ANDEAVOR DEF 14A 2008
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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
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Filed by a Party other than the Registrant: o
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NOTICE OF 2008 ANNUAL MEETING OF STOCKHOLDERS
MAY 6, 2008
Tesoro Corporation will hold its 2008 Annual Meeting of Stockholders on Tuesday, May 6, 2008, at the Grand Hyatt San Antonio, 1148 East Commerce Street, San Antonio, Texas 78205 beginning at 5:00 P.M. Central Time:
1. To elect nine directors;
2. To approve amendments to the Tesoro Corporation 2006 Long-Term Incentive Plan to increase the total number of shares authorized for issuance under the plan from 3,000,000 to 6,000,000 shares of common stock, to increase the shares available for option grants from 2,250,000 to 5,250,000 shares and to increase the shares available for restricted stock and similar awards defined as Full Value Awards in the Plan from 750,000 to 2,750,000 shares;
3. To ratify the appointment of Ernst & Young LLP as our independent auditors for fiscal year 2008; and
4. To transact such other business as may properly come before the meeting or any adjournment thereof.
Holders of common stock of record at the close of business on March 14, 2008, are entitled to notice of and to vote at the annual meeting.
By Order of the Board of Directors,
CHARLES S. PARRISH
April 3, 2008
San Antonio, Texas
2008 ANNUAL MEETING OF STOCKHOLDERS
MAY 6, 2008
This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of Tesoro Corporation of proxies to be voted at the 2008 Annual Meeting of Stockholders to be held on Tuesday, May 6, 2008, and at any adjournment thereof.
Each proxy will be voted as specified thereon by the stockholder. Any duly executed proxy not specifying the contrary will be voted as follows:
A stockholder giving a proxy may revoke it by written notice received by Tesoros Corporate Secretary at any time before it is voted.
At the close of business on March 14, 2008, the record date for the 2008 annual meeting, there were outstanding and entitled to vote 145,089,742 shares of our common stock. The holders of our common stock are entitled to one vote for each share held by them on all matters submitted to them. We have no other voting securities outstanding.
A copy of our 2007 Annual Report on Form 10-K is being mailed with this Proxy Statement to all stockholders as of the record date.
Our principal executive offices are located at 300 Concord Plaza Drive, San Antonio, Texas 78216-6999. This Proxy Statement and accompanying form of proxy are first being mailed to stockholders on or about April 3, 2008.
QUESTIONS AND ANSWERS
Stockholders of record as of the close of business on March 14, 2008 will be entitled to notice of, and to vote at, our 2008 Annual Meeting of Stockholders or any reconvened meetings after any adjournments of the meeting.
On the record date, March 14, 2008, we had outstanding 145,089,742 shares of common stock, which constitute our only outstanding voting securities. Each stockholder is entitled to one vote for each share of common stock held as of the record date.
You are being asked to vote on the following matters: the election of nine directors, the approval of amendments to increase the total number of shares of common stock authorized for issuance and the shares available for option grants and restricted stock and similar awards defined as Full Value Awards under our 2006 Long-Term Incentive Plan, and the ratification of Ernst & Young LLP as our independent auditors for fiscal year 2008.
The Board recommends that you vote as follows:
What is the difference between holding shares as a stockholder of record and as a beneficial owner of shares held in street name?
Many of our stockholders hold their shares through a stockbroker, bank or other nominee rather than directly in their own names. As summarized below, there are some distinctions between shares held of record and those owned beneficially.
If your shares are registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, you are considered the stockholder of record with respect to those shares, and these proxy materials are being sent directly to you by us. As a stockholder of record, you have the right to grant your voting proxy directly to us or to vote in person at the meeting. We have enclosed a proxy card for your use.
If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of the shares held in street name, and these proxy materials are being forwarded to you by your broker or nominee who is considered the stockholder of record
with respect to those shares. As the beneficial owner, you have the right to direct your broker on how to vote and are also invited to attend the meeting. However, since you are not the stockholder of record, you may not vote these shares in person at the meeting. Your broker or nominee has enclosed a voting instruction card for your use.
If you are a stockholder whose shares are registered in your name, you may vote your shares by one of the following three methods:
The deadline for voting electronically through the internet or by telephone is 11:59 p.m., Eastern Time, on May 5, 2008.
If your shares are held in street name (through a broker, bank or other nominee), you may receive a separate voting instruction form with this Proxy Statement, or you may need to contact your broker, bank or other nominee to determine whether you will be able to vote electronically using the internet or telephone.
PLEASE NOTE THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU WILL NOT BE PERMITTED TO VOTE IN PERSON AT THE MEETING UNLESS YOU FIRST OBTAIN A LEGAL PROXY ISSUED IN YOUR NAME FROM THE RECORD HOLDER.
The proxies identified on the back of the proxy card will vote the shares of which you are stockholder of record in accordance with your instructions. If you sign and return your proxy card without giving specific voting instructions, the proxies will vote your shares FOR the nominated slate of directors and FOR each of the other proposals. The giving of a proxy will not affect your right to vote in person if you decide to attend the meeting.
What if I am a participant in the Tesoro Corporation Thrift Plan or the Tesoro Corporation Retail Savings Plan?
Participants in the Tesoro Corporation Thrift Plan or the Tesoro Corporation Retail Savings Plan may instruct Fidelity Management Trust Company, as trustee for such plans, how to vote all shares of Tesoro common stock allocated to their accounts. If a participant in the Tesoro Corporation Thrift Plan or the Tesoro Corporation Retail Savings Plan does not instruct Fidelity Management Trust Company how to vote, the shares of Tesoro common stock allocated to such participants accounts will not be voted.
By submitting your proxy card or voting by internet or by telephone, you authorize the proxies to use their judgment to determine how to vote on any other matter properly brought before the meeting. The proxies identified on the back of the proxy will vote your shares in accordance with your instructions. If you sign and return your proxy card or otherwise vote without giving specific voting instructions, the proxies will vote your shares FOR the nominated slate of directors and FOR each of the other proposals. The Board does not intend to bring any other business before the meeting, and it is not aware that anyone else intends to do so. If any other business comes before the meeting, it is the intention of the persons named in the enclosed form of proxy to vote as proxies in accordance with their best judgment.
Yes. Whether you vote by telephone, internet or by mail, you can change or revoke your proxy before it is voted at the meeting by:
Your shares are probably registered in more than one account. You should vote each proxy card you receive.
A quorum is the number of shares that must be present to hold the meeting. The quorum requirement for the meeting is the presence of stockholders, in person or by proxy, who own a majority of the outstanding shares as of the record date. A proxy that a stockholder submits may indicate that all or a portion of the shares represented by the proxy are not being voted (stockholder withholding) with respect to a particular matter. Proxies that are marked abstain, proxies relating to street name shares that are returned to us but marked by brokers as not voted (broker non-votes) and proxies reflecting shares subject to stockholder withholding will be treated as shares present for purposes of determining the presence of a quorum on all matters unless authority to vote is completely withheld on the proxy.
A broker non-vote occurs when a broker submits a proxy that states that the broker does not vote for some or all of the proposals, because the broker has not received instructions from the beneficial owners on how to vote on the proposals and does not have discretionary authority to vote in the absence of instructions.
The preliminary voting results will be announced at the meeting. The final results will be published in our quarterly report on Form 10-Q for the second quarter of 2008.
We will bear the cost of the solicitation. In addition to the use of the mails, our directors, officers and employees, without additional compensation, may solicit proxies by personal interview, telephone, telegram or otherwise. We have retained a professional proxy soliciting organization, Innisfree M&A Incorporated, to aid in the solicitation of proxies from brokers, bank nominees and other institutional owners, and possibly individual holders of record of 1,000 shares or more, by personal interview, telephone or similar means. We will pay such organization its customary fees, estimated not to exceed $8,500, and will reimburse such organization for certain expenses.
May I propose actions for consideration at next years annual meeting of stockholders or nominate individuals to serve as directors?
You may submit proposals for consideration at future stockholder meetings, including director nominations.
Under the Securities and Exchange Commission rules, stockholder proposals for our 2009 Annual Meeting of Stockholders must be received at our principal executive offices by December 4, 2008, to be considered for inclusion in our proxy materials relating to that meeting. Nominations for directors must be submitted as described on page 22 of this proxy statement.
Under our By-Laws, other stockholder proposals must be delivered to or mailed and received at our principal executive offices not less than 90 days nor more than 180 days prior to the anniversary date of the immediately preceding annual meeting (which for the 2009 annual meeting would be no earlier than November 7, 2008, and no later than February 5, 2009); provided, however, that in the event that the date of the annual meeting is more than 45 days later than the anniversary date of the immediately preceding annual meeting (which for the 2009 annual meeting would be after June 20, 2009), other stockholder proposals to be timely must be received not later than the close of business on the tenth day following the earlier of the date on which a written statement setting forth the date of the annual meeting was mailed to stockholders or the date on which it is first disclosed to the public.
Any stockholder proposals must be in writing and addressed to the attention of our Corporate Secretary. We reserve the right to reject, rule out of order, or take other appropriate actions with respect to any proposal or nomination that does not comply with these and other applicable requirements.
At the 2008 annual meeting, the stockholders are requested to elect nine directors, constituting the whole Board of Directors, to hold office until the 2009 Annual Meeting of Stockholders or until their successors are elected and qualified. Proxies cannot be voted for more than nine nominees. Unless otherwise specified, all duly executed proxies received on a timely basis will be voted for the nominees set forth below. All of the nominees are currently on our Board of Directors. Each of the nominees has indicated his willingness to serve as a director, if elected, and we have no reason to believe that any nominee will be unable to serve. The persons designated as proxies, however, reserve full discretion to cast votes for other persons in the event that any one or more of the nominees are unable to serve.
The election of director nominees requires a plurality of the votes cast at the election. Under Delaware law and our Restated Certificate of Incorporation and By-laws, shares as to which a stockholder withholds authority to vote on the election of directors (Abstentions) and shares as to which a broker indicates that it does not have discretionary authority to vote (Broker Non-Votes) will not be counted as voting on the election of directors and will not affect the election of the nominees receiving a plurality of the votes cast.
Tesoro has adopted a majority vote provision as part of our Corporate Governance Guidelines. Under this provision, in an uncontested election of directors (i.e. an election where the only nominees are those recommended by the Board), any nominee for director who receives a greater number of votes withheld from his or her election than votes for his or her election (a Majority Withheld Vote) is required to promptly tender his or her resignation to the Board following certification of the stockholder vote.
The Governance Committee will promptly consider the resignation offer and a range of possible responses based on the circumstances that led to the Majority Withheld Vote, if known, and make a recommendation to the Board. The Board will then act on the Governance Committees recommendation taking into account the Governance Committees recommendation and will publicly disclose its decision regarding whether to accept the directors resignation offer, or, if applicable, the reason(s) for rejecting the resignation offer, in a Form 8-K or 10-Q furnished to the Securities and Exchange Commission within ninety (90) days from the date of the certification of the stockholder vote. The Governance Committee in making its recommendation, and the Board, in making its decision, may each consider any factors or other information that it considers appropriate or relevant, including, without limitation, the stated reasons why stockholders withheld, or third parties recommended that stockholders withhold, votes for election from such director, the reasonableness and accuracy of the bases for such reasons and recommendation, the length of service and qualifications of such director, the directors contributions to Tesoro, and our Corporate Governance Guidelines.
If the resignation of a director tendering his or her resignation pursuant to this policy is accepted by the Board, then the Governance Committee will recommend to the Board whether to fill such vacancy or to reduce the size of the Board.
Any director who tenders his or her resignation pursuant to this provision shall not participate in the Governance Committee recommendation or Board action regarding
whether to accept the resignation offer. However, if each member of the Governance Committee received a Majority Withheld Vote at the same election, then the independent directors who did not receive a Majority Withheld Vote shall appoint a committee amongst themselves solely for the purpose of considering the resignation offers and recommend to the Board whether to accept them.
Information regarding the business experience of each nominee for director and certain other information as to each nominee for director is set forth in the table below and in the following paragraphs. Certain of the information appearing in the table and notes thereto have been furnished to us by the respective nominees. No director or nominee for election as a director of Tesoro has a family relationship with any other director, nominee or executive officer of Tesoro. Our Board of Directors recommends that you vote FOR the election to the Board of each of the following nominees.
The Board of Directors met 12 times during 2007. Each member of the Board attended at least 75% of the meetings of the Board and committees on which such director served during 2007.
The Board of Directors has affirmatively determined that each of Messrs. Bookout, Chase, Goldman, Grapstein, Johnson, Nokes, Schmude and Wiley has no material relationship with Tesoro and has satisfied the independence requirements of the Securities and Exchange Commission and the New York Stock Exchange. In addition, the Board has determined that all of the members of each of the Audit, Compensation and Governance Committees of the Board meet the independence requirements of the NYSE and SEC. In assessing director independence, the Board of Directors considered the relationships (as a customer or supplier or otherwise) of Tesoro with various companies and charities with which such directors may be affiliated and has determined that none of these relationships could impair the independence of such directors. In making this assessment, as to such companies, the Board took into account the level of transactions with such companies in relationship to Tesoros and the other parties aggregate sales, the level of director involvement in such transactions and the ability of such directors to influence such transactions and as to charities, the Board reviewed the charities to which Tesoro made donations and determined that none of the directors were associated with any of such charities.
Our Corporate Governance Guidelines provide that all members of the Board are expected to attend Tesoros annual meeting of stockholders. All of our directors attended the 2007 Annual Meeting of Stockholders. We require that a majority of our directors be independent in accordance with the requirements of the NYSE and SEC. In addition, the Governance Committee is required to seek to attain a diverse Board and that any search by such committee or search firm to fill vacancies will seek to include diverse candidates from traditional and non-traditional pools. Other than these requirements, the Board has not defined any other minimum requirements for Board membership. In general, however, persons considered for Board positions must have demonstrated leadership capabilities, have no personal or financial interest that would conflict or appear to conflict with the interests of Tesoro and be willing and able to commit the necessary time for Board and committee service. Our Corporate Governance Guidelines are available on our website at www.tsocorp.com under the heading About Tesoro under the subheading Social Responsibility and is available in print to any stockholder who requests it from the Secretary of Tesoro.
In 2007, we provided the following annual compensation to directors who are not employees:
Each member of the Board who is not an officer of Tesoro receives a base retainer of $100,000 per year, $50,000 of which is payable in restricted shares of Tesoro common stock under the 2005 Director Compensation Plan described below and $50,000 of which is payable in cash. The independent, non-employee Lead Director of the Board receives an additional $25,000 per year for his service in that capacity. In addition, the chair of the Audit Committee receives $15,000 per year, the chair of the Compensation Committee receives $10,000 per year and the chairs of the Environmental, Health & Safety and Governance Committees each receive $8,000 per year for service in such positions. We reimburse our directors for travel and lodging expenses that they incur in connection with their attendance at meetings of the Board, meetings of any Board committee of which they are a member and our annual meeting of stockholders.
The Tesoro Corporation 2005 Director Compensation Plan, which we refer to as the 2005 Plan, provides non-employee directors an opportunity to obtain or increase their proprietary interest in Tesoro, thereby encouraging them to continue to serve on our Board of Directors. The 2005 Plan provides that a non-employee directors annual retainer fee (as it may be determined by the Board from time to time, which is currently $100,000 as described above) for any twelve-month period beginning May 1 and ending April 30 will be paid in quarterly installments. For each service period during the term of the 2005 Plan, provided there are sufficient shares of our common stock remaining available for issuance under the 2005 Plan, we will pay to each non-employee director the non-cash portion of the annual retainer fee earned during the service period in whole shares of our common stock. The number of shares of our common stock to be delivered to each non-employee director will be determined by dividing the amount of the non-cash portion of the annual retainer fee earned during the service period by the fair market value of our common stock on the last trading day during such service period (generally, determined as the closing sale price of the common stock on that date as reported on the NYSE). No fractional shares of our common stock will be issued under the 2005 Plan; accordingly, the number of shares of our common stock to be delivered to a non-employee director with respect to the non-cash portion of the annual retainer fee earned during a service period will be rounded up to the nearest whole share if necessary to prevent the issuance of a fractional share. The maximum number of shares of our common stock that may be granted under the 2005 Plan is 100,000, subject to certain adjustments.
Under the Tesoro Corporation Board of Director Deferred Compensation Plan, a director electing to participate may defer between 20% and 100% of his Lead Director or Committee Chair fees for the ensuing year, with deferred compensation credited to an interest-bearing account maintained by us. Interest is applied each quarter to the beginning balance at the prime rate published in the Wall Street Journal on the last business day of such quarter plus two percentage points (9.25% at December 31, 2007). All payments under the Deferred Compensation Plan are solely our obligation. Upon the death of a participating director, the balance in his account under the Deferred Compensation Plan is payable to his beneficiary or beneficiaries in one lump sum. In the event of the disability, retirement or the removal or resignation prior to the death, disability or retirement of a participating director, the balance in his account will be paid to such director in ten equal annual installments. In the event of a change of control (as change of control is defined in the Deferred Compensation Plan), the balance in each participating directors account will be distributed to him as a lump sum within 30 days after the date of the change of control. We also have an agreement with Frost National Bank of San Antonio, Texas, under which the Tesoro Corporation Board of Director Deferred Compensation Plan Trust was established for the sole purpose of creating a fund to provide for the payment of deferred compensation to participating directors under the Deferred Compensation Plan.
Under the Tesoro Corporation Board of Director Deferred Phantom Stock Plan, each non-employee director shall have credited to his account as of the last day of the year a yearly accrual
equal to $7,250 (limited to 15 accruals, including previous accruals of retirement benefits under the Director Retirement Plan); and each participant who is serving as a chairman of a committee of the Board immediately prior to his termination as director and who has served at least three years as a director shall have an additional accrual equal to $5,000 credited to his account. The Deferred Phantom Stock Plan allows for pro rata calculations of the yearly accrual in the event a director serves for part of a year. In addition, a participating director may elect to defer any part or all of the cash portion of his annual director retainer into his account. Each transfer, accrual or deferral shall be credited quarterly to the participating directors account in units based upon the number of shares that could have been purchased with the dollars credited based upon the closing price of our common stock on the NYSE on the date the amount is credited. Dividends or other distributions accrue to the participating directors account. Participating directors are vested 100% at all times with respect to deferrals. Participating directors vest in the yearly accruals upon completion of three full years of service as a member of the Board. If a participating director voluntarily resigns or is removed from the Board prior to serving three years on the Board, he shall forfeit all amounts not vested. If a director dies, retires, or becomes disabled, he shall be 100% vested in his account without regard to service. Distributions from the Deferred Phantom Stock Plan shall be made in cash, based on the closing market price of our common stock on the NYSE on the business day immediately preceding the date on which the cash distribution is to be made, and such distributions shall be made in either a lump-sum distribution or in annual installments not exceeding ten years as elected by the director concurrent with his or her deferral election. If the director has changed his election in the one year period preceding such event, the change in the election will not be effective and the distribution will be made in accordance with the directors prior election. Death, disability, retirement or cessation of status as a director of Tesoro, constitute events requiring a distribution. Upon the death of a participating director, the participating directors beneficiary will receive, as soon as practicable, the cash value of the participating directors account as of the date of death. At December 31, 2007, participating directors accounts included the following units of phantom stock: Mr. Bookout 1,956 units; Mr. Chase 299 units; Mr. Goldman 3,273 units; Mr. Grapstein 37,546 units; Mr. Johnson 12,610 units; Mr. Nokes 127 units; Mr. Schmude 26,713 units; and Mr. Wiley 2,588 units.
Our 1995 Non-Employee Director Stock Option Plan, which we refer to as the 1995 Plan, provides for the grant to non-employee directors of automatic, non-discretionary stock options, at an exercise price equal to the fair market value of our common stock as of the date of grant. Under the 1995 Plan, each person serving as a non-employee director initially receives an option to purchase 10,000 shares of our common stock. Thereafter, each non-employee director, while the 1995 Plan is in effect and shares are available to be granted, is granted an option to purchase 6,000 shares of our common stock on the next day after each annual meeting of our stockholders, but not later than June 1 if no annual meeting is held. All options under the 1995 Plan become exercisable six months after the date of grant. The 1995 Plan will terminate as to the issuance of stock options in February 2010.
We provide group life insurance benefits in the amount of $100,000 and accidental death and dismemberment insurance up to a maximum of $350,000 for each of the members of the Board of Directors who are not our employees and certain former non-employee directors. The total premiums paid for such insurance ranged from $132 to $1,320 per director during 2007.
Tesoro is committed to integrity, reliability and transparency in its public disclosures. Years before the implementation of the corporate governance requirements of the Sarbanes-Oxley Act of 2002, Tesoro had implemented corporate governance guidelines, established Audit, Compensation and Governance Committees consisting entirely of non-management, independent directors, insured that a majority of the members of the Board of Directors were non-management, independent directors and established a Lead Director to preside over meetings of the independent directors. In recent years, we have taken additional steps to implement enhancements to our corporate governance practices in response to new corporate governance listing standards of the NYSE and regulations of the SEC. In particular, we have:
The Board has the following standing committees: Audit Committee, Compensation Committee, Environmental, Health & Safety Committee, and Governance Committee, each of which has a written committee charter that is available on our website at www.tsocorp.com under the heading About Tesoro under the subheading Social Responsibility and is available in print to any stockholder who requests it from Tesoros Corporate Secretary. The Audit Committee Charter was amended and restated on February 28, 2008 and is attached to this proxy statement as Annex A.
Function: The Audit Committees primary purpose is to provide assistance to the Board in fulfilling its responsibility to Tesoro and its stockholders relating to its oversight of management
and its auditors concerning corporate accounting, financial reporting practices, and the quality and integrity of Tesoros financial reports, including our compliance with legal and regulatory requirements, the independent auditors qualifications and independence, the performance of Tesoros internal audit function and independent auditors, and the preparation of the report required by the rules of the SEC to be included in our annual proxy statement.
Members: Mr. Grapstein (Chairman), Mr. Bookout, Mr. Chase and Mr. Goldman.
Meetings in 2007: Nine
Approval of Audit and Non-Audit Services: Since the beginning of 2003, 100% of audit and non-audit services provided by the independent auditors were approved by the Audit Committee.
Service on Other Audit Committees: No member of the Audit Committee serves on the audit committees of more than three public companies, including Tesoro except Mr. Chase, who serves on the audit committees of four public companies. Tesoros Governance Committee carefully considered whether Mr. Chases service on three other audit committees would impair his ability to effectively serve on Tesoros Audit Committee or prevent him from devoting the time and energy necessary for Tesoros Audit Committee. The Governance Committee unanimously concluded that Mr. Chase is always very well prepared and makes significant contributions to Audit Committee meetings.
Audit Committee Financial Expert: The members of the Audit Committee are not professionally engaged in the practice of accounting or auditing, but are financially literate and each of the members of the Committee, currently comprised of Messrs. Grapstein, Bookout, Chase and Goldman, qualify as audit committee financial experts, as defined by SEC rules.
Function: The Compensation Committees primary purpose is to discharge the responsibilities of the Board to our stockholders, potential stockholders and investment community with respect to our compensation programs and compensation of our Chief Executive Officer and other members of Tesoros senior management. In performing its duties, the Compensation Committee does the following: reviews and approves all areas of senior executive compensation, including the compensation of the executive officers named in the Summary Compensation Table below under Executive Compensation; reviews and approves the aggregate amount of all, cash incentive awards and stock incentives for our employees; administers our long-term incentive plans; reviews retirement matters; reviews new employment or management stability agreements and amendments and extensions of existing agreements and administers and interprets employment agreements; prepares an annual report for inclusion in our proxy statement on the compensation of our CEO and named executive officers; and provides information and advice annually to the Governance Committee on compensation for non-employee directors.
The Compensation Committee periodically approves and adopts, or makes recommendations to the Board for, Tesoros compensation decisions (including the approval of options and restricted stock to executive officers). The CEO, the General Counsel, the Vice President, Human Resources and the Managing Director, Compensation, Recognition and
Talent Acquisition attend regular Committee meetings. Each meeting concludes with an executive session during which only the Committee members, all of whom are non-management, independent directors, are present. The Committee regularly engages Towers Perrin as a consultant to review Tesoros compensation practices and to compare the compensation of Tesoros executive officers to those of a comparative group. For more information on the role of Towers Perrin in determining or recommending the amount or form of executive compensation, please see the discussion under Executive Compensation Compensation Discussion and Analysis.
The Compensation Committee meets outside the presence of all of our executive officers, including the named executive officers, to consider appropriate compensation for our CEO. With respect to our CEO, the Governance Committee receives a list of goals from the CEO each year during the first quarter. At year-end, the CEO formally reviews his performance against these individual goals with the Governance Committee. The Governance Committee then analyzes the CEOs performance and reports the results to the Compensation Committee which determines his base salary, annual cash incentive plan award payout and long-term equity incentive awards based on the assessment of his performance. For all other executive officers, including our named executive officers, our CEO makes recommendations to the Compensation Committee with respect to the appropriate base salary, payments to be made under our annual cash incentive plan and the grants of long-term equity incentive awards for all executive officers, excluding himself. Based in part on these recommendations from our CEO and other considerations, the Compensation Committee approves the annual compensation package of our executive officers other than our CEO.
Members: Mr. Johnson (Chairman), Mr. Bookout, Mr. Nokes and Mr. Wiley.
Meetings in 2007: Seven
Function: The Environmental, Health & Safety Committee assists the Board in fulfilling its oversight responsibilities for environmental, health, safety and security matters including monitoring overall compliance with all federal, state and local governmental rules and regulations.
Members: Mr. Schmude (Chairman), Mr. Chase, Mr. Nokes and Mr. Wiley
Meetings in 2007: Four
Function: The Governance Committee takes a leadership role in and provides assistance to the Board in fulfilling its corporate governance responsibilities to our stockholders, potential stockholders and the investment community. The Governance Committee also reviews and makes recommendations to the Board annually regarding: the organization and structure of the Board and the committees of the Board; compensation for the non-employee members of the Board; corporate governance guidelines; and the role and effectiveness of the CEO, the Board and each committee of the Board.
Members: Mr. Goldman (Chairman), Mr. Grapstein, Mr. Johnson and Mr. Schmude.
Meetings in 2007: Five
Consideration of Nominees for Membership on the Board of Directors: The Governance Committee considers from time to time suitable candidates for membership on the Board, including nominees recommended by stockholders. At the direction of the Governance Committee, our CEO initially meets with a potential Board candidate to provide information about Tesoro and determine whether the candidate has an interest in serving on the Board. Afterwards, the potential candidate meets with the Chairman of the Governance Committee. If both the Chairman of the Governance Committee and the CEO agree that the individual might be a good candidate for Board membership, the candidate is invited to meet with the other members of the Board. If the Board concurs that the candidate might be a good addition to the Board, separate meetings are arranged with our independent auditors and the Senior Vice President, General Counsel and Secretary. Stockholders wishing to submit a recommendation for a potential Board candidate should write the Governance Committee. Stockholders may also make nominations for directors at annual or certain special stockholder meetings if they comply with the procedures described below under Stockholder Communications Nomination of Directors. The Governance Committee has not received any recommendations for nominees for Board members from stockholders for the 2008 Annual Meeting. All potential candidates for Board membership, whether nominated through our internal process or by stockholder nomination, receive equal consideration for Board membership.
On June 8, 2005, the Governance Committee engaged the SpencerStuart organization (for a fee of $100,000 plus reimbursement of expenses) to assist in identifying and evaluating new candidates for membership on the Board. Tesoro did not pay any fees to SpencerStuart in 2007.
The names of the members of our Compensation Committee in 2007 are set forth above. No member of the Compensation Committee is, or was during 2007, an officer or employee of Tesoro. During 2007, no member of the Compensation Committee had any relationship with Tesoro requiring disclosure under Item 404 of Regulation S-K. There were no compensation committee interlocks or insider participation during 2007.
Tesoros Code of Business Conduct and Ethics for Senior Financial Executives is specifically applicable to the CEO, the CFO, the Treasurer, the Controller and persons performing similar functions. In addition, we have a Code of Business Conduct that applies to all of our directors, officers and employees. Both the Code of Business Conduct and Ethics for Senior Financial Executives and the Code of Business Conduct are available on our website at www.tsocorp.com under the heading About Tesoro under the subheading Social Responsibility. We will post on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics for Senior Financial Executives.
Communications with the Board, the Lead Director or the Non-employee Members of the Board
Persons may communicate with the Board, or directly with Mr. Grapstein or the non-employee members of the Board, by submitting such communication in writing in care of Chairman of the Board of Directors, Tesoro Corporation, 300 Concord Plaza Drive, San Antonio, Texas 78216-6999.
Communications with the Audit Committee
The Audit Committee has established procedures for the receipt, retention, and treatment of complaints received by Tesoro regarding accounting, internal controls, or auditing matters and the confidential, anonymous submission by Tesoros employees of concerns regarding questionable accounting or auditing matters. Persons wishing to communicate with Tesoros Audit Committee may do so by submitting such communication in writing in care of the Chairman, Audit Committee, Tesoro Corporation, 300 Concord Plaza, San Antonio, Texas 78216-6999.
Nomination of Directors
Under our By-laws, a Tesoro stockholder entitled to vote for the election of directors, may, if he or she complies with the following procedures, make a nomination for director at a stockholder meeting. Nominations for director may be made by stockholders only after compliance with the procedures set forth in our By-laws. The following summary is qualified in its entirety by reference to the full text of the By-laws. Written notice of such stockholders intent to make such nomination must be delivered either by personal delivery or by United States mail, postage prepaid to Tesoro (Attention: Corporate Secretary) on a timely basis as set forth below and must contain (i) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the stockholder is a holder of record of Tesoro stock entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (iv) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations); and (v) the consent of each nominee to serve as a director if so elected.
In the case of an annual meeting of stockholders, the required notice must be delivered not later than 90 days (which for the 2009 meeting would be February 5, 2009) nor more than 180 days (which for the 2009 meeting would be November 7, 2008) prior to the date of the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting of stockholders is more than 45 days later than the anniversary date of the immediately preceding annual meeting of stockholders (which for the 2009 meeting would be June 20, 2009), notice by the stockholder to be timely must be received by the Corporate Secretary not later than the close of business on the tenth day following the earlier of the day on which a written
statement setting forth the date of the annual meeting of stockholders was mailed to stockholders or the date on which it is first disclosed to the public. In the case of a special meeting of stockholders for the election of directors, the required notice must be delivered not later than the close of business on the tenth day following the earlier of the date on which notice of the date of the special meeting of stockholders was mailed or such public disclosure was made to the stockholders. Notwithstanding the foregoing, if an existing director is not standing for reelection to a directorship that is the subject of an election at such meeting, then a stockholder may make a nomination with respect to such directorship at anytime not later than the close of business on the tenth day following the earlier of the date on which a written statement setting forth the fact that such directorship is to be elected and the name of the nominee proposed by the Board of Directors is first mailed to stockholders or the date on which such information is first disclosed to the public.
We believe that our senior executives, including our named executive officers, and other key employees should have an ongoing stake in our success. We also believe that these executives and key employees should have a considerable portion of their total compensation, relative to their level of responsibility, tied to stock price performance since stock-related compensation is directly tied to stockholder value. Furthermore, the refining and marketing business is a capital intensive and highly cyclical business. A lengthy period, often of several years, generally occurs after the implementation of strategies before companies in our industry can realize significant benefits from such strategies and future returns depend on supply and demand factors that typically cycle from highs to lows and back again. This delay makes it not only appropriate, but also a very common practice, for businesses such as ours to use stock options, deferred stock units, performance stock awards, performance units and similar awards under long-term incentive compensation plans to tie compensation for employee performance to Tesoros long-term value creation. We believe that such awards, along with stock ownership and grants of restricted stock, will encourage our leadership to remain with Tesoro through the highs and the lows of the cycles, which we believe will, in turn, foster consistency of vision, optimal financial results and a determined focus on building long-term stockholder value. The Tesoro Corporation 2006 Long-Term Incentive Plan, which we refer to as the 2006 Plan, gives Tesoro the means to encourage, reward and retain the critical knowledge possessed by our management team and future officers and other key employees through stock-based compensation and is critical in fostering superior returns in the future.
When the 2006 Plan was approved by shareholders, 3,000,000 shares of common stock were reserved for issuance. Of such amount, the maximum number of shares of common stock with respect to which options may be granted is 2,250,000 and the maximum aggregate number of shares of common stock with respect to which restricted stock awards, deferred stock unit awards, performance stock awards, performance unit awards and other stock-based awards may be granted is 750,000. At February 29, 2008, awards for 2,938,810 shares had been granted out of the 2006 Plan with awards for 71,390 shares remaining for issuance.
The Board of Directors considers availability of shares of common stock for future grants under the 2006 Plan to be important to the business prospects and operations of Tesoro and
believes that, after giving effect to the proposed 3,000,000 share increase of the 2006 Plan, we will have sufficient awards available for grant to our employees and others for the next two to three years. The additional shares will allow us to continue to provide long-term incentive awards that will assist us in attracting and hiring new officers and employees, as well as retaining key employees. In addition to our request for additional shares, Tesoro is also requesting that the maximum aggregate number of shares of common stock with respect to which options may be granted be increased to 5,250,000 and restricted stock awards, deferred stock unit awards, performance stock awards, performance unit awards and other stock-based awards defined as Full Value Awards under the 2006 Plan be increased to 2,750,000. These changes provide the Compensation Committee of the Board of Directors greater flexibility to issue both options and Full-Value Awards as necessary to execute changes in Tesoros long-term incentive compensation strategy. In no event will the total amount of awards under the Plan exceed 6,000,000 shares.
If new shares are not approved for issuance under the 2006 Plan, we may be required to curtail use of long-term incentives, or issue cash-settled forms of long-term incentive compensation including full value phantom stock or stock appreciation rights which may carry higher stock-based compensation expense variability relative to stock-settled awards.
The Board of Directors believes that the proposed amendments, including the increase in the number of shares issuable under the 2006 Plan, and the other changes described below are in the best interests of Tesoro and its stockholders. The Board considers grants of options, restricted stock, or other stock-based incentive compensation provided under the 2006 Plan to be an effective method to attract and retain officers, directors, employees and to encourage long-term performance and productivity.
Following is a summary of the material changes proposed to be made to the 2006 Plan. A copy of the proposed amendments to the 2006 Plan is attached as Annex B.
Increase in Shares Available. The proposed amendment increases by 3,000,000 the number of shares of common stock available for issuance under the 2006 Plan to 6,000,000 shares.
Increase in Shares Available for Option Grants. The proposed amendment increases by 3,000,000 shares to 5,250,000 the maximum number of shares with respect to which option grants may be made.
Increase in Shares Available for Restricted Stock and Other Awards. The proposed amendment increases by 2,000,000 shares to 2,750,000 the maximum number of shares with respect to which restricted stock awards, deferred stock unit awards, performance stock award, performance unit awards and other stock-based awards defined as Full Value Awards under the 2006 Plan may be made.
Summary of the 2006 Long-Term Incentive Plan
The following is a summary of the principal features of the 2006 Plan and assumes the approval of the proposed amendments. This summary is qualified in its entirety by the specific
terms of the 2006 Plan, a copy of which is available to any stockholder upon request, and the terms of the proposed amendments, a copy of which is attached as Annex B.
General Description. The 2006 Plan is a flexible plan that permits the grant of options, restricted stock, deferred stock units, performance stock awards, performance units, other stock-based awards and cash-based awards.
Purpose. The purpose of the 2006 Plan is to reward corporate officers and other employees of Tesoro by enabling them to acquire shares of common stock and to receive other compensation based on the increase in value of Tesoro common stock or certain other performance measures. The Plan is intended to advance the best interests of Tesoro and its stockholders by providing those persons who have substantial responsibility for the management and growth of Tesoro with additional performance incentives and an opportunity to obtain or increase their proprietary interest in Tesoro, thereby encouraging them to continue in their employment with Tesoro.
Term. If approved by the stockholders, the amendment to the 2006 Plan will be effective as of May 6, 2008 and no awards may be granted under the 2006 Plan on or after May 3, 2016.
Administration. The Compensation Committee of the Board of Directors (or a subcommittee comprised of at least two of its members) shall administer the 2006 Plan (the Plan Committee). In administering the 2006 Plan, the Plan Committee shall have the full power to:
All determinations and decisions made by the Plan Committee pursuant to the provisions of the 2006 Plan and all related orders and resolutions of the Plan Committee shall be final, conclusive and binding on all persons, including Tesoro, its stockholders, employees, holders and the estates and beneficiaries of employees and holders.
Eligibility. All of Tesoros and its subsidiaries employees (approximately 5,500 people) are eligible to be selected to receive awards under the 2006 Plan. Actual selection of any eligible employee to participate in the 2006 Plan is within the sole discretion of the Plan Committee.
Maximum Shares Available. The maximum amount of common stock which may be issued under the 2006 Plan may not exceed 6,000,000 shares, in the aggregate. Of such amount, the maximum number of shares of common stock with respect to which options may be granted is 5,250,000 and the maximum aggregate number of shares of common stock with respect to
which restricted stock awards, deferred stock unit awards, performance stock awards, performance unit awards and other stock-based awards defined as Full Value Awards under the 2006 Plan may be granted is 2,750,000. The maximum number of shares of common stock with respect to stock options which may be granted to an employee during a fiscal year is 562,500. The maximum aggregate number of shares of common stock with respect to which restricted stock awards, deferred stock unit awards, performance stock awards, performance unit awards and other stock-based awards may be granted to an employee during a fiscal year is 187,500. Such limitations are subject to adjustment in accordance with the 2006 Plan.
If any outstanding award is forfeited or cancelled for any reason the shares of common stock allocable to the unexercised portion of that award may again be subject to an award granted under the 2006 Plan. If shares of common stock are withheld from payment of an award to satisfy tax obligations with respect to the award, such shares of common stock will count against the aggregate number of shares of common stock with respect to which awards may be granted under the 2006 Plan. If shares of common stock are tendered in payment of the option price of an option upon its exercise, such shares of common stock will not count against the aggregate number of shares of common stock with respect to which awards may be granted under the 2006 Plan.
The Plan Committee may grant options under the 2006 Plan to eligible persons in such number and upon such terms as the Plan Committee may determine, subject to the terms and provisions of the 2006 Plan. Except for substitution awards (described below), all options granted under the 2006 Plan shall be nonqualified stock options which are not intended to satisfy the requirements of section 422 of the Internal Revenue Code.
The price at which shares of common stock may be purchased under an option shall be determined by the Plan Committee, but such price may not be less than 100% of the fair market value of the shares on the date the option is granted.
Unless specified otherwise in an option agreement, an option shall expire on the tenth anniversary of the date the option is granted. An option shall not continue to vest after the termination of the employment relationship between the optionee and Tesoro and its subsidiaries for any reason other than death or disability of the optionee, unless otherwise specified in an option agreement.
Subject to certain conditions and exceptions, an option which is or has become exercisable on the date on which an optionee ceases to be an employee of Tesoro:
The Plan Committee shall specify in the option agreement the time and manner in which each option may be exercised. Unless the Plan Committee specifies otherwise, the option agreement shall set forth the following terms:
The Plan Committee may accelerate the time in which any outstanding option may be exercised. However, in no event shall any option be exercisable on or after the tenth anniversary of the date of the grant of the option.
Unless otherwise provided in the applicable option agreement, no option granted under the 2006 Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. All options granted to an optionee under the 2006 Plan shall be exercisable during the lifetime of the optionee only by the optionee.
An optionee shall not have any rights as a stockholder with respect to common stock covered by an option until the date he exercises the option.
Under the 2006 Plan, the Plan Committee may award restricted stock to eligible persons selected by the Plan Committee. The amount of, the vesting and the transferability restrictions applicable to any award of restricted stock will be determined by the Plan Committee, provided that all shares will not fully vest in less than three years (subject to certain exceptions such as a change-in-control). Except with respect to dividends as described below, during the restriction period, the recipient of the restricted stock will have all the rights of a stockholder with respect to the shares of restricted stock included in the restricted stock award during the restriction period established for the restricted stock award. Dividends with respect to restricted stock paid in cash, property or rights to acquire shares of common stock shall be paid only at such time as the vesting restrictions on the restricted stock award are satisfied.
Also during the restriction period, the certificates representing the restricted stock shall be registered in the recipients name and bear a restrictive legend to the effect that ownership of the restricted stock, and the enjoyment of the rights appurtenant thereto, are subject to the restrictions, terms and conditions provided by the 2006 Plan. Such certificates will be deposited with Tesoro and shall be subject to forfeiture in accordance with the 2006 Plan and the restricted stock agreement.
Deferred Stock Unit Awards
The 2006 Plan authorizes the Plan Committee to grant deferred stock units to eligible persons in such amounts and upon such terms as the Plan Committee shall determine. The amount of, the vesting and the transferability restrictions applicable to any deferred stock unit award shall be determined by the Plan Committee, provided that all stock unit awards will not fully vest in less than three years (subject to certain exceptions such as a change-in-control).
A deferred stock unit shall be similar in nature to restricted stock except that no shares of common stock are actually transferred to the holder until a later date specified in the applicable award agreement. Each deferred stock unit shall have a value equal to the fair market value of a share of common stock.
Payments pursuant to a deferred stock unit award shall be made (i) at such time as the Plan Committee specifies in the holders award agreement and (ii) either in cash or shares of common stock as specified in the holders award agreement.
Each recipient of deferred stock units shall have no rights of a stockholder with respect to the holders deferred stock units. A holder shall have no voting rights with respect to any deferred stock unit awards.
Under the 2006 Plan, the Plan Committee may grant performance stock and performance unit awards to eligible persons in such amounts and upon such terms as the Plan Committee shall determine. The amount of, the vesting and the transferability restrictions applicable to any performance stock or performance unit award shall be based upon the attainment of such performance goals as the Plan Committee may determine, provided that all performance stock or performance unit awards will not fully vest in less than three years (subject to certain exceptions such as a change-in-control). A performance goal for a particular performance stock or performance unit award must be established by the Plan Committee prior to the earlier to occur of (a) 90 days after the commencement of the period of service to which the performance goal relates or (b) the lapse of 25 percent of the period of service, and in any event while the outcome is substantially uncertain. A performance goal must be objective such that a third party having knowledge of the relevant facts could determine whether the goal is met and may be based on one or more of the following business criteria: earnings per share, earnings per share growth, total shareholder return, economic value added, cash return on capitalization, increased revenue, revenue ratios (per employee or per customer), net income, stock price, market share, return on equity, return on assets, return on capital, return on capital compared to cost of capital, return on capital employed, return on invested capital, shareholder value, net cash flow, operating income, earnings before interest and taxes, cash flow, cash flow from operations, cost reductions, cost ratios (per employee or per customer), proceeds from dispositions, project completion time and budget goals, net cash flow before financing activities, customer growth and total market value. Goals may also be based on performance relative to a peer group of companies. Unless otherwise stated, such a performance goal need not be based upon an increase or positive result under a particular business criterion and could include, for example, maintaining the status quo or limiting economic losses (measured, in each case, by reference to specific business criteria). Prior to the payment of any compensation based on the achievement of performance goals, the Plan Committee must certify in writing that applicable performance goals and any of the material terms thereof were, in fact, satisfied.
The Tesoro Board of Directors has selected Ernst & Young LLP to serve as independent auditors of Tesoro for the fiscal year ending December 31, 2008. Although stockholder ratification is not required, the Board of Directors has directed that such appointment be submitted to the stockholders of Tesoro for ratification at the annual meeting. Deloitte & Touche LLP has provided audit services to Tesoro for the years ended December 31, 2006 and 2007. The year ending December 31, 2008 will be the first year that Ernst & Young LLP is engaged to supply audit services to Tesoro. A representative of Ernst & Young LLP will be present at the Annual Meeting, and will have an opportunity to make a statement if he or she desires to do so and will be available to respond to appropriate questions.
On March 6, 2008, the Audit Committee approved a change in its independent registered public accounting firm. The Audit Committee appointed Ernst & Young LLP to serve as its independent registered public accounting firm for the year ended December 31, 2008 and approved the dismissal of Deloitte & Touche LLP. Deloitte & Touche LLP was notified of their dismissal on March 6, 2008.
The audit reports of Deloitte & Touche LLP on Tesoros consolidated financial statements as of and for the two fiscal years ended December 31, 2006 and 2007 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles except for an explanatory paragraph relating to a change in the method of accounting in 2006 for refined product sales and purchase transactions with the same counterparty that have been entered into in contemplation of one another, and for its pension and other postretirement plans.
In connection with the audits of Tesoros financial statements for each of the two fiscal years ended December 31, 2006 and 2007 and through March 6, 2008, there were no disagreements with Deloitte & Touche LLP on any matters of accounting principles or practices, financial statement disclosure or auditing scope and procedures which, if not resolved to the satisfaction of Deloitte & Touche LLP, would have caused the firm to make reference to such disagreement in connection with its reports on Tesoros consolidated financial statements for such period. During each of the two fiscal years ended December 31, 2006 and 2007 and through March 6, 2008, there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K.
Assuming the presence of a quorum, the affirmative vote of a majority of the votes cast are required to approve the appointment of Tesoros independent auditors. Under Delaware law and our Restated Certificate of Incorporation and By-laws, in determining whether this item has received the requisite number of affirmative votes, abstentions and broker non-votes will each be counted for purposes of determining the presence of a quorum but will not be counted and will have no effect on the outcome of the proposal.
The board of directors recommends a vote FOR the ratification of the selection of Ernst & Young LLP as independent auditors of Tesoro for the fiscal year ending December 31, 2008.
The Audit Committee does not prepare financial statements or attest to their accuracy. The preparation, presentation and integrity of the Companys financial reports are the responsibility of management. Deloitte & Touche LLP, the Companys independent auditors for 2007, are responsible for auditing the Companys financial statements in accordance with standards of the Public Company Accounting Oversight Board (United States) and expressing an opinion on their conformity to accounting principles generally accepted in the United States of America.
In performance of its oversight function, the Audit Committee reviewed and discussed the audited financial statements of the Company with management and the independent auditors. It also provided oversight of the independent auditors, the Companys internal audit function and the Companys system of internal controls over financial reporting. In performing these duties, the Audit Committee met a total of five times during 2007 with management and representatives from internal audit and the independent auditors.
The Audit Committee obtained from the independent auditors a formal written statement describing all relationships between the auditors and the Company that might bear on the auditors independence consistent with Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), discussed with the auditors any relationships that might impact their objectivity and independence and based on such information satisfied itself as to the independence of the Companys independent auditors. The Audit Committee also discussed with management, internal audit and the independent auditors the quality and adequacy of the Companys internal controls and the audit scope and plans for audits performed by internal audit and the independent auditors.
The Audit Committee discussed with the independent auditors all communications required by generally accepted auditing standards, including those described in Statement on Auditing Standards No. 61, as amended by Statements 89 and 90, as well as other regulations and standards (Audit Committee Communications) and, with and without management present, discussed and reviewed the results of the independent auditors examination of the financial statements. The Audit Committee also discussed with internal audit and management significant items that resulted from internal audit examinations.
Based on the reviews and discussions referred to above with management and the independent auditors, the Audit Committee recommended to the Board that the audited financial statements be included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007. The Audit Committee has engaged, subject to stockholder ratification, Ernst & Young LLP to audit the Companys financial statements for 2008.
Steven H. Grapstein, Chairman
John F. Bookout, III
Rodney F. Chase
Robert W. Goldman
April 3, 2008
For the years ended December 31, 2007 and 2006, professional services were performed by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, the Deloitte Entities).
The aggregate fees for professional services rendered by the Deloitte Entities in connection with their audit of our consolidated financial statements and reviews of the condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q and services that were provided in connection with statutory and regulatory filings or engagements were approximately $3,693,550 for 2007 and $2,915,022 for 2006. The 2007 and 2006 audit fees include the audit of our internal control over financial reporting and managements assessment thereof, as required by Section 404 of the Sarbanes-Oxley Act of 2002.
The aggregate fees for audit-related services rendered by the Deloitte Entities were approximately $562,163 for 2007 and $97,150 for 2006. The nature of the services performed for these fees were primarily employee benefit plan audits.
The aggregate fees for tax services rendered by the Deloitte Entities were approximately $303,206 for 2007 and $68,764 for 2006 for matters such as consultation on sales, use and excise tax matters in both 2007 and 2006.
All Other Fees
There were no fees paid to the Deloitte Entities for services not included above for 2007 and 2006.
The Audit Committee of our Board of Directors has considered whether such non-audit services rendered by the Deloitte Entities are compatible with maintaining the Deloitte Entities independence. In accordance with the Audit Committee charter, all audit and permitted non-audit services to be performed by the Deloitte Entities must be approved in advance by the Audit Committee and all pre-approvals of audit and non-audit services performed by the Deloitte Entities have been conducted solely by the Audit Committee since the beginning of 2003.
Security Ownership by Directors and Executive Officers
The following table shows the beneficial ownership of our common stock reported to us as of February 25, 2008, including shares as to which a vested right to acquire ownership exists (for example, through the exercise of stock options) within the meaning of Rule 13d-3(d)(1) under the Exchange Act and shares credited to accounts under our Thrift Plan, for each director and nominee, the CEO, our other four most highly compensated officers during 2007 and, as a group, such persons and other executive officers. Unless otherwise indicated, each person or member of the group listed has sole voting and investment power with respect to the shares of our common stock listed.
The following table summarizes, as of December 31, 2007, certain information regarding equity compensation to our employees, officers, directors and other persons under our equity compensation plans.
The following table sets forth information from filings made with the SEC as to each person or group who as of February 15, 2008 beneficially owned more than 5% of the outstanding shares of Tesoro common stock.
Section 16(a) of the Exchange Act requires our directors, executive officers and holders of more than 10% of our voting stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock or other of our equity securities. We believe that during the year ended December 31, 2007, our directors, executive officers and holders of more than 10% of our voting stock complied with all Section 16(a) filing requirements.
Tesoro did not have any transactions with any related persons requiring disclosure during 2007.
Our Board of Directors has not adopted a formal written related person transaction approval policy. However, Tesoro has historically used the procedure described below when reviewing, approving, or ratifying related person transactions. For these purposes, a related person is a director, nominee for director, executive officer, or holder of more than 5% of our common stock, or any immediate family member of any of the foregoing. This policy applies to any financial transaction, arrangement or relationship or any series of similar financial transactions, arrangements or relationships in which Tesoro is a participant and in which a related person has a direct or indirect interest, other than the following:
Our Audit Committee approves any related person transaction before commencement of the related person transaction, provided that if the related person transaction is identified after it commences, it is brought to the Audit Committee for ratification, amendment or rescission. The chairman of our Audit Committee has the authority to approve or take other actions in respect of any related person transaction that arises, or first becomes known, between meetings of the Audit Committee, provided that any action by the chairman of our Audit Committee must be reported to our Audit Committee at its next regularly scheduled meeting.
Our Audit Committee analyzes the following factors, in addition to any other factors the members of the Audit Committee deem appropriate, in determining whether to approve a related person transaction:
Our Audit Committee may, in its sole discretion, approve or deny any related person transaction. Approval of a related person transaction may be conditioned upon Tesoro and the related person following certain procedures designated by the Audit Committee.
Compensation Discussion and Analysis
We compensate our management through a combination of base salary, annual incentive bonuses and long-term equity-based awards which are designed to be competitive with those of comparable companies and to align executive performance with the long-term interests of our stockholders.
This section discusses the principles underlying our executive compensation policies and decisions and the most important factors relevant to an analysis of these policies and decisions. It provides qualitative information regarding the manner and context in which compensation is awarded to and earned by our executive officers and places in perspective the data presented in the tables and narrative that follow.
Our Compensation Committee
Our Compensation Committee approves all compensation and awards to executive officers including the CEO, CFO and the other three executive officers named in the Summary Compensation Table on page 47, all of whom we refer to as the named executive officers or NEOs. The Committees membership is determined by the Board of Directors and is currently composed of four non-management directors, all of whom are independent under SEC and NYSE rules.
The Compensation Committee periodically approves and adopts, or makes recommendations to the Board for Tesoros compensation decisions (including the approval of options and restricted stock to executive officers). The CEO, the General Counsel, the Vice President, Human Resources and the Managing Director, Compensation, Recognition and Talent Acquisition attend regular Committee meetings. Each meeting concludes with an executive session during which only the Committee members, all of whom are non-management, independent directors, are present. The Committee regularly engages Towers Perrin as a consultant to review Tesoros compensation practices and to compare the compensation of Tesoros executive officers to those of a comparative group.
The Compensation Committee meets outside the presence of all of our executive officers, including the NEOs, to consider appropriate compensation for our CEO. With respect to our CEO, the Governance Committee receives a list of goals from the CEO each year during the first quarter. At year-end, the CEO formally reviews his performance against these individual goals with the Governance Committee. The Governance Committee then analyzes the CEOs performance and reports the results to the Compensation Committee which determines his base salary, annual cash incentive plan award payout and long-term equity incentive awards based on the assessment of his performance. For all other executive officers, including our
NEOs, our CEO makes recommendations to the Compensation Committee with respect to the appropriate base salary, payments to be made under our annual cash incentive program and grants of long-term equity incentive awards for all NEOs, excluding himself. Based in part on these recommendations from our CEO and other considerations discussed below, the Compensation Committee approves the annual compensation package of our executive officers other than our CEO.
The annual performance review of our executive officers is considered by the CEO and the Compensation Committee when making decisions on setting base salary, targets for and payments under our annual cash incentive plan and grants of long-term equity incentive awards. When making these decisions for our executives, the Compensation Committee considers the importance of the position to us, the past salary history of the individual, the competitive landscape for the executive officers position and skill set and the contributions to be made by the executive officer to us. When approving changes in compensation for our officers at the Senior Vice President and above level, the Compensation Committee also reviews a tally sheet for each executive. Tally sheets set forth the dollar amounts of all components of each senior executives current compensation including salary, annual cash incentive compensation, long-term equity incentive awards, retirement plans, health and welfare benefits and other benefits including perquisites. These tally sheets allow the Compensation Committee to review how a change in the amount of each compensation element affects each executives total compensation and to review each executives total compensation in the aggregate. Based upon its most recent review, the Compensation Committee determined that total compensation, in the aggregate, for our executives was consistent with the Compensation Committees expectations. The Compensation Committee did not increase or decrease the amount of compensation to be awarded to our executives solely based upon the review of tally sheets. The Compensation Committee also reviews the analyses and recommendations of Towers Perrin when making its decision.
In February 2006, the Committee approved the 2006 Plan which was subsequently approved by our stockholders at the annual meeting in May 2006. The Committee adopted the 2006 Plan to serve as a key element in aligning employees efforts with the creation of future stockholder value. The Committee also adopted the Tesoro Corporation 2006 Long-Term Stock Appreciation Rights Plan, the purpose of which is to provide incentives and reward key managers and other employees by enabling them to receive compensation based on the increase in the value of our common stock. None of our NEOs received any awards under this plan.
During 2007, the Committee engaged Towers Perrin as a consultant to review our compensation practices and to compare the relative compensation for 18 senior management positions, including those of our NEOs, with Towers Perrins smokestack industry group, which consists of 250 companies, and verified the results by comparing Tesoros NEO compensation to that of Sunoco, Inc., and Valero Energy Corporation. We believe that this group of companies provides an appropriate basis for comparison because we compete for executive talent with this group and, in the cases of Sunoco and Valero, because they are companies in our industry, with similar assets and businesses to Tesoro. Towers Perrin concluded that Tesoros compensation aligned with its compensation philosophy of targeting base salaries and cash incentive compensation to the 50th percentile of the smokestack industry group with a 75th percentile target for exceptional performance and granting long-term equity incentives at the 75th percentile of the smokestack industry group.
The Committee reviewed all components of compensation for our executive officers, including salary, target bonus, long-term equity incentives, the dollar value to the executive and cost to Tesoro of all perquisites and all severance and change-in-control arrangements. Based on this review, the Committee determined that the compensation paid to our executive officers is consistent with our compensation philosophy.
Our total compensation philosophy is to provide the right mix of cash and equity awards, fixed versus variable compensation, and employee benefits for our NEOs, senior executives and other employees to:
Attracting and retaining talent. To attract and retain executives with the ability and experience necessary to lead us and deliver strong performance to our stockholders, we target base salaries and annual cash incentive payments at the 50th percentile with a stretch component for exceptional performance at the 75th percentile. We have chosen the 50th percentile because we believe it allows us to attract and retain executives and we have chosen the 75th percentile (for annual cash incentives only) as a target for exceptional performance because we believe it will provide an appropriate incentive to exceed better than targeted financial and operational results. For each individual officer, we also consider our needs for that officers skill set, experience, the contribution that the officer has made or we believe will make, whether the executive officers skill set is easily transferable to other potential employers and the competitive landscape for the executive officers skill set and position because we believe that we compete not only with a peer group of independent refiners, consisting of Alon USA Energy, Inc., Frontier Oil Corporation, Holly Corporation, Marathon Oil Corporation, Sunoco, Valero and Western Refining, Inc., for executive talent but also with the major integrated oil companies, such as ExxonMobil, Shell Oil Products, ConocoPhillips, and Chevron, for these individuals. We annually review the companies in our peer group and add or remove companies as necessary.
Inspire teamwork and motivate superior performance. We use a combination of business unit/team goals and individual performance measures to inspire teamwork and motivate exceptional performance.
Annual incentive compensation awards are based on the actual achievement of certain corporate and business unit/team performance goals, including certain business initiatives aimed at improving future earnings, which are determined by the Compensation Committee at the beginning of each year. For our NEOs, a portion (25% for 2007) of each individual award is based on an individual performance evaluation instead of business unit/team goals. The goals are set so that the attainment of the targets is not assured and requires significant effort by our executives. In 2007, the payout percentage for the NEOs was between 83% and 228% of the target, with an average of 132%.
Long-term awards are primarily determined through benchmarking these incentives against our peer group. However, individual performance is also considered when making long-term award decisions. Together, our annual and long-term incentive compensation programs are designed to:
Compensating all employees competitively and equitably. We provide a total compensation program that we believe will be perceived by both our NEOs and our stockholders as fair and equitable. In addition to conducting analyses of market pay levels and considering individual circumstances related to each NEO, we also consider the pay of each NEO relative to each other NEO and relative to other members of the management team. We have designed the total compensation programs to be consistent for our entire executive management team.
We provide a competitive benefits package to all full-time employees which includes health and welfare benefits, such as medical, dental, vision care, disability insurance and life insurance benefits, and a 401(k) savings plan and a qualified pension plan.
Aligning performance with stockholder interests. We seek to align the performance of our NEOs with stockholder interests through the grant of stock options and shares of restricted stock under our long-term incentive plan as well as basing part of each NEOs annual bonus on stockholder return. We generally target our annual long-term equity grants up to the 75th percentile of the smokestack industry group because we believe that the resulting financial benefits or impact of many of the decisions we make regarding capital expenditures and strategic planning take several years to determine and future returns depend on supply and demand factors that typically cycle from highs to lows and back again and therefore we believe that these long-term incentives need to be at this higher level because of the increased uncertainty associated with these awards and because these awards will encourage our leadership to remain with Tesoro through the highs and lows of the cycles, which we believe will, in turn, foster consistency of vision, optimal financial results and a determined focus on building long-term stockholder value. We also believe that a portion of our NEOs short-term annual compensation should be dependent on the price of our common stock. We recognize that since the price of our common stock is subject to external factors, we also tie annual incentive compensation to our financial and operational performance and to individual performance. The stock options granted to our NEOs vest solely based on the passage of time and only during their employment with Tesoro, except in the event of a change-in-control. We use stock options because we believe that options will generate value to the recipient only if our stock price increases during the term of the option which also benefits our stockholders. In addition, we believe that time-vested equity awards encourage long-term value creation and
executive retention because executives can realize value from such awards only if they remain employed by us until the awards vest. We also grant restricted stock to help our executive officers comply with our stock ownership guidelines (which are described below).
Elements of Executive Compensation
Our executive compensation program is designed to reflect the philosophy and objectives we have described above. The elements of executive pay are presented in the table below and discussed in more detail in the following paragraphs:
We view the base salary and incentive bonus components of compensation as related and designed to reward executives on an annual basis, while we make determinations regarding long-term incentives with a longer time horizon than we do the cash components. The benefits provided to our executives and employees are designed to be consistent both in design and value with benefits offered by the fully integrated oil and gas companies and our peer group of independent refiners with whom we compete for talent. Although our compensation committee does review total compensation and will make, and has made, adjustments if it believes total compensation is not aligned with our compensation philosophy and objectives (based, in part, on the Towers Perrin Report and in part on the Committees subjective determination), we do not believe that significant compensation derived from one component of compensation should negate or reduce compensation from other components. We determine the appropriate level for each compensation component based in part, but not exclusively, on competitive benchmarking consistent with our recruiting and retention goals, our view of internal equity and consistency, and other considerations we deem relevant, such as rewarding extraordinary performance. We make our salary and annual bonus decisions so that we can remain competitive with our peer group and larger integrated oil companies in attracting and retaining our executives and we grant long-term incentive awards up to the 75th percentile target because of the long-term nature of many of our capital spending decisions and strategic objectives. Except as described below, our Compensation Committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and annual compensation (base salary and annual performance incentives), between cash and non-cash compensation, or among different forms of non-cash compensation.
Base Salaries. Base salaries for our NEOs are reviewed each year through comparisons with the market survey data described above. The Committee does not consider any financial
performance criteria or use a formula to determine salary increases. Rather, the Compensation Committee, using its discretion, considers market based salary rates at the 50th percentile of the competitive peer group and individual roles and performance contributions.
The base salaries paid to our NEOs in 2007 are set forth below in the Summary Compensation Table on page 47. For 2007, base salary cash compensation for our NEOs was approximately $3.4 million with our CEO receiving approximately $1.2 million. We believe that the salaries paid achieved our objectives and were within our target.
Annual Performance Incentives. We established an annual incentive compensation program in order to emphasize pay for performance. We believe that this program helps focus our NEOs efforts in driving operating results that generate superior performance. The target bonus opportunity represents approximately 55% to 120% of an NEOs base salary if the target is met. If the target is exceeded, the bonus opportunity can exceed 100% with the maximum bonus opportunity ranging from 96.25% to 300% of the NEOs base salary.
Under our 2007 incentive compensation program, the Committee established individual objectives that it believed were the appropriate measures to align the goals of increasing stockholder value and creating the opportunity for Tesoro to continue to grow by increasing cash generation. These individual goals reflect the nature of each NEOs area of responsibility. For example, the goals for all of the NEOs responsible for operations include goals for safety and environmental stewardship. Senior executive target awards were structured such that 25% of the annual incentive opportunity was tied to individual performance evaluations and 75% was tied to the following corporate financial objectives:
In setting the earnings per share target for 2007, the Committee used the consensus estimates for earnings per share of the stock market analysts researching our common stock as a starting point. The Committee then established the target earnings per share at 10% higher than this consensus. During 2007, after completion of the Shell and USA Petroleum acquisitions, the Committee adjusted this target by reviewing the acquisition economics prepared by management and managements estimate of the projected increase in earnings per share resulting from these acquisitions. With respect to the relative stockholder return ranking, we measured the increase in our stock price during 2007 and compared the increase in our stock price to those of Sunoco and Valero. A ranking of first results in a maximum bonus, second, a target bonus and third, a minimum bonus so long as the earnings per share target was attained. In 2007, Tesoro achieved a ranking of first compared to Sunoco and Valero in the total stockholder return comparison. The threshold for making incentive payments is 80% of the target with the maximum payment being made if 130% of target is achieved. The Committee has the discretion to change the outcome of the annual cash incentive calculation and did so for Mr. Lewis and one other executive officer in 2007 because of their roles in the Shell and USA Petroleum acquisitions. In January 2008, the Committee reviewed each NEOs achievement of these goals during 2007 and approved the cash incentive compensation disclosed in the Summary Compensation Table.
Long-Term Incentives. We believe that our senior executives, including our NEOs, should have an ongoing stake in our success. We also believe that these executives should have a considerable portion of their total compensation tied to stock price performance since stock-related compensation is directly tied to stockholder value.
Our long-term incentives are in the form of stock options and shares of restricted stock. We target annual long-term equity awards at the 75th percentile of the smokestack industry group. We determine this percentile first by reviewing the value of long-term equity incentives of the smokestack industry group and determining a value for the 75th percentile and then by making a calculation based upon our stock price, the volatility of our stock price, a risk free rate of return, dividend yield and expected life of the award. We use a mix of 70% stock options/30% restricted stock in making these awards. Tesoro has historically granted all long-term equity incentives at the Compensation Committees meeting in late January or early February of each year. We have chosen this time because it is the first meeting of each calendar year at which our results of operations from the previous year are available to the Compensation Committee. We do not time stock option or restricted stock grants in coordination with the release of material non-public information. In February 2007, the Compensation Committee adopted an equity award governance policy which formalized this practice. Among other things, the policy prohibits the issuance of stock options at a price less than the closing sale price of our common stock on the date of grant.
Option grants generally have a term of ten years and vest over three years. Restricted stock grants vest over three years. Vesting is accelerated in certain events described under Employment Contracts and Management Stability Agreements, and Estimated Payments Upon Change-In-Control or Termination.
Executive Benefits. We provide certain benefits and perquisites to executive officers. These benefits and perquisites are not tied to any formal performance criteria and are intended to serve as part of a competitive total compensation package. These benefits and perquisites include, but are not limited to, supplemental retirement plans, nonqualified deferred compensation plans, change-in-control arrangements and, for certain senior executive officers, employment agreements and reimbursement for certain club membership fees, estate planning and financial planning services. In addition, to maximize the time that Mr. Smith spends on Tesoro business, and for safety and security reasons, Tesoro permits Mr. Smith to use Tesoros airplane for personal travel. Mr. Smith reimburses Tesoro for his personal use of the airplane. See page 49 for additional details.
Nonqualified Deferred Compensation. Our named executive officers are eligible to participate in our Executive Deferred Compensation Plan (EDCP). The purpose of the EDCP is to provide executives and key management personnel the opportunity to make additional pre-tax deferrals capped under our qualified 401(k) plan (Thrift Plan), due to salary and deferral limitations imposed under the Internal Revenue Code and as an additional resource for compensation and tax planning.
Participants may elect to defer up to 50% of their base salary and/or up to 100% of their annual bonus compensation after FICA tax deductions. Tesoro matches the participants contributions dollar-for-dollar up to 4% of eligible earnings above the IRS salary limitation (i.e., $225,000 for 2007). A participant will vest in the company contributions upon the
completion of three years of service credit under the terms of the Thrift Plan. Those participants that are eligible for supplemental retirement benefits under Tesoros Amended Executive Security Plan (ESP), are eligible to defer compensation under the EDCP, but are not eligible for the matching provisions of the EDCP. Messrs. Smith, Finnerty, Wright and Lewis are eligible for benefits under the ESP. The EDCP Plan also permits us to make discretionary contributions to participants accounts from time to time in amounts and on terms as we may determine. No such additional discretionary contributions have been made on behalf of any of our senior executives, including the NEOs, accounts to date.
Participants are able to direct investment selections for their own accounts and may change the investment allotment at anytime, subject to restrictions. The investment selection generally includes mutual funds available through the Thrift Plan, except Tesoro Stock which is not offered in the EDCP.
As imposed by Section 409A of the Internal Revenue Code, a participant must wait six months, except in the event of a death, before receiving a distribution of their benefit from the EDCP. Distributions at retirement or termination will be made in accordance to the distribution election made by the participant at the time of their deferral election. Participants may select distributions to be made in the form of a lump sum or installments (no more frequently than monthly) over a period of two to fifteen years. If a participant does not designate a distribution direction at the time of deferral, the default distribution is that the deferral account balance will be distributed in a lump sum payment on the seventh month following retirement or termination, whichever comes first. For vested deferral account balances that are less than $100,000 at the time of termination will be distributed in the form of a lump sum, paid in cash, regardless of the participants distribution selection.
Retirement Plans. We maintain a noncontributory qualified retirement plan that covers officers and other eligible employees. Benefits under the plan are payable either on a straight-life annuity basis or a lump-sum basis, if employment began prior to January 1, 2006, and are based on the average monthly earnings, years of service and ages of participating employees. Average monthly earnings used in calculating retirement benefits are primarily salary and bonuses received by the participating employee during the 36 consecutive months that produce the highest average monthly rate of earnings out of the last 120 months of service.
In addition, we maintain an unfunded executive security plan, the Amended Executive Security Plan, which we refer to as the ESP, for certain executive officers and other defined key personnel. The ESP provides for a monthly retirement benefit equal to a percentage of the officers highest average monthly salary for any consecutive 36-month period during the 120 months preceding retirement (Earnings). The monthly retirement benefit percentage is defined as the sum of 4% of Earnings for each of the first ten years of employment, plus 2% of Earnings for each of the next ten years of employment, plus 1% of Earnings for each of the next ten years of employment. The maximum percentage is 70%. The ESP provides for the payment by us of the difference, if any, between (a) the total retirement income payment calculated above and (b) the sum of retirement income payments from our Retirement Plan, Social Security and retirement benefits from predecessor companies where service time with the predecessor employer is recognized in accordance with a facility acquisition agreement.
Employment Contracts, Management Stability Agreements and Change-In-Control and Termination Arrangements
We provide the opportunity for our NEOs to be protected under the severance and change-in-control provisions contained in their employment agreements. We believe that these provisions help us to attract and retain an appropriate caliber of talent for the position. Our severance and change-in-control provisions for the NEOs are summarized in Employment Contracts and Management Stability Agreements on page 51 and Estimated Payments Upon Change-In-Control or Termination beginning on page 59.
The Compensation Committee and management also reviewed potential payments to our NEOs under termination and change-in-control scenarios including:
This review included potential severance payment obligations, potential values of accelerated shares of restricted stock and stock options, and projected payment obligations in connection with our retirement and savings programs, health and welfare plans, and other executive benefits. The Compensation Committee determined that the total potential payments, in the aggregate, for our NEOs under each scenario to be reasonable and not excessive.
Stock Ownership Guidelines
Tesoros Board has established stock ownership guidelines to:
As of December 31, 2007, we had eight non-employee directors, three Executive Vice Presidents and seven Senior Vice Presidents subject to the stock ownership policies. Under the guidelines, each of the executives named below is required to retain 50% of the net shares obtained from an option exercise or restricted stock grant until he or she satisfies the ownership
guidelines based on the lesser of a multiple of salary or the number of shares as set forth in the following table.
The stock ownership guidelines for our CEO are included in his employment contract which is described on page 51.
2008 Compensation Program
On February 28, 2008 the Compensation Committee approved the 2008 Program covering our NEOs and certain other officers, whom we refer to as Participants. Except as noted otherwise, the 2008 Program covers a one-year performance period ending December 31, 2008. Tesoros 2008 earnings before interest and financing costs, interest income and other, income taxes, and depreciation and amortization, or EBITDA must meet a threshold level of $1 billion or greater before any percentage of the 2008 Program is funded. If the EBITDA performance threshold is achieved, cash bonuses will be distributed to Participants based on the following performance metrics: (i) total stockholder return relative to Sunoco and Valero on a cumulative two-year basis measured at the end of 2008 with no bonuses paid for this portion of the 2008 Program if total stockholder return is negative for the two-year period; (ii) a combination of corporate-wide and business unit scorecards containing quantitative measurements of safety, capital management, expense control, and cash improvement initiatives among others; and (iii) a discretionary evaluation by the Board of Directors of a Participants individual performance.
EBITDA is a non-GAAP financial measure. EBITDA should not be considered as an alternative to net earnings or income, earnings before income taxes, net cash from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles.
We define EBITDA as net income plus:
Impact of Regulatory Requirements on Compensation
Deductibility of Executive Compensation. Section 162(m) of the Internal Revenue Code limits the tax deductibility by a publicly-held corporation of compensation in excess of $1 million paid to the CEO or any other of its four most highly compensated executive officers, unless that compensation is performance-based compensation as defined by the
Internal Revenue Code. We believe that our stock option grants qualify as performance-based compensation and are not subject to any deductibility limitations under Section 162(m). The Compensation Committee considers deductibility under Section 162(m) with respect to other compensation arrangements with executive officers. However, the Compensation Committee and the Board believe that it is in the best interest of Tesoro that the Compensation Committee retain its flexibility and discretion to make compensation awards, whether or not deductible, in order to foster achievement of performance goals established by the Compensation Committee as well as other corporate goals that the Compensation Committee deems important to our success, such as encouraging employee retention and rewarding achievement.
Nonqualified Deferred Compensation. On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable to nonqualified deferred compensation arrangements. While the final regulations have not yet become effective, we believe we are in compliance with the statutory provisions which were effective January 1, 2005.
Policy on Recovery of Compensation. Our CEO and CFO are required to repay certain bonuses and equity-based compensation they receive if we are required to restate our financial statements as a result of misconduct as required by Section 304 of the Sarbanes-Oxley Act of 2002.
The Compensation Committee of Tesoro has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.
This report is submitted by the members of the Compensation Committee.
William J. Johnson, Chairman
John F. Bookout, III
J.W. (Jim) Nokes
Michael E. Wiley
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding the compensation of our Chairman and CEO, our CFO and our three other highest paid executive officers for 2006 and 2007.
Personal Use of Aircraft: Mr. Smith is the only officer that uses Tesoros aircraft for personal use. The methodology that we use to calculate our incremental direct operating cost for Mr. Smiths personal use of the aircraft is based on the cost of fuel, trip-related airport fees, and pilot meals and lodging. Since the aircraft is primarily used for business travel, the methodology excludes the fixed costs which do not change based on the usage of the aircraft and non-trip related hangar and maintenance expenses. As Mr. Smith reimburses Tesoro for his personal use of the aircraft, there is no dollar amount to be reported for 2006 or 2007.
Financial and Tax Planning: We provide financial and tax planning services to our officers and to select key executives through our preferred providers or through the executives own financial planning firm. We provide reimbursement for these expenses, subject to an annual limit approved by the Compensation Committee.
Estate Planning and Will Preparation: We provide estate planning and will preparation services to our officers and to select key executives through our preferred provider or through the executives own legal firm. We
provide reimbursement for these expenses, subject to a pre-established limit approved by the Compensation Committee.
Executive Annual Physical: We provide for annual physicals to our officers and to select key executives including travel costs associated with receiving this benefit.
Social Club Memberships: We provide for the initiation fees and dues for club memberships to social organizations and health clubs to our officers. We provide reimbursement for these expenses, subject to the limits of total initiation fees not to exceed 10% of the executives base pay in the aggregate and monthly dues of up to $750 in the aggregate.
Thrift Plan Company Contributions: We provide matching contributions dollar-for-dollar up to 7% of eligible earnings for all employees that participate in the Thrift Plan.
Executive Deferred Compensation Plan Company Contributions: We provide matching contributions dollar-for-dollar up to 4% of eligible earnings above the IRS salary limitation ($225,000 for 2007).
Restricted Stock Dividends: Dividends paid on restricted stock that vested in 2007 and 2006, respectively.
GRANTS OF PLAN-BASED AWARDS
The following table sets forth information regarding the grants of annual cash incentive compensation, stock options and restricted stock to our NEOs.
The following table sets forth the relationship of salary and annual incentive compensation to total compensation for each of our CEO, CFO and the remaining NEOs for 2006 and 2007.
We have entered into either employment agreements or management stability agreements with our NEOs, the significant terms of which are detailed below. The purpose of these agreements is to ensure continued stability, continuity and productivity among members of our management team.
Mr. Smith. Mr. Smiths employment agreement, originally dated December 3, 2003 and amended February 2, 2006 and November 1, 2006, has a term which expires on December 31, 2010 at an annual base salary (the Base Salary) of no less than $1,000,000 (set at $1,200,000 effective as of February 5, 2006). In addition to the Base Salary, we will establish an annual incentive compensation strategy for Mr. Smith in which he will be entitled to participate in a manner consistent with his position and consistent with the evaluation of his performance by the
Governance Committee of the Board. The target incentive bonus will be 120% of his Base Salary as in effect each year; however, his actual annual bonus may range from 0% to 250% and will be determined based upon achievement of performance goals established by the Compensation Committee.
Under the agreement, the Board, effective as of December 11, 2003, granted Mr. Smith an award of 500,000 restricted shares of our common stock under the 1993 Plan that vest in equal installments 60 days after each of the first five anniversaries of December 3, 2003, subject to Mr. Smiths continuous employment with us for the first four years through the applicable vesting date and for the fifth year, through December 3, 2008. During 2004, Mr. Smith purchased 500,000 shares of Tesoros common stock and, as required by his employment agreement, we awarded one share of restricted stock to Mr. Smith for each such share purchased. The 500,000 restricted shares matching Mr. Smiths open-market purchased shares will vest on December 3, 2008, provided there is no interruption in Mr. Smiths employment. We have no further obligations to award Mr. Smith restricted stock to match any future purchases of Tesoros common stock. The employment agreement also requires Mr. Smith, from the period of December 3, 2007 through the end of the term of his Employment Agreement, to own shares of Tesoros common stock equal in value to at least five times the amount of his annual base salary. This ownership requirement was satisfied as of December 31, 2007, based on Mr. Smiths 2007 annual base salary and stock ownership.
Messrs. Finnerty, Wright and Lewis. Messrs. Finnertys, Wrights and Lewiss employment agreements (dated February 2, 2005, August 3, 2004 and February 2, 2005, respectively, and each as amended on February 2, 2006 and further amended in 2007) provide annual base salaries of no less than $415,000, $450,000 and $375,000, respectively (set at $754,000, $608,000 and $550,000, respectively, effective as of December 31, 2007), and are for terms of three years with renewals for an additional year on the annual anniversary date of each agreement, unless we terminate the agreement in accordance with its terms. In addition to their base salaries, each of Messrs. Finnerty, Wright and Lewis will be entitled to participate in our annual incentive compensation plan with a target incentive bonus of at least 65% of his annual base salary (set at 100%, 80% and 80%, respectively, in 2007), with payments to be determined based upon the achievement of performance goals established by our Compensation Committee under such plan. We also will reimburse initiation fees and dues for social clubs and reimburse Messrs. Finnerty, Wright and Lewis for estate planning, tax and financial planning expenses to the extent the Board, or a duly authorized committee thereof, determines such fees are reasonable and in our best interest.
Mr. Schwethelm. We have a Management Stability Agreement with Mr. Schwethelm that is operative only in the event of a change-in-control. The terms of this agreement are described below under Estimated Payments Upon Change-in-Control or Termination.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth the outstanding equity awards of our NEOs at the end of 2007.