiCo, Inc. Executive Incentive Compensation Plan.
If proposals are submitted by more than one shareholder, PepsiCo will only list the primary filers name, address and number of shares held. We will provide information about co-filers promptly if we receive a request for such information.
BEVERAGE CONTAINER RECYCLING (PROXY ITEM NO. 4)
As You Sow, 311 California Street, Suite 510, San Francisco, CA 94104, who has the power to represent 98 shares of PepsiCo Common Stock, has submitted the following resolution for the reasons stated:
WHEREAS: PepsiCo repeatedly emphasizes its commitment to environmental leadership. However, most Pepsi beverage containers in the U.S. continue to be landfilled, incinerated or littered, thereby contributing to depletion of natural resources, environmental pollution, and reducing the U.S. supply of plastic bottle and aluminum can feedstocks for recycling.
We are pleased PepsiCo met its goal to incorporate 10% recycled content resin into its plastic beverage containers in the U.S. by year-end 2005, and maintained this goal through 2008. We believe both recycled content and container recovery goals are essential to an effective recycling strategy. PepsiCo joined with its beverage industry peers to form the Beverage Packaging Environmental Council (BPEC) in order to study declining beverage container recovery rates. However, BPEC has failed to adopt a public, quantitative beverage container recovery goal. In contrast to PepsiCo, major beverage firms Coca-Cola Co. and Nestle Waters North America have established public, quantitative beverage container recovery goals.
Unfortunately, the U.S. recycling rates for beverage containers have declined significantly. The National Association for PET Container Resources estimates the recovery rate for PET plastic bottles, including beverage containers, declined from 39.7% in 1995 to 23.5% in 2006. The Aluminum Association and other trade groups reported the aluminum can recycling rate was 54% in 2007, down from a level of 65% reported by the Container Recycling Institute for 1992.
Yet, significantly higher container recovery rates are possible. In 11 U.S. states with container deposit legislation (or bottle bills), beverage container recycling rates of 70% and higher are being achieved, levels on average three times as high as in states without deposits. In Norway and Sweden, beverage companies have achieved container recovery rates of 80% and higher.
Nevertheless, PepsiCo actively opposes container deposit systems without putting forth a sustainable plan capable of achieving comparable U.S. recovery rates.
BE IT RESOLVED THAT Shareowners of PepsiCo request that the board of directors review the efficacy of its container recycling program and prepare a report to shareholders, by September 1, 2009, on a recycling strategy that includes a publicly stated, quantitative goal for enhanced rates of beverage container recovery and recycling in the U.S. The report, to be prepared at reasonable cost, may omit confidential information.
We believe the requested report is in the best interest of PepsiCo and its shareholders. Leadership in this area may protect the Pepsi brands and improve the companys reputation. We anticipate the report will detail the means and feasibility of achieving, as soon as practicable, a sustainable, quantitative, beverage container recovery goal. The report should:
PepsiCo Response: Year after year, PepsiCo continues to play an important and active role in support of recycling. However, we fully agree that more needs to be done to recover containers.
Over the past few years, PepsiCo has taken strong steps to increase recycling, including:
PepsiCo believes we need a multi-faceted and comprehensive approach to recycling that includes public education, government partnership and enhancement of infrastructure, as well as public policy changes and model programs. These efforts require public-private partnerships, community engagement and on-going input and cooperation from a variety of stakeholders. Our strategy reaffirms our continued long term commitment to increase recycling and our belief in a shared responsibility in supporting the recycling of beverage containers.
The Board of Directors recommends that shareholders vote AGAINST this resolution.
REPORT ON IMPACTS OF GENETICALLY ENGINEERED PRODUCTS (PROXY ITEM NO.5)
The Adrian Dominican Sisters, 1257 East Siena Heights Drive, Adrian, Michigan 49221-1793, who own 3,400 shares of PepsiCo Common Stock, has submitted the following resolution for the reasons stated:
RESOLVED: Shareholders request that an independent committee of the Board review Company policies and procedures for monitoring genetically engineered (GE) products and report (at reasonable cost and omitting proprietary information) to shareholders within six months of the annual meeting on the results of the review, including:
Pepsico products contain corn, rice, canola, soy and sugar, potentially GE. This proposal received 8.44% shareholder vote in 2008.
Court rulings call into question the adequacy of USDAs oversight of GE crops
PepsiCo Response: PepsiCo continues to be dedicated to producing high quality, great tasting food and beverage products in every part of the world. PepsiCo strives to ensure all products meet or exceed stringent safety and quality standards and uses only ingredients that are safe and approved by applicable government and regulatory authorities. We believe that genetically engineered products can play a role in generating positive economic, social and environmental contributions to societies around the world; particularly in times of food shortages. Approval of genetically modified foods differs from country to country regarding both use and labeling. For this reason, PepsiCo adheres to all relevant regulatory requirements regarding the use of genetically modified food crops and food ingredients within the countries it operates.
The United States Food and Drug Administration (FDA) has concluded that approved foods developed through biotechnology, such as corn, are as safe for consumption as traditionally developed foods and may be used as ingredients in other foods in the United States. This finding is supported by significant scientific consensus. As a result, along with most other food companies in the United States, PepsiCo has products that may contain genetically engineered ingredients. PepsiCos use of these genetically engineered ingredients is fully compliant with FDA requirements and we have strong practices and protocols in place to ensure that only ingredients approved by the FDA as safe are used in our products.
To avoid contamination by crops not approved for food ingredients, PepsiCo tests ingredients and works closely with its suppliers and regulatory authorities. To address any potential issues, PepsiCo maintains a robust traceability and retrieval process. We also closely monitor and carefully follow government safety regulations. Our priority is to ensure the safety of our products, including the integrity of all ingredients used in PepsiCo products.
The issue of genetically engineered crops and ingredients has been extensively studied and continues to be researched by scientists. As PepsiCo maintains its own high safety standards and relies on government agencies worldwide to effectively regulate food standards, we do not believe the report requested by the proponents would serve any significant purpose to promote safety.
The Board of Directors recommends that shareholders vote AGAINST this resolution.
CHARITABLE CONTRIBUTIONS REPORT (PROXY ITEM NO.6)
Estella Salvatierra, 2739 Woodley Place NW, Washington, DC 20008-1518, who owns 255 shares of PepsiCo Common Stock, has submitted the following resolution for the reasons stated:
Whereas, charitable contributions should enhance the image of our company in the eyes of the public. Because there is no system of accountability for charitable contributions, Company executives may use our Companys assets for purposes that are not shared by and may harm the interest of the Company, thereby potentially decreasing shareholder value.
Whereas, Company executives have allowed the Companys assets to be given away to organizations without providing details to shareholders on how those assets were actually used by the organization. According to the 2007 PepsiCo Annual Report, Company executives gave away $74.8 million of the Companys assets in 2007. Because there is no accountability on how the Companys charitable contributions are actually used, some of those assets may be misused and harm the value of the Companys stock.
Resolved: That the shareholders request the Company to provide a semiannual report, omitting proprietary information and at reasonable cost, disclosing: the Companys standards for choosing which organizations receive the Companys assets in the form of charitable contributions; business rationale and purpose for each of the charitable contributions; personnel who participated in making the decisions to contribute; the benefits to the Company and beneficiaries produced by Company contributions; and a follow-up confirming that the organization actually used the contributions for the purpose stated.
Current disclosure is insufficient to allow the Companys Board and shareholders to evaluate fully the proper use of corporate assets by outside organizations and how those assets should be used, especially for controversial causes. For example, PepsiCo, Inc. is the leading corporate sponsor of Parents, Families and Friends of Lesbians and Gays, Inc. (PFLAG).
PepsiCo Response: PepsiCo believes that shareholders should be provided with information on how their company is spending funds for charitable purposes. PepsiCo has been providing this information since 1999.
On PepsiCos website, www.pepsico.com under the Purpose section, PepsiCo provides comprehensive information regarding the numerous activities and charitable donations of PepsiCo and the PepsiCo Foundation. Such information includes amounts donated, policies and procedures, governance, charitable organizations supported, rationale for giving, and the primary platforms to be achieved with such corporate contributions. The current platforms of the PepsiCo Foundation are improved health, environment and inclusion. In addition, PepsiCo has recently made corporate contributions to support health and wellness, diversity, education, and employee initiatives, as well as donations relating to disaster relief. Furthermore, the website is updated throughout the year to provide information relating to significant grants.
The Company believes that the enhanced disclosure already provided on the Companys website is the most efficient and effective use of the Companys resources.
The Board of Directors recommends that shareholders vote AGAINST this resolution.
ADVISORY VOTE ON COMPENSATION (PROXY ITEM NO.7)
TIAA-CREF, 730 Third Avenue, New York, NY 10017, who owned 15,432,041 shares of the Companys common stock as of December 2008, has submitted the following resolution for the reasons stated:
RESOLVED, that the shareholders of PepsiCo, Inc. (the Company) recommend that the board of directors adopt a policy requiring that the proxy statement for each annual meeting contain a proposal, submitted by and supported by Company management, seeking an advisory vote of shareholders to ratify and approve the board Compensation Committee Report and the executive compensation policies and practices set forth in the Companys Compensation Discussion and Analysis.
Investors have long been concerned about inappropriate executive compensation and the current financial crisis has highlighted the importance of the link between financial incentives and company performance. Over the past two years, shareholders have filed over 100 Advisory Vote resolutions, with many garnering over 50% support.
In 2007 TIAA-CREF became the first U.S. institution to implement an Advisory Vote, offering our participants with a vote and a mechanism to provide feedback to the board and management through a website. TIAA-CREF trustees have found the vote and participant feedback relevant and useful in their compensation planning.
In 2008 Aflac became the first U.S. listed company to provide its shareholders with an Advisory Vote resulting in a 93% vote in favor. This result indicates that investors will provide support where appropriate and will not automatically vote against compensation plans.
Congress has initiated legislation to mandate an Advisory Vote for all companies. We strongly believe that a market-based solution, rather than legislation, would provide both companies and shareholders with a more flexible alternative. It is for this reason that we have asked PepsiCo to take a leadership role in voluntarily adopting an Advisory Vote.
TIAA-CREF does not believe that shareholders should be in the business of setting compensation, and this proposal does not seek to interfere with the process. However, we believe that the results of an Advisory Vote would help the board and management understand shareholder views on the quality of the companys executive compensation disclosure.
We believe that a company that clearly explains its compensation philosophy and metrics, reasonably links pay to performance and communicates effectively to investors will, like Aflac, receive a positive response to a management-sponsored Advisory Vote.
Shareholders should not be required to withhold votes from compensation committee members when executive compensation is at issue. With more companies requiring directors to receive majority support to be elected, investors must exercise care and restraint in withholding or voting against board members. Compensation should be addressed with a scalpel, not a sledge hammer, and an Advisory Vote provides shareholders with an appropriate tool to do so.
We urge our board to provide shareholders with an Advisory Vote on executive compensation and ask our fellow shareholders to join us by voting FOR this proposal.
PepsiCo Response: We believe that PepsiCos executive compensation programs, described in the Compensation Discussion and Analysis, are responsibly designed and administered by the Compensation Committee with strict corporate governance standards to support PepsiCos pay-for-performance philosophy. We also believe that our shareholders currently possess effective tools to voice their support for, or concerns with, executive compensation at PepsiCo. In contrast, we do not believe that a shareholder advisory vote would convey meaningful information or specific concerns that the Company and the Compensation Committee could address.
Furthermore, leaders of the U.S. Congress have made it clear that they intend to recommend legislation in Congress current session requiring a shareholder advisory vote on executive compensation that would apply to all U.S. public companies. (Currently only companies that receive governmental assistance under the Troubled Asset Relief Program (TARP) are required to have a shareholder advisory vote on executive compensation.) We believe that adopting an advisory vote procedure ahead of this potential legislation would be premature. We believe that the Company and shareholders are best served by monitoring legislative developments and promptly adopting any new shareholder advisory vote procedures that are mandated by law.
In addition, we believe adoption of an advisory vote resolution is unnecessary because the Compensation Committee applies strict governance standards in administering executive compensation and benefit programs. PepsiCos compensation and benefits programs for executive officers operate with many strong governance features including:
We also believe that adoption of an advisory vote resolution is unnecessary because our shareholders have many ways to communicate their views to PepsiCo regarding executive compensation, including:
The Board of Directors recommends that shareholders vote AGAINST this resolution.
The Board of Directors knows of no other matters to be brought before the Annual Meeting. If any other business should properly come before the Annual Meeting or any adjournment thereof, the persons named in the proxy will vote on such matters according to their best judgment.
2010 SHAREHOLDER PROPOSALS
PepsiCo welcomes comments or suggestions from its shareholders. If a shareholder wants to have a proposal formally considered at the 2010 Annual Meeting, and included in the Proxy Statement for that meeting, we must receive the proposal in writing on or before November 25, 2009. If a proposal is received by February 1, 2010, in our discretion, we may include it in the 2010 proxy materials.
PepsiCo will pay the costs relating to this Proxy Statement, the proxy and the Annual Meeting.
In addition to the solicitation of proxies by mail and electronically, PepsiCo intends to ask brokers and bank nominees to solicit proxies from their principals and will pay the brokers and bank nominees their expenses for the solicitation. Employees of PepsiCo may also solicit proxies. They will not receive any additional pay for the solicitation.
The Annual Report to Shareholders for 2008, including financial statements, was delivered or made available with this Proxy Statement or was previously delivered to shareholders. If you have not received the Annual Report, please contact PepsiCos Manager of Shareholder Relations, at PepsiCo, Inc., 700 Anderson Hill Road, Purchase, NY 10577 or (914) 253-3055. The Annual Report can also be found on our website at www.pepsico.com by clicking on Investors Annual Reports.
A copy of PepsiCos Annual Report on Form 10-K for the fiscal year ended December 27, 2008 (including the financial statements, schedules and a list of exhibits) will be sent to any shareholder without charge by contacting the Company at the address or phone number listed above. You also may obtain our Annual Report on Form 10-K over the Internet at the Securities and Exchange Commissions website, www.sec.gov, or at our website, www.pepsico.com by clicking on Investors SEC Filings.
Please vote your shares promptly through any of the means described on the proxy card or the Notice of Annual Meeting.
By order of the Board of Directors,
Larry D. Thompson
As of November 14, 2008
The Board of Directors (the Board) of PepsiCo, Inc. (the Corporation), acting on the recommendation of its Nominating and Corporate Governance Committee, has developed and adopted certain corporate governance principles (the Guidelines) establishing a common set of expectations to assist the Board and its Committees in performing their duties in compliance with applicable requirements. In recognition of the continuing discussions about corporate governance, the Board will review and, if appropriate, revise these Guidelines from time to time.