PG » Topics » Summary

This excerpt taken from the PG DEF 14A filed Aug 30, 2005.
Summary

      This section summarizes the Committee’s full report.

      The Company’s executive compensation is based on a few simple principles: pay competitively, pay for performance, and design compensation programs that support the business. These principles have served the Company well, and have enabled the Company to deliver strong shareholder value increases over time. Additionally, these principles have assisted the Company in developing and retaining extraordinary executive talent — an achievement few other major corporations have matched.

      At the executive level, a substantial portion of total compensation is comprised of variable, at-risk incentive programs, with the majority based on the Company’s long-term success. Company executives are compensated at competitive levels with individuals performing similar jobs in comparable companies and achieving similar results. This conclusion is based on comprehensive surveys by Hewitt Associates, which is an independent outside compensation consulting firm, and on the opinion of Frederic W. Cook & Co., a retained consultant who does no other work with the Company or its management and reports exclusively to this Committee.

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      We compare the Company’s pay structure and its business, financial and stock price performance to a benchmark group (“Compensation Survey Group”) that consists of two kinds of companies – those we compete with in the marketplace and those outside our industry with whom we compete for talent. The group includes 25 companies. We periodically evaluate the Compensation Survey Group’s composition to ensure it remains relevant, and update it accordingly. For this past year the companies were:

         
3M
Altria Group
Boeing
Bristol-Myers Squibb
Coca-Cola
Colgate-Palmolive Co.
Du Pont
Exxon Mobil
General Electric
  General Mills
General Motors
Gillette Co.
Hewlett-Packard
IBM
Johnson & Johnson
Kimberly Clark Corp.
Kraft Foods Inc.
  Lockheed Martin
Merck
Motorola
PepsiCo
Pfizer
Sara Lee Corporation
Verizon Communications
Wyeth

      There were no changes to the Compensation Survey Group compared to fiscal year 2003-04.

      For fiscal year 2004-05, the Committee established compensation targets for the Company’s executive officers at the median of the Compensation Survey Group, based on the latest available data. Depending on results, actual compensation can be below as well as above target. Actual total compensation was above these targets because of strong business and financial performance at the Company.

 
Components

      There are three major components of the Company’s executive compensation program: base salaries, annual incentives and long-term incentives. All these components are designed to deliver year-to-year and long-term shareholder value increases. In fact, the vast majority of executives’ compensation is at risk, vests over time, and is tied directly to the Company’s long-term success.

 
Criteria and Company Results

      The Company sets compensation levels each year based on five criteria:

  •  The Company’s absolute performance, measured by unit volume growth, net sales growth, earnings per share growth, free cash flow growth and total shareholder return;
 
  •  The Company’s performance relative to its established goals;
 
  •  The Company’s performance relative to its Compensation Survey Group;
 
  •  Compensation targets for specific positions set at the median of the Compensation Survey Group; and
 
  •  Individual contributions to Company performance.

      Additionally, we expect executives to uphold the fundamental principles embodied in the Company’s Statement of Purpose, Values and Principles, plus the Worldwide Business Conduct Manual, the Sustainability Report, and the Environmental Quality Policy. These fundamental principles include a commitment to integrity, maximizing the development of each individual, developing a diverse organization, and continually improving the environmental quality of the Company’s products and operations. In upholding these fundamental principles, executives not only contribute to their own success, but also help ensure that the Company’s business, employees, shareholders, and the communities in which the Company operates will prosper.

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      In terms of the Company’s performance against these criteria, results during fiscal year 2004-05 were once again very strong. More specifically, our compensation decisions were influenced by the Company’s results on the following key performance metrics.

  —  Volume +8%
 
  —  Net sales +10%; up 8% excluding the impact of favorable foreign currency rate movements
 
  —  Earnings per share +15%
 
  —  Free cash flow of 90% of net earnings

      The Company’s performance on each of these criteria met or exceeded previously established targets. We also considered other indicators of the health of the Company’s business. Market shares continue to increase broadly across the businesses. In addition, despite a challenging cost environment, particularly on certain commodities including petroleum related products, the Company improved its cost structure. Progress was also broad based as all Global Business Units, each of the 16 largest countries and each of the 17 billion dollar brands grew volume in fiscal year 2004-05. Total shareholder return was in the top half of the peer group.

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