Procter & Gamble Company DEF 14A 2013
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant x
Filed by a Party other than the Registrant ¨
Check the appropriate box:
The Procter & Gamble Company
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
THE PROCTER & GAMBLE COMPANY
P.O. Box 599
Cincinnati, Ohio 45201-0599
August 23, 2013
Fellow Procter & Gamble Shareholders:
It is my pleasure to invite you to this years annual meeting of shareholders, which will be held on Tuesday, October 8, 2013.
The meeting will start at 9:00 a.m., Eastern Daylight Time, at the Procter & Gamble Hall at the Aronoff Center for the Arts, 650 Walnut Street, in Cincinnati.
We appreciate your continued confidence in our Company and look forward to seeing you on October 8.
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
THE PROCTER & GAMBLE COMPANY
P.O. Box 599
Cincinnati, Ohio 45201-0599
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
August 23, 2013
Purposes of the meeting:
Who may attend the meeting:
Only shareholders, persons holding proxies from shareholders, and invited representatives of the media and financial community may attend the meeting.
Shareholders attending the meeting who are hearing-impaired should identify themselves during registration so they can sit in a special section where an interpreter will be available.
What to bring:
If your shares are registered in your name, and you requested and received a printed copy of the proxy materials, you should bring the enclosed Admission Ticket to the meeting. If you received a Notice of Internet Availability of Proxy Materials and will not be requesting a printed copy of the proxy materials, please bring that Notice with you as your Admission Ticket.
If your shares are held in the name of a broker, trust, bank, or other nominee, you will need to bring a proxy or letter from that broker, trust, bank, or nominee confirming that you are the beneficial owner of those shares.
Audiocast of the annual meeting:
If you are not able to attend the meeting in person, you may join a live audiocast of the meeting on the Internet by visiting www.pg.com/investors at 9:00 a.m., Eastern Daylight Time, on October 8, 2013.
August 9, 2013 is the record date for the meeting. This means that owners of Procter & Gamble stock at the close of business on that date are entitled to:
Information About the Notice of Internet Availability of Proxy Materials:
Again this year, instead of mailing a printed copy of our proxy materials, including our Annual Report, to each shareholder of record, we have decided to provide access to these materials in a fast and efficient manner via the Internet. This reduces the amount of paper necessary to produce these materials, as well as the costs associated with mailing these materials to all shareholders. On August 23, 2013, we began mailing a Notice of Internet Availability of Proxy Materials (the Notice) to shareholders of record as of August 9, 2013, and we posted our proxy materials on the website referenced in the Notice (www.proxyvote.com). As more fully described in the Notice, shareholders may choose to access our proxy materials at www.proxyvote.com or may request a printed set of our proxy materials. In addition, the Notice and website provide information regarding how you may request to receive proxy materials in printed form by mail or electronically by email on an ongoing basis. For those who previously requested printed proxy materials or electronic materials on an ongoing basis, you will receive those materials as you requested.
Shareholders of record who have the same address and last name and have not previously requested electronic delivery of proxy materials will receive a single envelope containing the Notices for all shareholders having that address. The Notice for each shareholder will include that shareholders unique control number needed to vote his or her shares. This procedure reduces our printing costs and postage fees. If, in the future, you do not wish to participate in householding and prefer to receive your Notice in a separate envelope, please call us toll-free at 1-800-742-6253 in the U.S., or inform us in writing at: The Procter & Gamble Company Shareholder Services, c/o Computershare, Inc., P.O. Box 43078, Providence, RI 02940, or by email at P&G@computershare.com. We will respond promptly to such requests.
For those shareholders who have the same address and last name and who request to receive a printed copy of the proxy materials by mail, we will send only one copy of such materials to each address unless one or more of those shareholders notifies us, in the same manner described above, that they wish to receive a printed copy for each shareholder at that address.
Beneficial shareholders can request information about householding from their banks, brokers, or other holders of record.
Your vote is important. Please vote your proxy promptly so your shares can be represented, even if you plan to attend the annual meeting. You can vote by Internet, by telephone, or by requesting a printed copy of the proxy materials and using the enclosed proxy card.
Our proxy tabulator, Broadridge Financial Solutions, must receive any proxy that will not be delivered in person to the annual meeting by 11:59 p.m., Eastern Daylight Time on Monday, October 7, 2013.
By order of the Board of Directors,
DEBORAH P. MAJORAS
Chief Legal Officer and Secretary
2013 Annual Meeting of Shareholders
Voting Matters and Board Recommendations
This summary contains highlights of certain information in this proxy statement. However, because it is only a summary, it does not contain all the information that you may wish to consider prior to voting. Please review the complete proxy statement and the Companys Annual Report on Form 10-K for more detailed information.
Our Director Nominees
You are being asked to vote on the election of these 11 Directors. Additional information about each Directors background, skills and experience can be found on pages 59.
Executive Compensation Highlights
We Emphasize Pay for Performance by aligning incentives with business strategies to reward executives who achieve or exceed Company, business unit (Business Unit) and individual goals, while discouraging excessive risk-taking by removing any incentive to focus on a single performance goal to the detriment of others.
Average Mix of Key Components of NEO Compensation by Type, Length, and Form1
We Pay Competitively by setting target compensation opportunities to be competitive with other multinational corporations of similar size, value, and complexity.
We Focus on Long-Term Success by including equity as a cornerstone of our executive pay programs and by using a combination of short-term and long-term incentives to ensure a strong connection between Company performance and actual compensation realized.
1 The breakdown of FY 2012-13 NEO Compensation excludes Mr. Lafleys compensation for his role as Chief Executive Officer from May 23, 2013 through June 30, 2013.
2 The STAR Bonus is considered a cash program. However, participants may elect to receive their bonus in equity instead of cash.
As more fully described in the Notice, the Board of Directors of The Procter & Gamble Company (the Company) has made these materials available to you over the Internet or, upon your request, has mailed you printed versions of these materials in connection with the Companys 2013 annual meeting of shareholders, which will take place on October 8, 2013. The Notice was mailed to Company shareholders beginning August 23, 2013, and our proxy materials were posted on the website referenced in the Notice on that same date. The Company, on behalf of its Board, is soliciting your proxy to vote your shares at the 2013 annual meeting of shareholders. We solicit proxies to give shareholders of record an opportunity to vote on matters that will be presented at the annual meeting. In this proxy statement, you will find information on these matters, which is provided to assist you in voting your shares.
Who can vote?
You can vote if, as of the close of business on Friday, August 9, 2013, you were a shareholder of record of the Companys:
Each share of Company stock gets one vote. On August 9, 2013, there were issued and outstanding:
For participants in The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan and/or The Procter & Gamble Savings Plan:
If you are a participant in The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan and/or The Procter & Gamble Savings Plan, you can instruct the Trustees how to vote the shares of stock that are allocated to your account. If you do not vote your shares, the Trustees will vote them in proportion to those shares for which they have received voting instructions. Likewise, the Trustees will vote shares held by the trust that have not been allocated to any account in the same manner.
For participants in The Procter & Gamble Shareholder Investment Program and/or The Procter & Gamble International Stock Ownership Program:
If you are a participant in The Procter & Gamble Shareholder Investment Program and/or The Procter & Gamble International Stock Ownership Program, you can vote the shares of common stock held for your account through one of the proxy voting options set forth under How do I vote by proxy? below.
How do I vote by proxy?
Most shareholders can vote by proxy in three ways:
Please see the Notice or the information your bank, broker, or other holder of record provided you for more information on these options.
If you authorize a proxy to vote your shares over the Internet or by telephone, you should not return a proxy card by mail (unless you are revoking your proxy).
If you vote by proxy, your shares will be voted at the annual meeting in the manner you indicate on your proxy card. If you sign your proxy card but do not specify how you want your shares to be voted, they will be voted as the Board recommends.
Can I change or revoke my vote after I return my proxy card?
Yes. You can change or revoke your proxy by Internet, telephone, or mail prior to 11:59 p.m., Eastern Daylight Time, on Monday, October 7, 2013, or by attending the annual meeting and voting in person.
Can I vote in person at the annual meeting instead of voting by proxy?
Yes. However, we encourage you to vote your proxy by Internet, telephone, or mail prior to the meeting.
Election of DirectorsAs provided in the Companys Amended Articles of Incorporation, each of the 11 nominees for Director who receives a majority of votes cast will be elected as a member of the Board. A majority of votes cast means that the number of shares cast for a nominee must exceed the number of votes cast against that nominee. Abstentions and broker non-votes will have no effect. Pursuant to the By Laws of the Board of Directors, if a non-incumbent nominee for Director receives a greater number of votes cast against than votes cast for, such nominee shall not be elected as a member of the Board. Any incumbent nominee for Director who receives a greater number of votes cast against than votes cast for shall continue to serve on the Board pursuant to Ohio law, but shall immediately tender his or her resignation as a Director to the Board. Within 90 days, the Board will decide, after taking into account the recommendation of the Governance & Public Responsibility Committee (in each case excluding the nominee in question), whether to accept the resignation. Absent a compelling reason for the Director to remain on the Board, the Board shall accept the resignation. The Boards explanation of its decision shall be promptly disclosed on a Form 8-K submitted to the Securities and Exchange Commission (SEC).
The Board Proposal to Amend the Companys Code of Regulations to Reduce Certain Supermajority Voting Requirements requires the affirmative vote of a majority of the Companys issued and outstanding shares for adoption. Accordingly, abstentions and broker non-votes will have the same effect as votes against the proposal.
All other proposals require the affirmative vote of a majority of shares participating in the voting on each proposal for approval. Abstentions and broker non-votes will not be counted as participating in the voting and will therefore have no effect.
Who pays for this proxy solicitation?
The Company does. We have hired Phoenix Advisory Partners, a proxy solicitation firm, to assist us in soliciting proxies for a fee of $17,500 plus reasonable expenses. In addition, Phoenix Advisory Partners and the Companys Directors, officers, and employees may also solicit proxies by mail, telephone, personal contact, email, or other online methods. We will reimburse their expenses for doing this.
We will also reimburse brokers, fiduciaries, and custodians for their costs in forwarding proxy materials to beneficial owners of Company stock. Other proxy solicitation expenses that we will pay include those for preparing, mailing, returning, and tabulating the proxies.
Director Experiences, Skills and Qualifications
The composition of the Board is intended to reflect an appropriate mix of skill sets, experience, and qualifications that are relevant to the business and governance of the Company over time. Each individual Director should epitomize the Companys Purpose, Values and Principles, possess the highest ethics and integrity, and demonstrate commitment to representing the long-term interests of the Companys shareholders. Each Director should also have individual experiences that provide practical wisdom, mature judgment, and an inquisitive and objective mind. These experiences, at policy-making levels, may include business, government, technology, international, marketing, and other areas that are relevant to the Companys global operations. In addition, the evaluation of Director nominees by the Governance & Public Responsibility Committee takes into account diversity, including with respect to age, gender, international background, and race.
Below we identify and describe specific experiences, skills, and qualifications our Directors bring to the Board. Each of our current Directors is a highly qualified, recognized leader in his or her respective industry or field. Each of the Directors specific experiences, skills, and qualifications considered by the Board in their re-nomination are included in their individual biographies and the accompanying table on page 9 of this proxy statement. The fact that we do not list a particular experience, skill, or qualification for a Director does not mean that Director does not possess that particular experience, skill, or qualification.
Leadership, strategy, and risk management experience. Directors with significant leadership experience over an extended period, including current and former chief executive officers, provide the Company with special insights. These individuals demonstrate a practical understanding of how large organizations operate, including the importance of talent management and how employee and executive compensation are set. They understand strategy and risk management, and how these factors impact the Companys operations and controls. They possess extraordinary leadership qualities and are able to identify and develop leadership qualities in others. And, through their various leadership positions, they have access to important information and relationships that benefit the Company.
Consumer industry experience. Directors with experience in dealing with consumers, particularly in the areas of marketing and selling products or services to consumers, provide valuable insights to the Company. They understand consumer needs, recognize products and marketing campaigns that might resonate with consumers, and identify potential changes in consumer trends and buying habits.
International experience. Directors with experience in markets outside of the United States bring valuable knowledge to the Company, including exposure to different cultural perspectives and practices. Because we do business in over 180 countries, and business in international markets accounts for approximately 65% of the Companys revenue, having Directors on our Board with this experience is critical.
Marketing experience. Directors with experience identifying, developing, and marketing new products, as well as identifying new areas for existing products, can add significant positive impact to the Companys operational results. As one of the worlds largest advertisers, this is a particularly important attribute.
Finance experience. Directors with an understanding of accounting and financial reporting processes, particularly as they relate to a large, complex, international business, provide an important oversight role. The Company employs a number of financial targets to measure its performance, and accurate financial reporting is critical to the Companys success. Directors with financial experience are essential for ensuring effective oversight of the Companys financial measures and processes.
Government experience. Directors with government experience, whether as members of the government or through extensive interactions with government and government agencies, are able to recognize, identify, and understand the key issues that the Company faces in an economy increasingly affected by the role of governments around the world.
Technology and innovation experience. Directors with an understanding of technology and innovation help the Company focus its efforts in these important areas, as well as track progress against strategic goals and benchmarks. As one of the few companies with an Innovation & Technology Committee of the Board, this is particularly important to the Companys overall success.
The Board considers diversity to be an important criterion in the selection and nomination of candidates for Director. As a global company, the Board seeks Directors with international background and global experience, among other factors. This is reflected in the Boards Corporate Governance Guidelines, which set forth the minimum qualifications for Board members and note that the Board seeks to achieve a mix of Board members that represents a diversity of background and experience, including with respect to age, gender, international background, race, and specialized experience.
Although the Board does not establish specific goals with respect to diversity, the Boards overall diversity is a significant consideration in the Director nomination process. For this years election, the Board has nominated 11 individuals; all are incumbent nominees who currently bring tremendous diversity to the Board. Each nominee is a strategic thinker and has varying, specialized experience in areas that are relevant to the Company and its businesses. Moreover, their collective experience covers a wide range of countries, geographies, and industries, including consumer products, technology, financial services, national retail, agriculture, aerospace, and health care, as well as roles in consulting and government. These 11 Director nominees range in age from 52 to 66, and five of these 11 Directors, or 45% of our current Board, are women; one is African-American; and one is Mexican. The Board views this diversity as a clear strength.
The Board assesses the effectiveness of its diversity policy every year as part of the nomination process for the annual election of Directors by the Companys shareholders. The Boards Governance & Public Responsibility Committee, responsible for making recommendations for Director nominations to the full Board, reviews the Director nominees (including shareholder nominees) and ascertains whether, as a whole, the group meets the Boards policy in this regard. Having reviewed the collective background and experience of the 11 nominees, the Board has concluded that they provide significant diversity and clearly meet the Boards policy.
All of the Boards nominees for Director are incumbent nominees who will be elected for a one-year term. Angela F. Braly, Kenneth I. Chenault, Scott D. Cook, Susan Desmond-Hellmann, W. James McNerney, Jr., Margaret C. Whitman, Mary Agnes Wilderotter, Patricia A. Woertz, and Ernesto Zedillo were elected for one-year terms at the 2012 annual meeting. Terry J. Lundgren was appointed to the Board effective January 8, 2013. Johnathan A. Rodgers has announced his intention not to stand for re-election in October 2013 and to retire from the Board of Directors at that time. Accordingly, he was not re-nominated for election. Given Robert A. McDonalds pending retirement, he resigned from the Board of Directors effective May 23, 2013. In connection with his election as Chairman of the Board and Chief Executive Officer, A.G. Lafley was appointed to the Board effective May 23, 2013. The current terms of all nominees for Director will expire at the 2013 annual meeting. The Board has nominated each of these individuals for a new term that will expire at the 2014 annual meeting.
Each of the nominees for Director has accepted the nomination and agreed to serve as a Director if elected by the Companys shareholders. If any nominee becomes unable or unwilling to serve between the date of the proxy statement and the annual meeting, the Board may designate a new nominee, and the persons named as proxies will vote on that substitute nominee.
The Board of Directors recommends a vote FOR Angela F. Braly, Kenneth I. Chenault, Scott D. Cook, Susan Desmond-Hellmann, A.G. Lafley, Terry J. Lundgren, W. James McNerney, Jr., Margaret C. Whitman, Mary Agnes Wilderotter, Patricia A. Woertz, and Ernesto Zedillo as Directors to hold office until the 2014 annual meeting of shareholders and until their successors are elected.
Nominees for Election as Directors with Terms Expiring in 2014
Director Nominees Experience
As described on pages 3-4 of this proxy statement, our Board is highly qualified and each Director brings a diversity of skills and experiences to the Board. The list below is a summary; it does not include all of the skills, experiences, qualifications, and diversity that each Director nominee offers, and the fact that a particular experience, skill, or qualification is not listed does not mean that a Director does not possess it.
The Boards Purpose
The Board has general oversight responsibility for the Companys affairs pursuant to Ohios General Corporation Law, the Companys Amended Articles of Incorporation, the Code of Regulations, and the By Laws of the Board of Directors. In exercising its fiduciary duties, the Board represents and acts on behalf of the Companys shareholders and is committed to strong corporate governance, as revealed through its policies and practices. Although the Board does not have responsibility for the day-to-day management of the Company, it stays informed about the Companys business and provides guidance to Company management through periodic meetings, site visits, and other interactions. The Board is deeply involved in the Companys strategic planning process, leadership development, succession planning, and oversight of risk management. The Board has established committees to assist in fulfilling its oversight responsibilities. Additional details concerning the Boards commitments and principles guiding its overall governance practices are contained in the Boards Corporate Governance Guidelines, which can be found in the corporate governance section of the Companys website at www.pg.com/investors.
The Boards Leadership Structure
The Board regularly considers the appropriate leadership structure for the Company and has concluded that the Company and its shareholders are best served by the Board retaining discretion to determine whether the same individual should serve as both Chief Executive Officer (CEO) and Chairman of the Board, or whether the roles should be separated. The Board believes that it is important to retain the flexibility to make this determination at any given point in time based on what it believes will provide the best leadership structure for the Company. This approach allows the Board to utilize its considerable experience and knowledge to elect the most qualified Director as Chairman of the Board, while maintaining the ability to separate the Chairman of the Board and CEO roles when necessary. Accordingly, at different points in the Companys history, the CEO and Chairman of the Board roles have been held by the same person. At other times, the roles have been held by different individuals. In each instance, the decision on whether to combine or separate the roles was made in the best interests of the Companys shareholders, based on the circumstances at the time.
Further, in the event that the Board determines that the same individual should hold the positions of CEO and Chairman of the Board, the independent Directors of the Board annually elect a Presiding Director from among the independent Directors. The Presiding Director role is a significant one, with responsibilities consistent with accepted best practices, including:
Mr. McNerney serves as the Boards current Presiding Director and has been annually re-elected to that role since August 14, 2007. Mr. McNerney is a strong, independent Presiding Director, who fulfilled each of these duties during the past year. As the current Chairman of the Board, President, and Chief Executive Officer of The Boeing Company, and former CEO of 3M Company, he brings a wealth of diverse experiences and outside perspective to his role as Presiding Director. In FY 2012-13, the independent Directors met regularly, in 6 executive sessions, without Mr. McDonald present, and met one time, at its June meeting, without Mr. Lafley present. Mr. McNerney led those sessions and following each, he advised Mr. McDonald and Mr. Lafley, respectively, on the Boards discussions, including performance feedback.
In connection with the appointment of A.G. Lafley as Chairman and CEO, and upon recommendation of the Governance & Public Responsibility Committee, the non-employee Directors of the Board maintained the current leadership structure of the Company, determining that it was not in the best interests of shareholders to split the role of the Chairman of the Board and CEO and require an independent Chairman. The Board subsequently reappointed Mr. McNerney to serve as Presiding Director for the FY 2013-14.
The Board reached these decisions because of Mr. Lafleys proven leadership, their prior experience with him as Chairman and CEO of the Company, and Mr. McNerneys strength and independence as a Presiding Director. In addition, the Board wanted to keep the roles combined in order to minimize disruption during this time of leadership transition and ensure a strong leader for the Company and the Board to execute the Companys strategy and productivity efforts. Finally, Mr. Lafley as Chairman and CEO, and Mr. McNerney as Presiding Director work well together, and the Board was confident that the appropriate balance of power would be maintained. The Board will continue to periodically evaluate the Companys leadership structure to ensure that the Boards structure is right and appropriate at all times.
The Boards Oversight of Risk
It is the responsibility of the Companys senior management to develop and implement the Companys strategic plans, and to identify, evaluate, manage, and mitigate the risks inherent in those plans. It is the responsibility of the Board to understand and oversee the Companys strategic plans, the associated risks, and the steps that senior management is taking to manage and mitigate those risks. The Board takes an active approach to its role in overseeing the development and execution of the Companys business strategies as well as its risk oversight role. This approach is bolstered by the Boards leadership and committee structure, which ensures proper consideration and evaluation of potential enterprise risks by the full Board under the auspices of the Chairman of the Board and Presiding Director, and further consideration and evaluation of discrete risks at the committee level.
To ensure proper oversight of the Companys management and the potential risks that the Company faces, the non-employee members of the Board annually elect a Presiding Director from the Boards independent Directors. The Presiding Directors duties include helping to ensure that the Boards agenda and executive sessions are appropriately focused on risk. In addition, the Board is comprised of all independent Directors, except for Mr. Lafley, the Chairman and CEO; all members of the key committees of the Board (Audit, Compensation & Leadership Development, and Governance & Public Responsibility) are independent. This system ensures that key decisions made by the Companys most senior management, up to and including the CEO, are reviewed and overseen by the non-employee Directors of the Board, each of whom is independent.
Risk management oversight by the full Board includes a comprehensive annual review of the Companys overall strategic plan, typically conducted in June. The Board also devotes significant time to reviewing the strategic plans for each of the Companys global business units, including the risks associated with these strategic plans at Board meetings during the year. The Board also conducts reviews of other strategic focus areas for the Company. The Board annually reviews the conclusions and recommendations generated by managements enterprise risk management process. This process involves a cross-functional group of the Companys senior management which, on a continual
basis, identifies current and future potential risks facing the Company and ensures that actions are taken to manage and mitigate those potential risks. The Board also has overall responsibility for leadership succession for the Companys most senior officers and reviews succession plans on an ongoing basis.
In addition, the Board has delegated certain risk management oversight responsibilities to specific Board committees, each of which reports regularly to the full Board. In performing these oversight responsibilities, each committee has full access to management, as well as the ability to engage independent advisors. The Audit Committee oversees the Companys compliance with legal and regulatory requirements and its overall risk management process. It also regularly receives reports regarding the Companys most significant internal controls, compliance risks, and potential legal and regulatory risks, along with managements plans for managing and mitigating those risks, and processes for maintaining compliance within a strong internal controls environment. Representatives from the Companys independent auditor attend Audit Committee meetings, regularly make presentations to the Audit Committee, and comment on management presentations. In addition, the Companys Chief Financial Officer (CFO), Chief Legal Officer, chief audit executive, and representatives of the Companys independent auditor individually meet in private session with the Audit Committee to raise any concerns they might have with the Companys risk management practices.
The Boards C&LD Committee employs an independent compensation consultant, Frederic W. Cook & Co., Inc., who does not work for management and, among other tasks, reviews, and reports on all of the Companys executive compensation programs, including the potential risks and other impacts of incentives created by the programs. For more details on the arrangement with Frederic W. Cook & Co., Inc., please see the section entitled Engagement of Independent Adviser found on page 35 of this proxy statement.
The independent compensation consultants review included an analysis of the Companys short-term and long-term compensation programs covering key program details, performance factors for each program, target award ranges, maximum funding levels, and plan administrative oversight and control requirements. Key program elements assessed relating to potential compensation risks were pay mix, performance metrics, performance goals and payout curves, payment timing and adjustments, severance packages, equity incentives and stock ownership requirements, and trading policies. Simultaneously, members of management performed a similar review of the Companys other compensation programs. The results of the consultants analysis of the Companys executive compensation programs, as well as managements review of the Companys other compensation programs, were shared with the C&LD Committee, which concluded that the Companys compensation policies and practices are not reasonably likely to have a material adverse effect on the Company as a whole.
In reaching its conclusion, the C&LD Committee noted that the Companys compensation programs include a mix of cash and equity, as well as annual and long-term incentives. This mix of compensation, the design features of these programs, and the Companys respective oversight and control requirements mitigate the potential of any individual inclination toward taking unnecessary risks. The C&LD Committee also acknowledged various other features of the Companys compensation programs, policies, and practices designed to mitigate unwarranted risk. For example, the Companys annual cash bonus program, the Short-Term Achievement Reward (STAR), provides the C&LD Committee with discretion to reduce or eliminate any award that would otherwise be payable. In addition, the performance metrics under STAR include both quantitative measures (e.g., top-line growth, bottom-line profits, free cash flow, etc.) and qualitative measures (e.g., relative performance, internal collaboration, strategic strength, innovation, etc.). These non-metric features mitigate the risk of an executive focusing too much on the specific financial metrics under STAR. Moreover, the performance metrics associated with the STAR Company Factor (50% core earnings per share growth and 50% organic sales growth) are aligned with the Companys business plans and strategic objectives, and the weighting of STAR target awards in the mix of target annual cash compensation is generally at or below the median for the Peer Group, as defined on page 27 of this proxy statement.
Further, the C&LD Committee recognized that the Companys long-term incentives include a balanced portfolio of options, restricted stock units, and performance-vested stock (under the Performance Stock Plan). These long-term incentives incorporate a variety of payout horizons that focus executives on long-term performance: 10-year
terms with three-year cliff vesting for stock options, restricted stock units with five-year cliff vesting, and a three-year performance period for performance-vested stock. The C&LD Committee also noted that the design of the Performance Stock Plan reduces the likelihood that an executive will focus too much on a single performance measure by including four different performance categories, each of which is equally weighted: organic sales growth, before-tax operating profit growth, core earnings per share growth, and free cash flow productivity. In addition, each of these factors range from a minimum of 0% to a maximum of 200%. Using this sliding scale approach versus an all-or-nothing approach, discourages participants from taking unnecessary risks. Each of the financial measures are defined and further explained on page 33 of this proxy statement.
Finally, the C&LD Committee acknowledged that the Company has adopted several policies intended to mitigate inappropriate risk taking, including stock ownership guidelines for senior executives, a recoupment policy that can be applied in the event of any significant financial restatement, and an insider trading policy that prohibits margin and hedging transactions by senior executives.
Committees of the Board
To facilitate deeper penetration into certain key areas of oversight, the Board has established four committees. Membership on these Committees, as of August 9, 2013, is shown in the following chart:
All Directors served on the respective committees listed above, including committee chairs for the Companys entire fiscal year, with the following exception:
Mr. Lundgren was appointed as a member of the Governance & Public Responsibility and Innovation & Technology Committees effective for the February 12, 2013 meeting.
The Audit Committee met 8 times during the fiscal year ended June 30, 2013, to carry out its responsibilities under its charter. At each meeting, representatives of Deloitte & Touche LLP, the Companys independent registered public accounting firm, and financial management were present to review accounting, control, auditing, and financial reporting matters. During certain of these meetings, the Audit Committee also held private sessions with the Companys CFO, Chief Legal Officer, chief audit executive, and representatives of Deloitte & Touche LLP. All members of this Committee are independent under the New York Stock Exchange (NYSE) listing standards and the Board of Directors Guidelines for Determining the Independence of its Members (the Independence Guidelines), which can be found in the corporate governance section of the Companys website at www.pg.com/investors. The Audit Committee has the responsibilities set forth in its charter with respect to accounting, financial reporting and disclosure processes, and adequacy of systems of disclosure and internal control established by management; the quality and integrity of the Companys financial statements; the Companys compliance with legal and regulatory requirements; the Companys overall risk management profile; the independent registered public accounting firms qualifications and independence; the performance of the Companys internal audit function and the independent registered public
accounting firm; and preparing the annual Report of the Audit Committee to be included in the Companys proxy statement. The Audit Committees charter can be found in the corporate governance section of the Companys website at www.pg.com/investors.
The Compensation & Leadership Development Committee met 7 times during the fiscal year ended June 30, 2013, during which it held 6 executive sessions with no member of management present. All members of this Committee are independent under the NYSE listing standards, including the enhanced independence requirements for Compensation Committee members, which became effective in July 2013, and the Independence Guidelines. The C&LD Committee has a charter, under which it has full authority and responsibility for the Companys overall compensation policies, including base pay, short- and long-term pay, retirement benefits, perquisites, severance arrangements, recoupment, stock ownership requirements, and stock option holding requirements, if any, and their specific application to principal officers elected by the Board and to members of the Board. This Committee also assists the Board in the leadership development and evaluation of principal officers. As a practical matter, the CEO makes recommendations to the C&LD Committee regarding the compensation elements of the principal officers (other than his own compensation) based on Company performance, individual performance, and input from Company management and the C&LD Committees independent compensation consultant. All final decisions regarding compensation for principal officers are made by this Committee, and this Committee makes a recommendation to the Board regarding the shareholder votes related to executive compensation. For more details regarding principal officer compensation or this Committees process for making decisions regarding the compensation of principal officers, please see the Compensation Discussion and Analysis section found on pages 22-37 of this proxy statement. This Committee also approves all stock-based equity grants made under The Procter & Gamble 2009 Stock and Incentive Compensation Plan, but the Committee has delegated to the CEO the authority to make certain equity grants to non-principal officers, subject to the specific terms and conditions determined by the C&LD Committee. This Committee retains an independent compensation consultant, hired directly by the C&LD Committee, to advise it regarding executive compensation matters. The C&LD Committees charter can be found in the corporate governance section of the Companys website at www.pg.com/investors.
The Governance & Public Responsibility Committee met 9 times during the fiscal year ended June 30, 2013. All members of the Governance & Public Responsibility Committee are independent under the NYSE listing standards and the Independence Guidelines. The Governance & Public Responsibility Committee has governance responsibilities set forth in its charter with respect to identifying individuals qualified to become members of the Board; recommending when new members should be added to the Board and individuals to fill vacant Board positions; recommending to the Board the Director nominees for the next annual meeting of shareholders and whether to accept the resignation of any incumbent Director nominee who received a greater number of against votes than for votes in a non-contested election; recommending Board committees and committee assignments; periodically reviewing and recommending updates to the Boards Corporate Governance Guidelines; educating the Board and the Company in applicable governance laws and regulations; assisting the Board and the Company in interpreting and applying the Companys Corporate Governance Guidelines and other issues related to Board governance; and evaluating the Board and its members. The Committee also covers public responsibility topics, such as overseeing the Companys social investments and commitment to making a meaningful impact around the world, by reviewing strategies and plans for improving lives in ways that enable people to thrive and that increase their quality of living; overseeing the Companys commitment to and efforts regarding environmental sustainability; overseeing the Companys community and government relations; overseeing the Companys product quality and quality assurance systems; overseeing protection of the Companys corporate reputation; and other matters of importance to the Company and its stakeholders (including employees, consumers, customers, suppliers, shareholders, governments, local communities, and the general public); and overseeing the Companys organizational diversity. The Governance & Public Responsibility Committees charter can be found in the corporate governance section of the Companys website at www.pg.com/investors.
The Innovation & Technology Committee met 2 times during the fiscal year ended June 30, 2013. All members of the Innovation & Technology Committee are independent under the NYSE listing standards and the Independence Guidelines. The Innovation & Technology Committee has the responsibilities set forth in its charter with
respect to overseeing and providing counsel on matters of innovation and technology. Topics considered by this Committee include the Companys approach to technical and commercial innovation; the innovation and technology acquisition process; and tracking systems important to successful innovation. The Innovation & Technology Committees charter can be found in the corporate governance section of the Companys website at www.pg.com/investors.
Board Engagement and Attendance
Our current Directors are active and engaged. Board agendas are set in advance by the Chairman of the Board and Presiding Director, to ensure that appropriate subjects are covered and that there is sufficient time for discussion. Directors are provided with comprehensive materials in advance of Board and Committee meetings and are expected to review and reflect on these materials before each meeting, to ensure that time in Board and Committee meetings is focused on robust and active discussions versus lengthy presentations. During the fiscal year ended June 30, 2013, the Board held 12 meetings, and the Committees of the Board held 26 meetings, for a total of 38 meetings. Average attendance at these meetings by members of the Board during the past year exceeded 97%, and all Directors attended greater than 81% of the meetings of the Board and the Committees on which they serve. The Board expects all of its members to attend the annual meeting of shareholders; all Directors attended the October 9, 2012 annual meeting.
The non-employee members of the Board met 7 times during FY 2012-13 in executive session (without the presence of Mr. McDonald, Mr. Lafley or other employees of the Company) to discuss various matters related to the oversight of the Company, the management of Board affairs, succession planning for the Companys top management (including the CEO position), and the CEOs performance.
The Board believes that service on the boards of other public companies provides valuable governance and leadership experience that ultimately benefits the Company. The Board also recognizes that outside public board service requires a significant commitment of time and attention, and therefore, in accordance with best governance practices, limits Director participation on other public boards. Under the Corporate Governance Guidelines, Directors who are active CEOs of other public companies may sit on no more than two additional outside public boards, and other non-employee Directors may sit on no more than three additional outside public boards. All Directors are in compliance with this policy. This practice helps ensure that our Directors can give appropriate levels of time and attention to the affairs of the Company. In addition, when nominating a Director for service on the Board, the Governance & Public Responsibility Committee considers whether the nominee will have adequate time to serve as a Director of the Company. Each Director demonstrates their strong engagement and high attendance, and has adequate time to devote to the affairs of the Company.
The Board has determined that the following Directors are independent under the NYSE listing standards and the Independence Guidelines because they have either no relationship with the Company (other than being a Director and shareholder of the Company) or only immaterial relationships with the Company: Angela F. Braly, Kenneth I. Chenault, Scott D. Cook, Susan Desmond-Hellmann, Terry J. Lundgren, W. James McNerney, Jr., Johnathan A. Rodgers, Margaret C. Whitman, Mary Agnes Wilderotter, Patricia A. Woertz, and Ernesto Zedillo. All members of the Boards Audit, Compensation & Leadership Development, Governance & Public Responsibility, and Innovation & Technology Committees are independent.
In making these independence determinations, the Board applied the NYSE listing standards and the categorical independence standards contained in the Independence Guidelines. Under the Independence Guidelines, certain relationships were considered immaterial and, therefore, were not considered by the Board in determining independence, but were reported to the Chair of the Governance & Public Responsibility Committee. Applying the NYSE listing standards and the Independence Guidelines, the Board determined that there are no transactions, relationships or arrangements that would impair the independence or judgment of any of the Directors deemed independent by the Board.
Mr. Lafley is Chairman of the Board, President and CEO of the Company. As such, he cannot be deemed independent under the NYSE listing standards or the Independence Guidelines.
Pursuant to the Companys Independence Guidelines, upon Dr. Susan Desmond-Hellmanns appointment to Facebooks Board of Directors earlier in the year, the Governance & Public Responsibility Committee and the Board of Directors reassessed her independence. Facebooks relationship with the Company was deemed immaterial under the Boards Independence Guidelines because Dr. Desmond-Hellmann is a Director of Facebook but was not involved in negotiating any transactions with the Company and did not receive special benefits from any transactions.
Code of Ethics
The Company has a code of ethics for its Directors, officers, and employees. The most recent version of this code of ethics, which is consistent with SEC regulations and NYSE listing standards, is contained in the Worldwide Business Conduct Manual. The Worldwide Business Conduct Manual was updated and redeployed to all of the Companys employees, officers and Directors in early 2011, and can be found on the Companys website at www.pg.com, along with any future amendments thereto. The Worldwide Business Conduct Manual is firmly rooted in the Companys long-standing Purpose, Values and Principles, which is made available to employees in 28 different languages and can be found on the Companys website at www.pg.com.
Review and Approval of Transactions with Related Persons
The Worldwide Business Conduct Manual requires that all employees and Directors disclose all potential conflicts of interest and promptly take actions to eliminate any such conflict when the Company requests. In addition, the Company has adopted a written Related Person Transaction Policy that prohibits any of the Companys executive officers, Directors, or any of their immediate family members from entering into a transaction with the Company, except in accordance with the policy.
Under our Related Person Transaction Policy, the Chief Legal Officer is charged with primary responsibility for determining whether, based on the facts and circumstances, a related person has a direct or indirect material interest in a proposed or existing transaction. To assist the Chief Legal Officer in making this determination, the policy sets forth certain categories of transactions that are deemed not to involve a direct or indirect material interest on behalf of the related person. If, after applying these categorical standards and weighing all of the facts and circumstances, the Chief Legal Officer determines that the related person would have a direct or indirect material interest in the transaction, the Chief Legal Officer must present the transaction to the Audit Committee for review or, if impracticable under the circumstances, to the Chair of the Audit Committee. The Audit Committee must then either approve or reject the transaction in accordance with the terms of the policy. In the course of making this determination, the Audit Committee shall consider all relevant information available to it and, as appropriate, must take into consideration the following:
The Audit Committee may only approve the transaction if it determines that the transaction is not inconsistent with the best interests of the Company as a whole. Further, in approving any such transaction, the Audit Committee has the authority to impose any terms or conditions it deems appropriate on the Company or the related person. Absent this approval, no such transaction may be entered into by the Company with any related person.
Jon R. Moeller, the Companys CFO, is married to Lisa Sauer, a long-tenured employee of the Company who currently holds the position of Vice PresidentProduct Supply, Global Home Care. Her total compensation in the last year was approximately $820,000, consisting of salary, bonus, equity grants, and retirement benefits. Her compensation is consistent with the Companys overall compensation principles based on her years of experience, performance, and position within the Company. Prior to Mr. Moeller becoming CFO, the Audit Committee approved the continued employment of Ms. Sauer with the Company under the Companys Related Person Transaction Policy, concluding that her continued employment was not inconsistent with the best interests of the Company as a whole.
Deborah P. Majoras, the Companys Chief Legal Officer and Secretary, is married to John M. Majoras, one of over 800 partners in the law firm of Jones Day. The Company has hired Jones Day, in the ordinary course of business, to perform legal services. The Companys relationship with Jones Day dates back more than 25 years and significantly precedes Ms. Majoras joining the Company as Vice President and General Counsel in 2008 from the Federal Trade Commission, where she served as Chairman. Mr. Majoras does not receive any direct compensation from the fees paid to Jones Day by the Company, his ownership in the Jones Day law firm is significantly less than 1%, and the fees paid by the Company to Jones Day in the last fiscal year were significantly less than 1% of their annual revenues. Mr. Majoras did not personally render any legal services to the Company, nor supervise any attorney in rendering legal services to the Company during the previous fiscal year. Under the Companys Related Person Transaction Policy, the Audit Committee reviewed and approved the continued use of Jones Day as a provider of legal services to the Company, but required the Companys CEO to approve any recommendations by Ms. Majoras to hire Jones Day for a specific legal matter. In doing so, the Committee concluded that the Majorases did not have a direct or indirect material interest in the Companys hiring of Jones Day and that the relationship is not inconsistent with the best interests of the Company as a whole.
Mark Biegger, the Companys Chief Human Resources Officer (CHRO), has a brother, Brian Biegger, who is employed by the Company. Brian Biegger has been employed by the Company since 1983, well before Mark Bieggers appointment as CHRO in 2013, and is currently in the Customer Business Development organization. Brian Bieggers total annual compensation in the last year, consisting of salary, bonus, equity grants and retirement benefits was less than $360,000. His compensation is consistent with the Companys overall compensation principles based on his years of experience, performance, and positions within the Company. The Committee determined that Brian has a direct material interest in his annual compensation but approved this transaction because it is not inconsistent with the best interests of the Company as a whole, and appropriate controls are in place to avoid any potential conflicts of interest.
Other than as noted above, there were no transactions, in which the Company or any of its subsidiaries was a participant, the amount involved exceeded $120,000, and any Director, Director nominee, executive officer, or any of their immediate family members had a direct or indirect material interest reportable under applicable SEC rules or that required approval of the Audit Committee under the Companys Related Person Transaction Policy, nor are there any currently proposed.
Communication with Directors and Executive Officers
Shareholders and others who wish to communicate with the Board or any particular Director, including the Presiding Director, or with any executive officer of the Company, may do so by writing to the following address:
[Name of Director(s)/Executive Officer or Board of Directors]
The Procter & Gamble Company
One Procter & Gamble Plaza
Cincinnati, OH 45202-3315
All such correspondence is reviewed by the Secretarys office, which logs the material for tracking purposes. The Board has asked the Secretarys office to forward to the appropriate Director(s) all correspondence, except for personal grievances, items unrelated to the functions of the Board, business solicitations, advertisements, and materials that are profane.
Shareholder Recommendations of Board Nominees and Committee Process for Recommending Board Nominees
The Governance & Public Responsibility Committee will consider shareholder recommendations for candidates for the Board, which should be submitted to:
Chair of the Governance & Public Responsibility Committee
The Procter & Gamble Company
One Procter & Gamble Plaza
Cincinnati, OH 45202-3315
The minimum qualifications and preferred specific qualities and skills required for Directors are set forth in Article II, Sections B through E of the Boards Corporate Governance Guidelines. The Committee considers all candidates using these criteria, regardless of the source of the recommendation. The Committees process for evaluating candidates also includes the considerations set forth in Article II, Section B of the Committees Charter. After initial screening for minimum qualifications, the Committee determines appropriate next steps, including requests for additional information, reference checks, and interviews with potential candidates. In addition to shareholder recommendations, the Committee also relies on recommendations from current Directors, Company personnel, and others. From time to time, the Committee may engage the services of outside search firms to help identify candidates. During the fiscal year ended June 30, 2013, no such engagement existed (and none currently exists), and no funds were paid to outside parties in connection with the identification of nominees. All nominees for election as Directors who currently serve on the Board are known to the Committee and were recommended by the Committee to the Board as Director nominees.
Pursuant to the Companys Code of Regulations, a shareholder wishing to nominate a candidate for election to the Board at an annual meeting of shareholders is required to give written notice to the Secretary of the Company of his or her intention to make such nomination. The notice of nomination must be received at the Companys principal executive offices not less than 140 days nor more than 240 days prior to the one-year anniversary of the preceding years annual shareholder meeting. Certain other notice periods apply if the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date. Based on the one-year anniversary of the 2013 annual meeting, a shareholder wishing to nominate a candidate for election to the Board at the 2014 annual meeting must provide such notice no earlier than February 10, 2014, and no later than May 21, 2014.
As set forth in the Companys Code of Regulations, the notice of nomination is required to contain information about both the nominee and the shareholder making the nomination, including information sufficient to allow the Governance & Public Responsibility Committee to determine if the candidate meets certain criteria. A nomination that does not comply with the requirements set forth in the Companys Code of Regulations will not be considered for presentation at the annual meeting.
Availability of Corporate Governance Documents
In addition to their availability on the Companys website at www.pg.com, copies of the Companys Amended Articles of Incorporation, the Companys Code of Regulations, all Committee Charters, the Corporate Governance Guidelines (including Independence Guidelines, Confidentiality Policy and Financial Literacy and Expertise Guidelines), the Worldwide Business Conduct Manual, the Companys Purpose, Values, and Principles and the Related Person Transaction Policy are available in print upon request by writing to the Company Secretary at One Procter & Gamble Plaza, Cincinnati, OH 45202-3315.
The objective of the C&LD Committee is to provide non-employee members of the Board a compensation package consistent with the size-adjusted median of the Peer Group. Directors can elect to receive any part of their fees or retainer (other than the grant of Restricted Stock Units (RSUs)) as cash, retirement restricted stock or unrestricted stock. The Company did not grant any stock options to Directors in FY 2012-13. Effective October 9, 2012, non-employee members of the Board received the following compensation:
At its June 4, 2013 meeting, the Board of Directors, upon the recommendation of the C&LD Committee, agreed to increase the grant date fair value of the annual RSU grant from $160,000 to $175,000. This change was made to better align Director compensation with the size-adjusted median of the Peer Group, and will be effective with the October 8, 2013 meeting.
Non-employee members of the Board must own Company stock and/or RSUs worth six times their annual cash retainer. A number of the non-employee Directors were appointed or elected to the Board within the last few years. However, all non-employee Directors either meet or are on track to meet the ownership requirements within the five-year period established by the C&LD Committee.
The following table and footnotes provide information regarding the compensation paid to the Companys non-employee Directors in FY 2012-13. Directors who are employees of the Company receive no compensation for their service as Directors.
1 Annually, upon election at the Companys annual meeting of shareholders, each Director is awarded a grant of RSUs with a grant date fair value of $160,000. Since Mr. Lundgren did not join the Board until January 8, 2013, he was not entitled to the 2011-12 award. As of the end of FY 2012-13:
Unvested stock awards include RSUs that have not delivered in shares and restricted stock for which the restrictions have not lapsed. RSUs earn dividend equivalents which are accrued in the form of additional RSUs each quarter and credited to each Directors holdings. These RSUs have the same vesting restrictions as the underlying RSUs and are ultimately deliverable in shares. Restricted stock earns cash dividends that are paid quarterly with the option of reinvesting in Company stock.
2 For one of the Board meetings during FY 2012-13, the Company incurred cost associated with providing a minor commemorative item valued at $100. For the December 2012 Board meeting, each Director was encouraged to bring a guest. For all Board meetings throughout the fiscal year, Directors were entitled to bring a guest so long as the Director used the Company aircraft to attend the meeting and the guests attendance did not result in any incremental aircraft costs. Directors and their guests are also covered under the same insurance policy as all Company employees for accidental death while traveling on Company business (coverage is $750,000 for each Director and $300,000 for a guest). The incremental cost to the Company for this benefit is $1,982. In addition, the Company maintains a Charitable Awards Program for current and retired Directors who were participants prior to July 1, 2003. Under this program, at their death, the Company donates $1,000,000 per Director to up to five qualifying charitable organizations selected by each Director. Directors derive no financial benefit from the program because the charitable deductions accrue solely to the Company. The Company funds this contribution from general corporate assets. Upon the death of a former Director, the Company donated $1,000,000 during FY 2012-13 to charities previously designated by that Director. This program was discontinued for any new Director effective July 1, 2003. In FY 2012-13, the Company made a $500 donation on behalf of each Director to the Childrens Safe Drinking Water Program or to a different charity of their choice. Similar to the Charitable Awards Program described above, these donations were funded from general corporate assets, and the Directors derive no financial benefit from these donations because the charitable deductions accrue solely to the Company. As employee Directors, neither Mr. McDonald nor Mr. Lafley received a retainer, fees, or a stock award. Mr. McDonald attended Board meetings and activities as described above, and, in conjunction with those meetings, received the minor commemorative item.
3 Ms. Braly took $105,000 of her fees for FY 2012-13 in stock. For the first half of FY 2012-13, she received retirement restricted stock, which had a grant date fair value of $55,066. For the second half of FY 2012-13, she took her fees in unrestricted stock, which had a grant date fair value of $50,110.
4 Mr. Cook took $120,000 of his fees for FY 2012-13 in retirement restricted stock, which had a grant date fair value of $120,207.
5 Mr. Lundgren took his fees for the second half of FY 2012-13 in unrestricted stock, which had a grant date fair value of $55,126.
6 Mr. McNerney took his fees for FY 2012-13 in unrestricted stock, which had a grant date fair value of $157,734.
7 Mr. Rodgers took 50% of his fees for the first half of FY 2012-13 in retirement restricted stock, which had a grant date fair value of $27,567, and the remaining 50% in cash. During the second half of FY 2012-13, he took his fees in cash.
Report of the Compensation & Leadership Development Committee
The Compensation & Leadership Development Committee of the Board of Directors has reviewed and discussed the following section of this proxy statement entitled Compensation Discussion and Analysis with management. Based on this review and discussion, the Committee has recommended to the Board that the section entitled Compensation Discussion and Analysis, as it appears on the following pages, be included in this proxy statement and incorporated by reference into the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2013.
W. James McNerney, Jr., Chair
Kenneth I. Chenault
Scott D. Cook
Margaret C. Whitman
Mary Agnes Wilderotter
August 13, 2013
This compensation discussion and analysis explains the Companys compensation philosophies and programs. The focus of the analysis is on the Companys named executive officers (NEOs) for FY 2012-13: A.G. Lafley, Chairman of the Board, President and Chief Executive Officer; Robert A. McDonald, Retired Chairman of the Board, President and Chief Executive Officer; Jon R. Moeller, Chief Financial Officer; Werner Geissler, Vice ChairmanGlobal Operations; E. Dimitri Panayotopoulos, Vice ChairmanGlobal Business Units; and Filippo Passerini, Group PresidentGlobal Business Services and Chief Information Officer.
Effective May 23, 2013, Mr. McDonald stepped down as Chairman of the Board, President and Chief Executive Officer. From the time he stepped down until his retirement on June 30, 2013, Mr. McDonald acted as an advisor to the Company on transition issues.
Mr. Lafley, who served as President and Chief Executive Officer from June 8, 2000 until June 30, 2009 and as Chairman of the Board from July 1, 2002 until February 25, 2010, returned from retirement on May 23, 2013 to assume the role of Chairman of the Board, President and Chief Executive Officer.
Effective July 1, 2013, Mr. Panayotopoulos, formerly Vice ChairmanGlobal Business Units, was named Vice ChairmanAdvisor to the Chairman and Chief Executive Officer. In this capacity, he will report to Mr. Lafley until his future retirement date, which is expected to occur no later than January 2014 and will be determined based on business need and mutual agreement.
Our fundamental objective is to create value for our shareholders at leadership levels, on a consistent long-term basis. To accomplish this goal, we design executive compensation programs that emphasize pay for performance, support our business strategies, and discourage our executives from taking excessive risks. To ensure a balance between short-term decision making and long-term success, the Company uses three programs to incent executives: the one-year Short Term Achievement Reward (STAR), the three-year Performance Stock Plan (PSP), and the long-term Key Manager Stock Program. About 82% of NEO compensation is tied to Company performance via these programs.
The Companys focus for FY 2012-13 was on the execution of four key strategic priorities: maintaining strong developing market momentum, strengthening our core developed market business, building a strong innovation pipeline, and aggressively driving cost savings and productivity improvements. We delivered at or above target on all key financial metrics in FY 2012-13.
1 Core EPS Growth measures the Companys diluted net earnings per share from continuing operations excluding certain items that are not judged to be part of the Companys sustainable results or trends. This exclusion includes impairment charges for goodwill and indefinite-lived intangible assets in 2012 and 2013, incremental restructuring charges due to increased focus on productivity and cost savings in 2012 and 2013, charges in 2011, 2012 and 2013 related to the European legal matters, a gain resulting from the Companys purchase of the balance of its Baby Care and Feminine Care joint venture in Iberia in 2013, a charge in 2013 from the balance sheet impact of a devaluation of the official foreign exchange rate in Venezuela and a significant benefit in 2011 from the settlement of U.S. tax litigation primarily related to the valuation of technology donations. Please see Exhibit A for a reconciliation of non-GAAP measures, including Organic Sales Growth, Core EPS, Free Cash Flow, and Adjusted Free Cash Flow Productivity.
2 Organic Sales Growth measures sales growth excluding the impacts of acquisitions, divestitures, and foreign exchange from year-over-year comparisons.
3 Adjusted Free Cash Flow Productivity is defined as the ratio of operating cash flow less capital spending to net earnings adjusted for the impact of the Snacks divestiture in 2012, impairment charges for goodwill and indefinite-lived intangible assets in 2012 and 2013, and the Iberia holding gain in 2013.
Organic Sales Growth of 3% was at the mid-point of our target range, despite slowing underlying market growth. We stabilized our global market share and ended the year with improving share trends. For the fiscal year, we held or grew market share in businesses representing 56% of sales. We had over 60% of businesses holding or growing share in the April-June 2013 quarter versus 30% in the same period a year ago with sequential improvements each quarter throughout the year. Organic sales growth in our top 10 developing markets was up 8% for the year, while market share trends in core developed markets improved.
Core EPS Growth of 5% was above the high end of our target range, reflecting on-target top-line results combined with strong progress on cost savings and productivity. We delivered over $1.2 billion in cost of goods sold savings, and improved manufacturing productivity by 7% (versus our 5% target). We reduced non-manufacturing enrollment by 5,000 in FY 2012-13, bringing the cumulative enrollment reduction from our productivity efforts to 7,000 (versus our target established in February 2012 to reduce non-manufacturing enrollment by 5,700 by June 30, 2013). This productivity focus enabled us to cover a 4% reduction in Core EPS from foreign exchange as well as to accelerate second-half investments.
Adjusted Free Cash Flow Productivity was above target at 98%. We increased our quarterly dividend by 7% and had $6 billion in share repurchases. For the fiscal year, we effectively returned $12.5 billion of value to shareholders.
CEO Compensation for FY 2012-13
The Chief Executive Officers compensation is determined by the C&LD Committee with assistance from the C&LD Committees independent compensation consultant, Frederic W. Cook & Co. The C&LD Committee reviews and considers the following when making compensation decisions for the Chief Executive Officer:
Mr. Lafleys FY 2012-13 Compensation Highlights
In order to set Mr. Lafleys compensation for the time worked during FY 2012-13, the C&LD Committee reviewed the total compensation opportunity for chief executive officers in the Peer Group. They determined that Mr. Lafleys total compensation opportunity for FY 2012-13 would have been $19,000,000, reflecting his considerable experience and demonstrated results as the Companys previous Chief Executive Officer, as well as the relative size and value of the Company within the Peer Group. Of that $19,000,000, $2,000,000 was allocated to annual salary, $5,000,000 to annual cash bonus opportunity, and $12,000,000 to long-term incentive opportunity. Mr. Lafley received $217,391 in actual salary for FY 2012-13 representing his $2,000,000 annual salary rate and a start date of May 23, 2013. The C&LD Committee also awarded a cash payment of $1,632,000 in FY 2012-13 in lieu of participation in the short- and long-term incentive programs for FY 2012-13, which equated to 9.6% of his annualized short- and long-term incentive opportunity based on the approximately five weeks worked during FY 2012-13. This compensation structure was approved by both the C&LD Committee and the Board of Directors.
Mr. McDonalds FY 2012-13 Compensation Highlights
When setting Mr. McDonalds FY 2012-13 compensation, the C&LD Committee primarily considered the Company results. In addition, the C&LD Committee considered Mr. McDonalds leadership in other important areas such as sustainability, diversity, and innovation. The C&LD Committee decided to slightly increase Mr. McDonalds long-term compensation opportunity for FY 2012-13 to keep his total opportunity at the size-adjusted median of the compensation opportunity for chief executive officers in our Peer Group and to reflect his contributions, leadership, and company results.
Executive Compensation Practices
Our executive compensation practices support good governance and mitigate excessive risk-taking.
2012 Say on Pay Advisory Vote Outcome
In October 2012, shareholders approved the Companys Say on Pay proposal with 93.15% of votes cast in favor of the compensation paid to the NEOs. The Company considers this vote a positive endorsement of its executive compensation practices and decisions. The shareholders overwhelming support of the Companys executive compensation program is one factor that contributed to the C&LD Committees decision not to make significant changes to the Companys current executive compensation programs, principles, and policies. In addition, the Company routinely engages with our investors to understand their issues and perspectives on the Company, including our executive compensation practices. The C&LD Committee will continue to consider results from the annual shareholder advisory votes, including the next vote on October 8, 2013, as well as other shareholder input, when reviewing executive compensation programs, principles, and policies.
We design our compensation programs to motivate our executives to achieve our fundamental and overriding objectiveto create value for our shareholders at leadership levels on a consistent long-term basis. As such, we encourage shareholders to support the Companys advisory Say on Pay resolution, which can be found on pages 68-69 of this proxy statement.
End of Executive Summary
Our Compensation Objectives
Our fundamental and overriding objective is to create value for our shareholders at leadership levels on a consistent long-term basis. To accomplish this goal, the C&LD Committee designs executive compensation programs that:
Emphasizing Pay for Performance
Our executive compensation program consists of four key components: salary, STAR, and two long-term incentive equity programs PSP and the Key Manager Stock Grant. These four components constitute approximately 95% on average of each NEOs total compensation. The remaining 5% consists of retirement and other benefits.
We design our programs so that NEO compensation varies by type (fixed versus performance-based), length of performance period (short-term versus long-term), and form (cash versus equity). We believe that such variation is necessary to: (1) strike the appropriate balance between short- and long-term business goals; (2) encourage appropriate behaviors and discourage excessive risk-taking; and (3) align the interests of the Companys executives with our shareholders.
While salary is considered fixed, salary progression over time is based on individual performance. The remaining compensation components vary based on the performance of the individual, the performance of the individuals business unit, and the performance of the Company as a whole. This mix of components is designed to incent both individual accountability and collaboration to build long-term shareholder value. The charts below show the average mix of the key components of FY 2012-13 NEO compensation, excluding Mr. Lafleys, by type, length, and form.
Consistent with our design principles, performance-based programs pay out at 100% when goals are achieved. Payouts below 100% occur when goals are not achieved and payouts above 100% are possible when goals are exceeded. For example, over the previous 10 years, the average STAR payout for NEOs ranged from a low of 84% of target to a high of 164% of target and the Companys long-term performance program payout ranged from a low of 42% of target to a high of 200% of target. These payouts were based on the results achieved as compared to the pre-established performance targets, highlighting the clear link between pay and performance that underlies our compensation programs.
The C&LD Committee structures executive compensation so that total targeted annual cash and long-term compensation opportunities are competitive with the targets for comparable positions at 25 companies considered to be our peers, based on criteria described below (Peer Group). The C&LD Committee sets targets for each element of compensation relative to the same elements of compensation paid to those holding similar jobs at companies in our Peer Group, focusing on positions with similar management and revenue responsibility. The C&LD Committee reviews a regression analysis that adjusts for the differences in revenue size within the Peer Group. For the CEOs compensation analysis, the C&LD Committee considers the Companys revenue and market capitalization compared to our Peer Group.
The Peer Group is objectively determined and consists of global companies that generally meet the following criteria:
Each year, the C&LD Committee evaluates and, if appropriate, updates the composition of the Peer Group. Changes to the Peer Group are carefully considered and made infrequently to assure continuity from year to year. For FY 2012-13, the only change to the Peer Group was the replacement of Kraft Foods with Mondelez International, the successor corporation to roughly two-thirds of Krafts business following a corporate restructuring. The Peer Group currently consists of the following companies:
While the target total compensation for our NEOs is set considering the size-adjusted median target total compensation within our Peer Group, actual compensation varies depending on the NEOs experience in the particular role as well as total Company, business unit, and individual performance. Consistent with our principles to pay for performance and pay competitively, substantial differences may exist among NEOs pay because the C&LD Committee does not set specific guidelines for the ratio of any one positions pay to another.
Focus on Long-Term Success
To reinforce the importance of stock ownership and long-term focus for our most senior executives, including the NEOs, the C&LD Committee established the Executive Share Ownership Program and Stock Option Exercise Holding Requirement.
The Executive Share Ownership Program requires the CEO to own shares of Company stock and/or RSUs (including granted PSUs) valued at a minimum of eight times salary. All other NEOs must own stock and/or RSUs (including granted PSUs) valued at a minimum of four or five times salary, depending on the NEOs role. The C&LD Committee annually reviews these holdings, and in 2013 each NEO exceeded these requirements.
The Stock Option Exercise Holding Requirement ensures executives remain focused on sustained shareholder value even after exercising their stock options. The holding requirement applies when an executive, including an NEO, has not met the ownership requirements of the Executive Share Ownership Program. When the holding requirement applies, the CEO is required to hold the net shares received from stock option exercises for at least two years, and the other NEOs are required to hold net shares received from option exercises for at least one year. The holding requirement does not apply to incentive plan awards that executives elect to take as stock options instead of cash or unrestricted stock.
Elements of Our Compensation Programs
1 The breakdown of FY 2012-13 NEO Compensation excludes Mr. Lafleys compensation as Chief Executive Officer from May 23, 2013 through June 30, 2013.
2 The STAR Bonus is considered a cash program. However, participants may elect to receive their bonus in equity instead of cash.
Annual Cash Compensation
The Companys annual cash compensation consists of salary and STAR. We collect and analyze data from the Peer Group on the total annual cash compensation opportunity (salary plus annual bonus target) for positions comparable to those at the Company. We consider the target median annual cash compensation opportunity for each position within our peer group, adjusted for size using a regression analysis of Peer Group revenues, to set a salary range mid-point and a target for STAR, as a percentage of salary (STAR Target).
Mr. Lafleys earned salary for FY 2012-13 was $217,391, which represents the $2,000,000 annual salary rate the C&LD Committee determined for Mr. Lafley adjusted for a May 23, 2013 start date.
Mr. McDonalds salary remained at $1,600,000 for FY 2012-13. The salaries for Messrs. Geissler and Panayotopoulos also remained unchanged, at $1,045,000 and $1,085,000, respectively. The C&LD Committee increased Mr. Moellers salary from $825,000 to $850,000 to bring his annual cash compensation in line with the size-adjusted median of other chief financial officers in the Peer Group. The C&LD Committee also approved a 6% increase to bring Mr. Passerinis salary up to $850,000, in recognition of his continued strong performance in the dual role of Chief Information Officer as well as Group PresidentGlobal Business Services.
STAR Annual Bonus
The STAR program links a substantial portion of each NEOs annual cash compensation to the Companys performance for the fiscal year. The program focuses on the achievement of business unit results, but also includes a component that measures the performance of the Company as a whole. STAR awards are generally paid in cash, but executives can elect to receive their awards in RSUs, stock options, or deferred compensation.
STAR awards are calculated using the following formula:
The basis for each element of STAR is:
While the formula described above is used to calculate potential STAR awards, the C&LD Committee retains the authority to make no STAR award in a given year and the discretion to accept, modify, or reject managements recommendations for any or all employees, including the NEOs.
FY 2012-13 STAR Annual Bonus
In lieu of a FY 2012-13 STAR award, Mr. Lafley received a $480,000 cash payment on June 30, 2013. The C&LD Committee determined the amount of this payment by pro-rating an annual target bonus of $5,000,000 for the time worked during the fiscal year.
Based on the review of total annual cash compensation opportunity for similar positions in the Peer Group, the C&LD Committee maintained Mr. McDonalds STAR Target at 190% of salary for FY 2012-13. The C&LD Committee increased the CFOs STAR Target to 115% of salary to provide total targeted annual cash compensation opportunity and mix of incentive pay in line with other chief financial officers in the Peer Group. The STAR Target for the Vice Chairmen remained at 115%, and Mr. Passerinis STAR target remained at 90%.
At the beginning of FY 2012-13, the C&LD Committee established Organic Sales Growth and Core EPS Growth targets of 3.5% and 2%, respectively, to be used to compute the FY 2012-13 Company Performance Factor, and set a payout matrix that would generate a Company Performance Factor between 70% and 130% depending on the actual Organic Sales and Core EPS Growth achieved. Organic Sales Growth was slightly below target at 3%, and Core EPS Growth was above target at 5% resulting in a Total Company Performance Factor of 108%.
The C&LD Committee then reviewed the recommendations provided for the 21 different Business Unit Performance Factors and, after considering the performance of the total Company and the appropriate combination of Business Unit Performance Factors for each NEO, approved the following STAR awards.
1 Mr. Lafley did not participate in the FY 2012-13 STAR Program but received a prorated target cash payment as described above.
The C&LD Committee determined that a STAR award of $3,313,600 for Mr. McDonald, which was equal to 109% of his STAR Target and in line with the Companys average STAR award, was appropriate. With input from Mr. Lafley, the C&LD Committee also determined an appropriate award for Mr. Moeller would be $1,066,257, which is in line with the 109% Company average.
The STAR awards recommended to the C&LD Committee for Messrs. Geissler, Panayotopoulos and Passerini were computed using the formula described on page 29 of this proxy statement. These awards are in line with the Companys average award of 109%. For Messrs. Geissler and Panayotopoulos, the awards are appropriate based on their roles in managing the Companys overall results. For Mr. Passerini, who leads the Global Business Services organization, this award is also aligned with the results of all the businesses.
Long-Term Incentive Programs
The majority of the NEOs compensation is delivered through two long-term incentive programs tied to Company performance: the PSP and the Key Manager Stock Grant.
The C&LD Committee uses competitive market data to set total long-term compensation targets considering the median total long-term compensation of comparable positions in the Peer Group regressed for revenue size.
The CEO recommends NEO grants to the C&LD Committee based on benchmarked long-term compensation targets, adjusted for business results and individual contributions attributable to each NEO and, including that individuals leadership skills. These recommendations can be up to 50% above or 50% below the benchmarked target.
The C&LD Committee retains full authority to accept, modify, or reject these recommendations. In exceptional cases, no grant will be awarded. Approximately half of each NEOs long-term compensation is allocated to PSP via an Initial PSU Grant (as defined below). The remaining portion is a Key Manager Stock Grant. The final grant date fair value of the awards may not reflect an approximately 50/50 split between PSP and Key Manager Stock Grant due to the final accounting valuations for stock awards (PSUs and RSUs) versus stock options.
Performance Stock Program
The PSP aligns the interests of the NEOs with shareholders by encouraging NEOs to focus on the aspects of the long-term performance of the Company that create shareholder value. In the first year of each three-year performance period, the C&LD Committee grants Performance Stock Units (PSUs) to participants (Initial PSU Grant). The number of PSUs that vest at the end of the performance period will depend on Company results over the three-year period.
The C&LD Committee sets targets at the beginning of each performance period for the following categories (Performance Categories): Organic Sales Growth, before-tax Operating Profit Growth, Core EPS Growth, and Adjusted Free Cash Flow Productivity. The C&LD Committee then assigns a minimum and maximum for each Performance Category. At the end of the three-year performance period, each Performance Category will have a Performance Factor between 0% and 200%, depending on results achieved in each category. The Performance Factor will be 100% if the business results for the category are at target. Business results falling between the minimum and maximum levels are determined via linear interpolation. Using a sliding scale to reward performance, as opposed to all or nothing goals, discourages participants from taking unnecessary risks to ensure a final payment under the program. At the end of each three-year performance period, the C&LD Committee multiplies the average of the four Performance Factors by the Initial PSU Grant to determine the vested PSUs. The formula is as follows:
The vested PSUs are delivered in shares of Common Stock to the applicable participant following the end of the Performance Period. Participants may elect to defer receipt of the shares of Common Stock by choosing to instead receive RSUs.
Key Manager Stock Grant
The Key Manager Stock Grant is the second component of the Companys long-term incentive compensation for its senior executives. These awards are generally granted in stock options, but executives can elect to receive all or a portion of their grant in RSUs, with the exception of the CEO, whose grant form and amount is solely determined by the C&LD Committee. Stock options are not exercisable (do not vest) until three years from the date of grant and expire ten years from the date of grant, or earlier as related to certain termination events. Vested RSUs are delivered in shares of Common Stock five years from the date of grant. These awards focus executives on the long-term success of the Company, and the vesting restrictions enhance retention because employees who voluntarily resign from the Company during the specified vesting periods forfeit their grants.
FY 2012-13 Long-Term Incentive Grants
Mr. Lafley did not participate in FY 2012-13 long-term incentive programs. Instead, he received a $1,152,000 cash payment on June 30, 2013 that represents a pro rata portion of the long-term incentive opportunity that the C&LD Committee established for him for FY 2012-13.
The following long-term incentive grants were made in FY 2012-13. These grants are reported using grant date fair value, but the actual compensation realized by each NEO will be determined by future Company performance.
1 Mr. Lafley did not receive a FY 2012-13 long-term incentive grant. Instead, he received a pro-rated target cash payment as described above.
The C&LD Committee approved a slight increase in total long-term incentives for Mr. McDonald to maintain his long-term compensation opportunity at the size-adjusted median of chief executive officers in our Peer Group. When making this decision, the C&LD Committee considered the Company results and Mr. McDonalds leadership in other important areas, such as productivity, sustainability, and diversity, which are needed for the long-term success of the Company. This increase in Mr. McDonalds long-term opportunity results in a $10,399,333 grant date fair value, which is $166,091 lower than the grant date fair value of last years awards due to a lower stock option valuation. The lower grant date fair value for stock options also impacted each of the other NEOs long-term incentive values.
The C&LD Committee approved an increase of approximately 5% in total long-term incentives for Mr. Moeller, which is slightly above the median long-term compensation opportunity of other CFOs in the Peer Group for companies of similar size. This increase reflects Mr. Moellers performance as CFO and improving Company results. The grant date fair value of his long-term incentive awards was $3,763,743.
The C&LD Committee approved an increase of approximately 4% in total long-term incentives for Messrs. Geissler and Panayotopoulos to maintain their position at the size-adjusted median long-term compensation opportunity of similar positions in our Peer Group. The grant date fair value of Messrs. Geisslers and Panayotopoulos awards was $4,303,670 each.
The C&LD Committee approved an increase of approximately 8% in total long-term incentives for Mr. Passerini, which positions him above global function head positions at other companies in our Peer Group. This grant recognizes that, in addition to delivering results as Chief Information Officer, Mr. Passerini also served as Group PresidentGlobal Business Services. The grant date fair value of Mr. Passerinis long-term incentive awards was $2,578,024.
In conjunction with deciding the amount and allocation of the NEOs long term incentive opportunities for FY 2012-13, the C&LD Committee set the PSP Performance Factors listed below. The delivery of results against these factors will determine the ultimate payout for this portion of compensation.
1 Organic Sales Growth will be based on the percentile rank within the competitive peer group of the 3-year compound annual growth rate.
2 Before Tax Operating Profit will be based on the 3-year compound annual growth rate.
3 Core EPS Growth will be based on the 3-year compound annual growth rate.
4 Adjusted Free Cash Flow Productivity achieved will be based on the 3-year sum of Operating Cash Flow less the sum of Capital Expenditures divided by the sum of the Net Earnings.
Looking Back: Realized Pay for PSUs Granted in FY 2010-11
In addition to setting the Performance Goals for the next three years, the C&LD Committee reviewed the results for the past three years (FYs 2010-11 to 2012-13). The C&LD Committee reviewed these results against the goals established at the beginning of the Performance period to determine the realized pay.
1 Organic Sales Growth is based on the percentile rank within the competitive peer group of the 3-year compound annual growth rate.
2 Before Tax Operating Profit Growth is based on the 3-year compound annual growth rate.
3 Core EPS Growth is based on the 3-year compound annual growth rate.
4 Adjusted Free Cash Flow Productivity achieved is based on the 3-year sum of Operating Cash Flow less the sum of Capital Expenditures divided by the sum of the Net Earnings.
Based on the results delivered, the NEOs, except for Mr. Lafley, who did not receive a 2010-11 PSP grant, received PSP payouts at 20% of target, which resulted in the following PSU awards for each NEO:
1 Mr. Lafley did not receive a PSU grant in FY 2010-11. He will begin participating in the PSP program in FY 2013-14.
2 The value of PSUs granted and awarded was calculated by multiplying the number of PSUs by the Company stock price as of June 30, 2013. These PSUs will deliver in shares of Common Stock or RSUs (as elected by the participants) in August 2013.
This PSP payout reinforces the pay-for-performance design of the PSP.
Special Equity Awards
On rare occasions, the C&LD Committee makes special equity grants in the form of restricted stock or RSUs to senior executives to encourage retention of the talent necessary to manage the Company successfully or to recognize superior performance. There were no special equity awards granted to NEOs by the C&LD Committee during FY 2012-13.
The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan (PST) is the Companys primary retirement program for U.S.-based employees. The PST is a qualified defined contribution plan providing retirement benefits for full-time U.S. employees, including the NEOs. Under the PST, the Company makes an annual contribution of cash, which is used to purchase Company stock that is credited to each participants PST account, upon which dividends are earned. The amount of the stock grant varies based upon individual salaries and years of service.
Some participants in PST (including the NEOs) do not receive their full contribution due to federal tax limitations. As a result, they participate in the nonqualified PST Restoration Program. These individuals receive RSUs valued at an amount equal to the difference between the contribution made under PST and what would have otherwise been contributed under PST but for the tax limitations. Participants are vested in their PST accounts after five years, and their PST Restoration RSUs are forfeitable until they become eligible for retirement.
The PST and the PST Restoration Program have created ownership at all levels of the Company. These programs continue to serve the Company and its shareholders well by focusing employees on the long-term success of the business.
For non-U.S.-based employees, individual country plans provide retirement benefits. In addition, employees who work in multiple countries during their careers may also be eligible for supplemental benefits under the International Retirement Plan (IRP) and the Global International Retirement Arrangement (IRA). Messrs. Geissler, Panayotopoulos, and Passerini participate in these programs.
The Company provides certain other limited benefits to senior executives to fulfill particular business purposes, which are primarily for convenience and personal security. No changes were made to executive benefits over the past year, and the Company continues to manage executive benefits as a very small percentage (2%) of total compensation for the NEOs during FY 2012-13.
Benefits such as home security systems, secured workplace parking, and an annual physical health examination are provided to safeguard NEOs. While Company aircraft are generally used for Company business only, for security reasons the Chief Executive Officer is required by the Board to use Company aircraft for all air travel, including personal travel. To increase executive efficiency, in limited circumstances, NEOs may travel to outside board meetings on Company aircraft as part of a longer business trip. In addition, if a Company aircraft flight is already scheduled for business purposes and can accommodate additional passengers, NEOs and their spouse/guests may join flights for personal travel. To the extent any travel on Company aircraft (e.g. personal/spouse/guest travel) results in imputed income to the NEO, the NEO is responsible for paying the taxes on that income and the Company does not provide separate gross-up payments based on the NEOs personal income tax due. We also reimburse NEOs for the cost of some tax preparation and financial counseling to minimize distractions, keep NEOs attention focused on Company business, and to assure accurate personal tax reporting. To remain competitive and retain our top executives, we offer executive group whole life insurance coverage (equal to annual salary rate plus STAR Target up to $5,000,000). Finally, to further increase executive efficiency, we provide limited local transportation within Cincinnati. The C&LD Committee reviews these arrangements regularly to assure they continue to fulfill business needs and remain reasonable versus market practice.
Other Key Compensation Program Features
This additional information may assist the reader in better understanding the Companys compensation practices and principles.
Engagement of Independent Adviser
The C&LD Committee renewed its agreement with Frederic W. Cook & Co., to advise it on various compensation matters, including Peer Group identification, competitive practices and trends, specific program design, and actions with respect to NEO and principal officer compensation. Prior to the renewal, the C&LD Committee evaluated the independence of Frederic W. Cook & Co., taking into account any relationships with the Companys directors, officers, and employees in accordance with NYSE listing standards. Based on this evaluation, the C&LD Committee concluded Frederic W. Cook & Co. is an independent advisor. Under the terms of its agreement with the C&LD Committee, Frederic W. Cook & Co. is prohibited from doing any other business for the Company or its management, and the C&LD Committee has direct responsibility for oversight and compensation of the work performed by Frederic W. Cook & Co. The C&LD Committee generally meets with its independent compensation consultant in an Executive Session at regularly scheduled C&LD Committee meetings.
Company management uses a separate compensation consultant, Meridian Compensation Partners, LLC, to provide compensation advice, competitive survey analysis, and other benchmark information related to trends and competitive practices in executive compensation.
The C&LD Committee believes employment contracts for executives are not necessary, because most executives have spent the majority of their professional careers with the Company and have developed a focus on the
Companys long-term success. Moreover, the C&LD Committee does not provide special executive severance payments, such as golden parachutes, to its executives. In the event the Company encourages an NEO, or any other U.S. employee, to terminate employment with the Company (but not for cause), that individual may receive a separation allowance of up to one years annual salary, calculated based on years of service.
Generally, the Company does not increase payments to any employees, including NEOs, to cover non- business-related personal income taxes. However, certain expatriate allowances, relocation reimbursements, and tax equalization payments are made to employees assigned to work outside their home countries, and the Company will cover the personal income taxes due on these items in accordance with expatriate policy because there is a business purpose. In addition, from time to time, the Company may be required to pay personal income taxes for certain separating executives hired through acquisitions in conjunction with pre-existing contractual obligations.
Governing Plans, Timing, Pricing, and Vesting of Stock-Based Grants
All grants of stock options, PSUs, restricted stock and/or RSUs made to employees after October 13, 2009, are made under The Procter & Gamble 2009 Stock and Incentive Compensation Plan (as amended) (2009 Plan). The 2009 Plan was approved by Company shareholders at the October 13, 2009, annual shareholder meeting. Previous grants were made under The Procter & Gamble 2001 Stock and Incentive Compensation Plan (as amended) (2001 Plan) and The Gillette Company 2004 Long-Term Incentive Plan (2004 Gillette Plan). The 2001 Plan was approved by Company shareholders. The 2004 Gillette Plan was approved by Gillette shareholders and adopted by the Company in 2005 as part of our merger with The Gillette Company.
The 2009 Plan contains a vesting provision commonly known as a second trigger, which limits accelerated vesting in the event of a change in control. Time-based awards assumed as part of a change in control would only vest for involuntary terminations of employment for reasons other than cause and for terminations of employment for good reason.
With the exception of any special equity awards discussed on page 34 of this proxy statement, the Company grants stock, PSUs, RSUs, and stock options on dates that are consistent from year to year. If the C&LD Committee changes a grant date, it is done in advance and only after careful review and discussion. The pre-established grant dates for the programs are as follows: PST Restoration and IRP, first Thursday in August; STAR, last business day on or before September 15; and PSP and Key Manager Stock Grants, last business day of February (and, if necessary for corrections, on the last business day on or before May 9).
The Company has never re-priced stock options and is not permitted to do so without prior shareholder approval. The Company does not backdate stock options. We use the closing price of the Common Stock on the date of grant to determine the grant price for executive compensation awards. However, because the PST uses the value of shares based on the average price of Common Stock for the last five days in June, the grants of RSUs made under the PST Restoration Program and IRP follow this same grant price practice.
Mitigation of Excessive Risk-Taking
Recoupment & Clawback
The C&LD Committees Senior Executive Officer Recoupment Policy permits the C&LD Committee to recoup or clawback STAR or long-term incentive program payments made to executives in the event of a significant restatement of financial results for any reason. This authority is in addition to the C&LD Committees authority under the 2001 Plan and the 2009 Plan to suspend or terminate any outstanding stock options if the C&LD Committee determines that the participant violated certain plan provisions. Moreover, the 2009 Plan has a clawback provision that allows the Company or the C&LD Committee to recover certain proceeds from option exercises or delivery of shares if the participant violates certain plan provisions.
Balanced Weighting of Performance Metrics in Compensation Programs
The STAR program and PSP use balanced weighting of multiple performance metrics to determine the payout. This discourages excessive risk-taking by removing any incentive to focus on one goal to the detriment of others. STAR and PSP are described on pages 29-31 of this proxy statement.
Prohibition of Use of Company Stock in Derivative Transactions
The Companys Insider Trading Policy prohibits NEOs from involving Company stock in pledging, collars, short sales, hedging investments, and other derivative transactions. Purchases and sales of Company stock by NEOs can only be made during the one-month period following public earnings announcements or, if outside these window periods, with express permission from the Companys Legal Division or in accordance with a previously established trading plan that meets SEC requirements.
Deferred Compensation Plan
The Procter & Gamble Company Executive Deferred Compensation Plan (EDCP) allows executives to defer receipt of up to 100% of their STAR award and/or up to 50% of their annual salary. Executives may also elect to convert a portion of their PST Restoration RSUs into notional cash contributions to the EDCP with investment choices that mirror those available to all U.S. employees who participate in the Companys 401(k) plan. No above-market or preferential interest is credited on deferred compensation, as those terms are defined by the SEC.
Tax Treatment of Certain Compensation
Section 162(m) of the Internal Revenue Code limits the Company deductibility of executive compensation paid to certain NEOs to $1,000,000 per year, but contains an exception for certain performance-based compensation. Stock options awarded under the Key Manager Stock Grant as well as awards granted under STAR and PSP programs satisfy the performance-based requirements for deductible compensation.
While the C&LD Committees general policy is to preserve the deductibility of compensation paid to the NEOs, the C&LD Committee nevertheless authorizes payments that might not be deductible if it believes they are in the best interests of the Company and its shareholders. In addition, in certain years, individuals may receive non-deductible payments resulting from awards made prior to becoming an NEO.
Executive Compensation Changes for FY 2013-14
Mr. Lafleys salary will remain at $2,000,000 through FY 2013-14. In addition, his STAR Target will remain at $5,000,000 (250% of base salary). Following his prior retirement from the Company, Mr. Lafley relocated his home to Florida. As Chairman of the Board, President and Chief Executive Officer, he is expected to work at the Companys global headquarters in Cincinnati, Ohio. Because of this, the C&LD Committee provided Mr. Lafley an allowance of $200,000 intended to cover costs associated with a temporary residence and other living expenses due to having his permanent residence in Florida, but needing to work in Cincinnati. This allowance is not grossed up.
The C&LD Committee reviewed the competiveness of total annual cash compensation for the CFO, and Vice Chairmen at its June 4, 2013, meeting. As a result, the C&LD Committee made no changes to the salary or STAR Target for Messrs. Geissler and Panayotopoulos. The total annual cash compensation opportunity of the Vice Chairmen remains aligned with similar roles at companies in our Peer Group with similar size.
The C&LD Committee increased the STAR Target of Mr. Moeller from 115% to 120% for FY 2013-14. This increase more closely aligns Mr. Moellers total annual cash compensation opportunity with other chief financial officers in the Peer Group.
The C&LD Committee did not make any decisions in the June 4, 2013 meeting that impacted the compensation of Mr. Passerini.
The following tables, footnotes, and narratives, found on pages 38-55, provide information regarding the compensation, benefits, and equity holdings in the Company for the NEOs. For Mr. Lafley, some of the tables include compensation he earned during his 32-year career with the Company, including his prior service as Chairman of the Board, President and Chief Executive Officer, as required by the rules.
1 For Mr. Lafley, Bonus reflects the cash payment made on June 30, 2013 to reflect approximated STAR and long-term incentives as described on page 23 of this proxy statement. For all other NEOs, FY 2012-13 Bonus reflects 2012-13 STAR awards that will be paid on September 15, 2013. Each NEO that participated in STAR can elect to take his STAR award in cash, deferred compensation, RSUs, or stock options. For FY 2012-13 Messrs. McDonald, Moeller, and Passerini elected 100% cash and Messrs. Geissler and Panayotopoulos elected 100% options.
2 For FY 2012-13, Stock Awards include the grant date fair value of any PST Restoration Program awards and the PSUs granted in February 2013 under the PSP. For Messrs. Moeller and Passerini, FY 2012-13 Stock Awards also include the grant date fair value of RSUs granted in February 2013 under the Key Manger Stock Grant. The fair value of these awards is determined in accordance with FASB ASC Topic 718. For PSUs granted under the PSP, an executive must be an employee as of June 30th following the grant date to retain the PSUs (retention period), and the PSUs deliver in August following the end of the Performance Period (vesting period). For RSUs granted under the Key Manager Stock Grant, an executive must be an employee as of June 30th following the grant date to retain the RSUs (retention period), and the RSUs deliver five years from the grant date (vesting period). Pursuant to SEC rules, the amounts shown exclude the impact of forfeitures related to service-based vesting conditions. Please see Note 8 to the Consolidated Financial Statements contained in the Companys 2013 Annual Report on Form 10-K for more information.
3 Option Awards for FY 2012-13 include the grant date fair value of each Key Manager Stock Grant, determined in accordance with FASB ASC Topic 718. Executives must remain employed through June 30th following a Key Manager Stock Grant in order to retain these stock options (retention period) and these option grants become exercisable three years from the date of grant (vesting period). Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information on the assumptions made in the valuation for the current year awards reflected in this column, please see Note 8 to the Consolidated Financial Statements contained in the Companys 2013 Annual Report on Form 10-K. For information on the valuation assumptions with respect to grants made in prior fiscal years, please see the corresponding note to the Consolidated Financial Statements contained in the Companys Annual Report for the respective fiscal year.
4 This column reflects aggregate changes in the actuarial present value of Messrs. Geisslers, Panayotopoulos, and Passerinis pension benefits under all defined benefit and actuarial pension plans. For FY 2012-13, the aggregate value of pension benefits for Messrs. Geissler and Panayotopoulos decreased by $467,000 and $221,000, respectively. None of the other NEOs has a pension plan. None of the NEOs had above-market earnings on deferred compensation.
5 Please see the table below for information on the numbers that comprise the All Other Compensation column.