ANDEAVOR DEF 14A 2009
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SCHEDULE 14A INFORMATION
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NOTICE OF 2009 ANNUAL MEETING OF STOCKHOLDERS
MAY 6, 2009
Tesoro Corporation will hold its 2009 Annual Meeting of Stockholders on Wednesday, May 6, 2009, at the Rosewood Crescent Hotel, 400 Crescent Court, Dallas, Texas, beginning at 4:00 P.M. Central Time:
1. To elect nine directors;
2. To ratify the appointment of Ernst & Young LLP as our independent auditors for fiscal year 2009; and
3. 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 12, 2009, are entitled to notice of, and to vote at, the annual meeting.
Your vote is important. Whether or not you plan to attend the meeting, please vote as soon as possible. If you received notice of how to access the proxy materials over the internet, a proxy card was not sent to you and you may vote only by telephone or online. If you received a proxy card and other proxy materials by mail, you may vote by mailing a completed proxy card, by telephone or online. For specific voting instructions, please refer to the information provided in the following Proxy Statement, together with your proxy card or the voting instructions you receive by e-mail or that are provided via the internet.
By Order of the Board of Directors,
CHARLES S. PARRISH
March 26, 2009
San Antonio, Texas
2009 ANNUAL MEETING OF STOCKHOLDERS
MAY 6, 2009
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 2009 Annual Meeting of Stockholders to be held on Wednesday, May 6, 2009, 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:
(1) for the directors nominated for election at the meeting, and
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 12, 2009, the record date for the 2009 Annual Meeting, there were 139,360,994 shares of our common stock outstanding and entitled to vote. 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.
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 made available to stockholders on or about March 26, 2009.
Important Notice Regarding the Availability of Proxy Materials for the Stockholders Meeting to be held on May 6, 2009: This proxy statement and our 2008 Annual Report on Form 10-K are available at www.proxydocs.com/tso.
QUESTIONS AND ANSWERS
Stockholders of record as of the close of business on March 12, 2009 will be entitled to notice of, and to vote at, our 2009 Annual Meeting of Stockholders or any reconvened meetings after any adjournments of the meeting.
On the record date, March 12, 2009, we had 139,360,994 shares of common stock outstanding, 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 election of nine directors and the ratification of Ernst & Young LLP as our independent auditors for fiscal year 2009.
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 access to these proxy materials is being provided 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.
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. Notice that access to these proxy materials is available to you is being provided 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 4:59 p.m., Eastern Time, on May 5, 2009.
If your shares are held in street name (through a broker, bank or other nominee), you may receive a separate voting instruction form 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. Under New York Stock Exchange (NYSE) rules, your broker may vote shares held in street name on certain routine matters. NYSE rules consider the election of directors and the ratification of the selection of our independent auditors to be routine matters. As a result, your broker is permitted to vote your shares on those matters at its discretion without instruction from you. When a proposal is not a routine matter and the beneficial owner of
the shares has not provided voting instructions to the brokerage firm with respect to that proposal, the brokerage firm cannot vote the shares on the proposal. This is called a broker non-vote.
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 2009.
We will bear the cost of the solicitation. In addition to the use of the internet and 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, or Innisfree, 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 Innisfree its customary fees, estimated not to exceed $8,500, and will reimburse Innisfree for certain expenses.
What is the deadline to propose actions for consideration at next years annual meeting of stockholders?
You may submit proposals for consideration at future stockholder meetings. For a stockholder proposal to be considered for inclusion in our proxy statement for the annual meeting next year, the Corporate Secretary must receive the written proposal at our principal executive offices no later than November 26, 2009. Such proposals also must comply with SEC
regulations under Rule 14a-8 regarding the inclusion of stockholder proposals in company-sponsored proxy materials. Proposals should be addressed to:
300 Concord Plaza Drive
San Antonio, Texas 78216-6999
For a stockholder proposal that is not intended to be included in our proxy statement under Rule 14a-8, the stockholder must provide the information required by our Bylaws and give timely notice to the Corporate Secretary in accordance with our Bylaws, which, in general require that the notice be received by the Corporate Secretary:
If the date of the stockholder meeting is moved more than 45 days after the anniversary of our annual meeting for the prior year, then notice of a stockholder proposal that is not intended to be included in our proxy statement under Rule 14a-8 must be received no earlier than the close of business 120 days prior to the meeting and not later than the close of business on the 90th day prior to the meeting. If the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such meeting, the deadline is 10 days after public announcement of the meeting date.
You may propose director candidates for consideration by the Boards Nominating and Governance Committee. Any such recommendations should include the nominees name and qualifications for Board membership and should be directed to the Corporate Secretary at the address of our principal executive offices set forth above.
In addition, our Bylaws permit stockholders to nominate directors for election at an annual stockholders meeting. To nominate a director, the stockholder must deliver the information and materials required by our Bylaws including, among other things, a questionnaire completed by the proposed nominee.
A stockholder may send a proposed director candidates name and information to the Board at any time. Generally, such proposed candidates are considered as outlined in Corporate Governance Committees of the Board of Directors Governance Committee Consideration of Nominees for Membership on the Board of Directors on page 22.
To nominate an individual for election at an annual stockholders meeting, the stockholder must give timely notice to the Corporate Secretary in accordance with our Bylaws, which, in general, require that the notice be received by the Corporate Secretary between the close of business on November 7, 2009 and the close of business on February 5, 2010, unless the annual meeting is moved by more than 45 days after the anniversary of the prior years annual meeting, in which case the deadline will be as described in Corporate Governance Stockholder Communications Nomination of Directors on page 24.
How may I obtain a copy of Tesoros Bylaw provisions regarding stockholder proposals and director nominations?
You may contact the Corporate Secretary at our principal executive offices for a copy of the relevant Bylaw provisions regarding the requirements for making stockholder proposals and nominating director candidates.
Under rules adopted by the SEC, we are furnishing proxy materials to our stockholders primarily via the internet, instead of mailing printed copies of those materials to each stockholder. On or about March 26, 2009, we mailed to our stockholders (other than those who previously requested electronic or paper delivery) a Notice of Internet Availability containing instructions on how to access our proxy materials, including our proxy statement and our annual report. The Notice of Internet Availability also instructs you on how to access your proxy card to vote over the internet or by telephone.
This new process is designed to expedite stockholders receipt of proxy materials, help conserve natural resources and lower the cost of the meeting. However, if you would prefer to receive printed proxy materials, please follow the instructions included in the Notice of Internet Availability. If you have previously elected to receive our proxy materials electronically, you will continue to receive these materials via e-mail unless you elect otherwise.
At the 2009 Annual Meeting, the stockholders are requested to elect nine directors, constituting the whole Board of Directors, to hold office until the 2010 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 Bylaws, 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. Our Corporate Governance Guidelines are available on our website, www.tsocorp.com under the heading About Tesoro under the subheading Social Responsibility and are available in print to any stockholder who requests them from Tesoros Corporate Secretary.
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 nine times during 2008. Each member of the Board attended at least 75% of the meetings of the Board and committees on which such director served during 2008.
The Board of Directors has affirmatively determined that each of Messers. 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 NYSE. 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 2008 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 any 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 are available in print to any stockholder who requests them from the Secretary of Tesoro.
In 2008, 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 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 Directors Deferred Compensation Plan, a director electing to participate may defer between 20% and 100% of his total cash compensation 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 (5.25% at December 31, 2008). 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 Directors 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 Directors 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 a previous 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 or beneficiaries will receive, as soon as practicable, the cash value of the participating directors account as of the date of death. At December 31, 2008, participating directors accounts included the following units of phantom stock: Mr. Bookout 5,349 units; Mr. Chase 857 units; Mr. Goldman 5,019 units; Mr. Grapstein 41,278 units; Mr. Johnson 13,478 units; Mr. Nokes 681 units; Mr. Schmude 30,722 units; and Mr. Wiley 4,596 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 5,000 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 3,000 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 $220 to $1,320 per director or former director during 2008.
The Board approved changes to its compensation program effective May 1, 2009. The new program provides for an annual retainer of $220,000 with one-half paid in cash and the other half paid in phantom stock which must be deferred for a minimum three years before it may be distributed to a Director. The new program eliminates the annual grant of stock options and the annual crediting of deferred phantom stock valued at $7,250 to the Director Deferred Phantom Stock Plan. The new compensation program maintains the same level of Lead Director and Committee Chairman fees and continues our practice of not paying meeting attendance fees.
The annual retainer will be paid in quarterly installments. Deferred phantom stock will be credited to a Directors account using the market price of Tesoros common stock at the end of each calendar quarter. Unless elected by a Director to be further deferred, phantom stock will be distributed to Directors in cash at the end of the three year deferral period using the market price of our common stock on the date of distribution. The new program is simpler in design and reflects best practice. We feel that providing a significant portion of a Directors compensation in the form of deferred phantom stock provides greater linkage of Director pay to stockholder interests.
Concurrent with adoption of the 2009 Director compensation program, the Board approved changes to the Director Stock Ownership guidelines. The new guidelines require Directors to own stock (either directly or as deferred phantom shares) valued at five times their annual cash retainer. Current Directors have five years from May 1, 2009 to meet the ownership target. New Directors will have five years from their initial election to the Board to meet their ownership requirement.
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, ensured that a majority of the members of the Board of Directors were non-management, independent directors, ensured that each of our directors stands for election by the stockholders each year, 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. We have held regular executive sessions for non-management, independent members of the Board. In 2008, the non-management, independent directors met in executive session five times and the members of
the Audit Committee met in executive session five times. Mr. Grapstein presided over these sessions as Lead Director and chair of the Audit Committee, respectively. In his role as Lead Director, Mr. Grapstein works with management to determine the agenda for all Board meetings. The Governance Committee, which consists entirely of non-management, independent directors, chooses the Lead Director annually, immediately after the Annual Meeting of Stockholders. In addition, 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.
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 2008: 6
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, including Tesoro. 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, and that his service on the audit committees of four public companies does not impair his effectiveness on Tesoros Audit Committee.
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 Messers. 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 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 option and restricted stock grants to executive officers). The CEO, CFO, the General Counsel, the Senior Vice President, Administration and the Managing Director, Compensation and Benefits attend regular Committee meetings. Each meeting concludes with an executive session during which only the Compensation Committee members, all of whom are non-management, independent directors, are present. The Compensation 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, or 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. The CEO formally reviews his performance against these individual goals with the Board during the year and after the close of the fiscal year. The Governance Committee analyzes the CEOs performance and reports the results to the Compensation Committee which combines this performance review with other data and
input from non-management, independent directors to determine the CEOs base salary, annual cash incentive plan award payout and long-term equity incentive awards. 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. These recommendations are made after the results of operations for the prior fiscal year and our annual capital budget have been approved by our entire Board of Directors.
Members: Mr. Johnson (Chairman), Mr. Bookout, Mr. Nokes and Mr. Wiley.
Meetings in 2008: 7
Function: The Environmental, Health & Safety Committee assists the Board in fulfilling its oversight responsibilities for environmental, health, safety and security policy and procedures. In performing its duties, the Environmental, Health & Safety Committee reviews Tesoros compliance programs; reviews significant operational events with environmental, health, safety and/or security implications; is apprised of significant environmental, health, safety and security regulatory developments; and reviews Tesoros material regulatory capital expenditures.
Members: Mr. Schmude (Chairman), Mr. Chase, Mr. Nokes and Mr. Wiley
Meetings in 2008: 4
Function: The Governance Committee takes a leadership role in and provides assistance to the Board in fulfilling its corporate governance responsibilities to our stockholders. 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-management, independent 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 2008: 4
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 Corporate Secretary. 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 2009 Annual Meeting. All potential candidates for Board membership, whether nominated through our internal process or by stockholder nomination, receive equal consideration for Board membership.
The names of the members of our Compensation Committee in 2008 are set forth above. No member of the Compensation Committee is, or was during 2008, an officer or employee of Tesoro. During 2008, 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 2008.
Tesoros Code of Business Conduct and Ethics for Senior Financial Executives is specifically applicable to the CEO, the CFO, 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.
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.
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.
Under our Bylaws, 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 stockholders meeting. Nominations for director may be made by stockholders only after compliance with the procedures set forth in our Bylaws. The following summary is qualified in its entirety by reference to the full text of the Bylaws.
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 the information required by our Bylaws including: (i) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (ii) the class or series and number of shares beneficially owned and of record by the stockholder; (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, as amended, and the rules and regulations thereunder (or any subsequent provisions replacing such act, rules or regulations); (v) a description of all compensation paid by the stockholder to the nominee during the past three years; and (vi) the submission of a written questionnaire by the nominee setting forth, among other things, the nominees background and qualifications.
In the case of an annual meeting of stockholders, the required notice must be delivered not later than 90 days (which for the 2010 meeting would be February 5, 2010) nor more than 180 days (which for the 2010 meeting would be November 7, 2009) 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 2010 meeting would be June 20, 2010), to be timely notice by the stockholder must be received by the Corporate Secretary not earlier than the 120th day prior to the date of such meeting and not later than the close of business on the 90th day prior to the date of such meeting, or if the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such meeting, the tenth day following 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 was 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 earlier than the 180th day prior to the date of such special meeting and not later than the close of business on the 90th day prior to the date of such special meeting or if the public announcement of the date of such special meeting is less than 100 days prior to the date of such special meeting, 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.
Tesoros Audit Committee has selected Ernst & Young LLP to serve as independent auditors of Tesoro for the fiscal year ending December 31, 2009. 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 provided audit services to Tesoro for the years ended December 31, 2006 and 2007. 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. 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.
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 is required to approve the appointment of Tesoros independent auditors. Under Delaware law and our Restated Certificate of Incorporation and Bylaws, 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, 2009.
The Audit Committee represents and assists the Board in fulfilling its responsibilities for general oversight of the integrity of Tesoros financial statements, Tesoros compliance with legal and regulatory requirements, the independent auditors qualifications and independence, the performance of Tesoros internal audit function and independent audit firm, and risk assessment and risk management. The Audit Committee manages Tesoros relationship with its independent auditors (which report directly to the Audit Committee). The Audit Committee has the authority to obtain advice and assistance from outside legal, accounting or other advisors as the Audit Committee deems necessary to carry out its duties and receives appropriate funding, as determined by the Audit Committee, from Tesoro for such advice and assistance.
Tesoros management is primarily responsible for Tesoros internal control and financial reporting process. Tesoros independent auditors, Ernst & Young LLP, are responsible for performing an independent audit of Tesoros consolidated financial statements and issuing opinions on the conformity of those audited financial statements with United States generally accepted accounting principles and the effectiveness of Tesoros internal control over financial reporting. The Audit Committee monitors Tesoros financial reporting process and reports to the Board on its findings.
In this context, the Audit Committee hereby reports as follows:
1. The Audit Committee has reviewed and discussed the audited financial statements with Tesoros management.
2. The Audit Committee has discussed with the independent registered public accounting firm the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (Codification of Statements on Auditing Standards, AU 380), as adopted by the Public Company Accounting Oversight Board (PCAOB) in Rule 3200T.
3. The Audit Committee has received the written disclosures and the letter from the independent auditors required by the PCAOB regarding the independent auditors communications with the Audit Committee concerning independence, and has discussed with the independent auditors their independence.
4. Based on the review and discussions referred to in paragraphs (1) through (3) above, the Audit Committee recommended to the Board, and the Board has approved, that the audited financial statements be included in Tesoros Annual Report on Form 10-K for the year ended December 31, 2008, for filing with the Securities and Exchange Commission.
The undersigned members of the Audit Committee have submitted this Report to the Board of Directors.
Steven H. Grapstein, Chairman
John F. Bookout, III
Rodney F. Chase
Robert W. Goldman
March 20, 2009
For the years ended December 31, 2008 and 2007, professional services were performed by Ernst & Young LLP, or EY, and Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates which we refer to as the Deloitte Entities, respectively.
The aggregate fees for professional services rendered by EY and the Deloitte Entities in connection with their respective audits 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 $3,134,655 for 2008 and $3,693,550 for 2007, respectively. The 2008 and 2007 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. The nature of the services performed for these fees were primarily employee benefit plan audits. There were no fees paid to EY for audit-related services for 2008.
The aggregate fees for tax services rendered by the Deloitte Entities were approximately $303,206 for 2007 for matters such as consultation on sales, use and excise tax matters. There were no fees paid to EY for tax services for 2008.
The aggregate fees paid to EY for services not included above were approximately $2,682 for 2008. There were no fees paid to the Deloitte Entities for services not included above for 2007.
The Audit Committee of our Board of Directors has considered whether such non-audit services rendered by EY and the Deloitte Entities are compatible with maintaining EYs and the Deloitte Entities independence. In accordance with the Audit Committee charter, all audit and permitted non-audit services to be performed by EY must be approved in advance by the Audit Committee and all pre-approvals of audit and non-audit services performed by EY and 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 March 12, 2009, 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 2008 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, 2008, 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 March 12, 2009 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, 2008, 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 2008.
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
Tesoro believes in paying for performance. We compensate our executives through a combination of base salary, annual cash incentive bonuses, long-term equity awards and health and welfare benefits such as medical, dental, vision care, disability insurance and life insurance benefits, and a 401(k) savings plan and a nonqualified pension plan. We also offer a competitive level of nonqualified retirement and deferred compensation plans for employees whose compensation exceeds certain income limits established under the Internal Revenue Code prohibiting the earnings from being considered under our tax-qualified retirement and savings plan. The base salary component of our executive compensation is designed to be competitive with those of comparable companies. The annual cash incentive payment is designed so that our executives are paid for both individual and company performance while remaining within our budgetary constraints. Long-term equity based awards are designed to align executive compensation with the long-term interests of our stockholders by rewarding our executives for excellent performance as it is reflected in our stock price. As discussed further below, we target our base salaries to be at the 50th percentile of a peer group and, during 2008, we targeted our equity-based awards between the 50th and 75th percentile of this group. We believe that annual incentive bonuses should be paid only if the goals set by our Compensation Committee are attained. As a result, in the 2008 performance year, because we did not attain the financial threshold that the Compensation Committee set for the payment of annual incentive bonuses, none of our named executive officers, whom we refer to as NEOs, received a bonus for the 2008 performance year.
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 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 46, all of whom we refer to as the NEOs. The Compensation 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 option and restricted stock grants to executive officers). The CEO, CFO, the General Counsel, the Senior Vice President, Administration and the Managing Director, Compensation and Benefits attend regular Compensation Committee meetings. Each meeting concludes with an executive session during which only the Compensation Committee members, all of whom are non-management, independent directors, are present. The Compensation 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. The CEO formally reviews his performance against these individual goals with the Board during the year and after the close of the fiscal year. The Governance Committee analyzes the CEOs performance and reports the results to the Compensation Committee which combines this performance review with other data and input from non-management, independent directors to determine the CEOs base salary, annual cash incentive plan award payout and long-term equity incentive awards. 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. These recommendations are made after the results of operations for the prior fiscal year and our annual capital budget have been approved by our entire Board of Directors.
The performance review of our executive officers is considered by the CEO and the Compensation Committee when making decisions on setting base salary, bonus targets, payments under our annual cash incentive program and grants of long-term equity incentive awards. When making base salary decisions for our executives, the Compensation Committee considers, in addition to individual performance, the relative importance of the position to us, the past salary history of the individual and the competitive landscape for the executive officers position. Annual incentive plan payments are based upon financial and operational targets approved by the Compensation Committee which are designed to be at risk as the financial targets are attainable only with exceptional performance.
When approving changes in total compensation for our officers at the Senior Vice President level and above, the Compensation Committee also reviews individual compensation data sheets which provide information on each executives current and past compensation including salary, annual cash incentive compensation and long-term equity incentive awards. The Compensation Committee also reviews the analyses and recommendations of Towers Perrin when making its decision. This information allows 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 and our compensation philosophy, which is described below. The Compensation Committee did not increase or decrease the amount of compensation awarded to our executives solely based upon this information.
In February 2006, the Compensation Committee approved the Tesoro Corporation 2006 Long-Term Incentive Plan, which we refer to as the 2006 Plan, which was subsequently approved by our stockholders at the annual meeting in May 2006. In February 2008, the Compensation Committee approved an amendment to the 2006 Plan which was subsequently approved by our stockholders at the annual meeting in May 2008. The Compensation Committee adopted the 2006 Plan to serve as a key element in aligning employees efforts with the creation of future stockholder value. The Compensation 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 have received any awards under this plan.
The Compensation Committee engaged Towers Perrin as a consultant to review our compensation practices and to compare the relative compensation for 14 senior management positions, including those of our NEOs, with Towers Perrins smokestack industry group, which consists of 324 companies, which we sometimes refer to as the smokestack group. The names of these companies are listed in Appendix A. The smokestack group is a subset of data from Towers Perrins general industry executive compensation database. This group excludes companies from industries considered by us to compensate executives significantly differently than most mainstream industrial companies such as Tesoro (i.e., technology, media, pharmaceutical, financial services, healthcare and telecommunications companies). The companies included in the smokestack group vary greatly in size and are mostly publicly traded but also include some private companies. We believe that the smokestack group provides an appropriate basis for comparison because we compete for executive talent with this group and because the members of this group are often industrial companies which include fully integrated oil companies and refining and retail marketing companies, all of which require large capital expenditures to grow their businesses with long periods of time required to determine the success of their capital spending. We use the data from the smokestack group to benchmark executive pay rather than companies in our own industry because we believe that the relatively small number of independent refiners would not provide a statistically valid tool on which to base compensation decisions. Towers Perrins review of the compensation of our senior executives concluded that Tesoros target compensation is aligned with its compensation philosophy of generally targeting base salaries and annual incentives to the 50th percentile of the smokestack group while our actual 2008 long-term incentive awards were slightly below the 50th percentile of the smokestack group.
Because we compete with other refining and marketing companies for executive talent and because these companies are subject to many of the same external factors as we are, we verify our compensation decisions by comparing our compensation levels to the amounts reported in the proxy materials for Sunoco, Inc. and Valero Energy Corporation. We have chosen Sunoco and Valero because they are companies in our industry with similar assets and businesses. We believe this final step provides a useful, final verification of compensation levels of our NEOs versus executives with similar positions and similar duties at these two, comparable companies; however, we do not attempt to target the compensation levels of our NEOs to those with similar positions with Valero and Sunoco.
The Compensation 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 Compensation Committee determined that the compensation paid to our executive officers is consistent with our compensation philosophy.
Tesoro believes strongly in pay for performance. 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:
The Compensation Committee believes that this combination of cash and equity-based compensation supports our compensation philosophy by having a significant portion of targeted compensation at-risk and tied to both short-term performance (annual cash incentive payments) and long-term performance (stock option, stock appreciation rights and restricted stock grants).
The Compensation Committee believes that, as a result of our pay for performance philosophy, balance of short-term and long-term incentives, our use of equity compensation awards to encourage a longer-view, and our stock ownership guidelines, Tesoros executive compensation program does not encourage our management to take unreasonable risks relating to our business.
Pay for Performance. The Compensation Committee believes that compensation should be incentive driven with a significant portion at risk. The annual cash incentive payments support our pay-for-performance philosophy by directly linking pay amounts to the level of individual and company performance that the Compensation Committee believes is necessary to achieve goals which are attainable only through substantial effort and the achievement of our strategic financial and operating goals. In 2008, we did not pay any incentive compensation to our NEOs because we did not achieve the financial threshold established by the Compensation Committee. We also believe that the ownership stake in Tesoro provided by equity-based compensation, the time vesting of these awards and our stock ownership guidelines (discussed on page 43) not only align the interests of the named executive officers with our stockholders and promote executive retention but also reward excellent performance to the extent it is reflected in our stock price.
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 incentive payments at the 50th percentile of the smokestack group. We have chosen the 50th percentile for base salaries and for annual incentive bonuses because we believe it allows us to attract and retain executives. In 2007, because we achieved our goals, the payout percentage for the NEOs was between 83% and 228% of the target, with an average of 132%. In the 2008 performance year, when we did not attain the earnings before interest and financing costs, interest income, foreign currency and exchange gain (losses), other income, income taxes, and depreciation and amortization, or EBITDA, threshold established by our Compensation Committee, we did not make any annual incentive payments to our NEOs for the 2008 performance year. For each individual NEO, we also consider our needs for that executives 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 superior individual performance.
Annual incentive compensation awards are based on the actual achievement of critical 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. The goals are set so that the attainment of the targets is not assured, require significant effort by our executives and are at risk if these critical goals are not achieved.
On February 28, 2008, the Compensation Committee approved the 2008 compensation program covering our NEOs and certain other officers. Except as noted otherwise, the 2008 program covered a one year performance period ending December 31, 2008. Tesoros 2008 EBITDA was required to meet a threshold level of $1 billion before any incentive compensation payments would be made. The Compensation Committee believed that this threshold would require significant effort by our executives because at the time the Compensation Committee set this level, crude oil prices were rising rapidly leading to a further deterioration of refining margins which had begun in the second half of 2007. In turn, this would require our NEOs to adhere strictly to our budget, carefully choose capital projects to pursue and continue to grow our business while minimizing our borrowings under our revolving credit agreement.
Because Tesoro did not meet the EBITDA threshold, no incentive bonuses were paid, even though the Compensation Committee is permitted to exercise its discretion in paying annual incentive compensation.
EBITDA is a non-GAAP financial measure. EBITDA should not be considered as an alternative to net earnings, earnings before income taxes, net cash from operating activities or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States.
We define EBITDA as net income plus:
Long-term awards are primarily determined through benchmarking these incentives against the smokestack 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 our senior management team. We make a subjective determination of the relative value within our company of each NEO and the importance of the position to us when considering relative pay. 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. We also provide nonqualified retirement and deferred compensation plans for employees whose compensation exceeds certain income limits established under the Internal Revenue Code prohibiting it from being considered under our tax-qualified retirement and savings plans.
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. In addition, we utilize stockholder return as a factor that is considered by the Compensation Committee in awarding annual bonuses. We also believe that our NEOs should not receive any incentive bonuses if they do not deliver on the critical financial and operational targets established by our Compensation Committee. For our NEOs, in 2008, we generally targeted our annual long-term equity grants up to the 75th percentile of the smokestack group because we believe that:
We recognize that since the price of our common stock is subject to external factors, we also tie annual incentive compensation to our critical financial and operational performance measurements 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.
Because of the decrease in our stock price during 2008, the exercise prices of all options granted from 2006 through 2008 are greater than the market price at March 12, 2009. The terms of the 2006 Plan prohibit any repricing of options except in the event of a stock split or other change in our capital structure. We currently have no plan to ask stockholders to approve a repricing or an option exchange program.
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 payment 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 the 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 Compensation 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 decisions so that we can remain competitive with our peer group and larger integrated oil companies in attracting and retaining our executives, we target our annual incentive bonuses at the 50th percentile and we grant long-term incentive awards between the 50th and 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 smokestack group. The Compensation 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 smokestack group and individual roles and performance contributions but does not rigidly target the 50th percentile when making base salary decisions.
The base salaries paid to our NEOs in 2008 are set forth below in the Summary Compensation Table on page 46. For 2008, base salary cash compensation for our NEOs was approximately $4.2 million with our CEO receiving approximately $1.3 million. In January 2008, our Compensation Committee increased the base salaries of our then named executive officers to remain competitive with market practices, support executive recruitment and retention objectives and establish internal equity among executives. These increases were consistent with practice among our competitors as reflected in the peer group described above and we believe that the salaries paid achieved our objectives and were within our target. These increases were as follows:
In 2009, no base salary increases have been made to our NEOs.
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. Unless the Compensation Committee decides otherwise, if the target is not achieved, no bonus is paid. If the target is met, the target bonus opportunity represents approximately 55% to 120% of an NEOs base salary. If the target is exceeded, the bonus opportunity can exceed 100% with the maximum bonus opportunity ranging from 110% to 300% of the NEOs base salary.
Under our 2008 incentive compensation program, in order for any bonuses to have been paid, we were required to achieve a threshold level of EBITDA of $1 billion. Because this threshold level was not achieved, no incentive bonuses were paid to our CEO or any of the other NEOs. If the threshold had been achieved, bonuses would have been based on individual objectives established by the Compensation Committee 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 reflected the nature of each NEOs area of responsibility. For example, the goals for all of the NEOs responsible for operations included goals for safety and environmental stewardship. Senior executive target awards were structured such that 80% of the annual incentive opportunity was tied to a combination of corporate and business unit scorecards as well as achievement of strategic goals and 20% was tied to the relative total stockholder return ranking versus Valero and Sunoco measured on a cumulative two year basis.
We chose EBITDA as our performance threshold because it is a supplemental financial measure used by our management and by external users of our financial statements, such as investors, commercial banks, research analysts and others to assess the financial performance of our assets without regard to financing methods, capital structure or historical cost basis and the ability of our assets to generate sufficient cash to fund our capital expenditures. We determined the EBITDA threshold of $1 billion because we believed that this level would allow us to grow our business while also allowing us to minimize borrowings under our revolving credit agreement.
Senior executives, including the NEOs, did not receive any annual incentive compensation for 2008 because they did not meet the financial threshold established for them by the Compensation Committee. The Compensation Committee will review and consider 2008 bonuses for other eligible employees in April 2009 in recognition of the success our employees achieved by lowering costs, reducing inventory and managing capital to produce positive earnings and cash flow despite a tough economic and operating environment.
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. In 2008, we targeted annual long-term equity awards for our CEO and executive vice presidents at the 75th percentile of the smokestack group with equity awards for our senior vice presidents, including Mr. Parrish, one of our NEOs, targeted at between the 50th and 75th percentile. We determined an individual executives target long-term incentive award value by using the appropriate market percentile outlined above as well as through considering internal equity and individual performance. Once determined, the target value is allocated between a mix of 70% stock options and 30% restricted stock. We calculate the number of stock options by applying the Black-Scholes stock option pricing model to the value of the awards to be made as stock options. The Black-Scholes model factors in Tesoros stock price, stock price volatility, dividend rate, and the risk free rate of return at the time the Compensation Committee approves the grant. Restricted stock awards are determined by dividing the award value allocated to restricted shares
by the closing stock price on the date of grant. 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 ratably 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 requires 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., $230,000 for 2008). 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. Messers. Smith, Finnerty, Wright, Lewis and Parrish 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 with the distribution election made by the participant at the time of their deferral election. Participants may elect 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 election 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. 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 election.
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-line or equivalent annuity or a lump-sum basis 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-month period in the last 120 months preceding retirement that produces the highest average. We also maintain a nonqualified Restoration Plan that covers a select group of management and highly compensated employees that restores benefits that are not provided under the qualified Retirement Plan due to compensation and benefit limitations imposed under the Internal Revenue Code.
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 three highest calendar years of compensation (equal to the sum of base salary plus bonus) for any seven-year period 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 qualified Retirement Plan, Social Security and retirement benefits from predecessor companies where service time with the predecessor employer is recognized in accordance with an individual or 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 and management stability 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 52 and Estimated Payments Upon Change-In-Control or Termination beginning on page 61.
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.
Tesoros Board has established stock ownership guidelines to:
As of January 1, 2009, we had eight non-management, independent directors, three Executive Vice Presidents and nine Senior Vice Presidents subject to the stock ownership guidelines. Under these 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.
2009 Compensation Program
Annual Incentive Compensation. In January 2009, the Compensation Committee approved the terms of the 2009 Incentive Compensation Program for our named executive officers and other senior executives. The funding metrics are unweighted, discretionary benchmarks the Compensation Committee can use to determine the bonus funding level
percentage of an executives base salary. The funding metrics which the Compensation Committee can use, on a discretionary basis, to determine awards are:
The 2009 program covers a one year performance period ending December 31, 2009. Incentive compensation is not payable to the executives unless Tesoro has (i) free cash flow, (ii) positive net income and (iii) no borrowings on its revolving credit facility at the time of any bonus payment. The goals have been set so that the attainment of the targets is not assured and requires significant effort by our executives.
Long-Term Incentive Awards. In February 2009, the Compensation Committee approved long-term incentive awards covering our NEOs and other key employees. The 2009 awards further reinforce the direct relationship between senior executive compensation and the creation of long-term stockholder value. Awards for our senior executives were determined using a combination of factors including market data, internal equity, and individual performance. All awards were targeted at the 50th percentile of the smokestack group.
The 2009 phantom and equity stock option awards were granted with an exercise price equal to our closing stock price on February 20, 2009 of $14.13. All 2009 awards vest ratably over three years. Awards for the NEOs are summarized in the table below.
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. In October 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable to nonqualified deferred compensation arrangements. We believe we are in compliance with the statutory provisions which were effective January 1, 2005 and the regulations which became effective on January 1, 2009.
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, our former CFO and our three other highest paid executive officers.
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.