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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

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Phillips 66

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LOGO

March 25, 2020

To My Fellow Shareholders:

On behalf of the Board of Directors, I am pleased to invite you to Phillip 66’s 2020 Annual Meeting of Shareholders. Due to concerns regarding the coronavirus (COVID-19), and to assist in protecting the health and well-being of our shareholders and employees, we have decided to conduct this year’s meeting in a virtual meeting format only. The meeting will be held on Wednesday, May 6 at 9:00 a.m. Central Daylight Time at www.virtualshareholdermeeting.com/PSX2020.

The attached Notice of Annual Meeting of Shareholders and Proxy Statement provide you with information on how to join the meeting online and the business to be conducted at the meeting. Your vote is very important. Whether or not you plan to attend the meeting, and no matter how many shares you own, we encourage you to vote your shares.

In 2019, we delivered earnings of $3.1 billion and earnings per share of $6.77. We achieved a total shareholder return of 34% during the year, exceeding our peer group average and the S&P 100. We increased our quarterly dividend by 12.5% in 2019 and returned $3.2 billion to shareholders through dividends and share repurchases. Additionally, our Board of Directors approved a new $3 billion share repurchase program. We executed and progressed major growth projects, including the Gray Oak Pipeline and other Midstream projects. All of this was accomplished in a safe and reliable manner. Our goal is zero incidents, zero accidents and zero injuries. In 2019, we again achieved industry-leading safety performance with a combined workforce total recordable rate of 0.15.

At Phillips 66, our strategy focuses on growth, returns and distributions, built on a strong foundation of operating excellence and a high-performing organization. We have executed our strategy well and have put in place programs aimed at continued successful execution. In 2019, we announced AdvantEdge66, a program designed to transform our company through technology and new ways of working. Our success begins with our employees, and in 2019 we also rolled out Our Energy in Action – a set of behaviors that preserves the best of who we are and challenges us to improve. We believe we have the right strategy in place and the right tools to help our employees continue to execute it well.

Phillips 66 is committed to safely and responsibly carrying out our vision of providing energy and improving lives. We remain focused on operational excellence, executing our growth projects, enhancing returns on existing assets and maintaining strong shareholder distributions.

Thank you for your continued support and investment in Phillips 66.

In safety, honor and commitment,

 

LOGO

 

Greg C. Garland

Chairman of the Board and

Chief Executive Officer

 

 

 

LOGO

 

 


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Driven to Make a Difference

 

LOGO  

Meet Mansi Sanghvi. Engineer. Safety champion. Community pillar.

 

Mansi believes in purpose - at home, work, and in the community.

 

It is why she chose to join Phillips 66 nearly five years ago, first as an intern and later as an Instrumentation and Controls Engineer at the Bayway Refinery in Linden, New Jersey.

 

“I love being in the field, working with my peers and seeing the impact my work has,” Mansi says. “It drives me.”

 

So, too, does helping others. She recently helped organize a drive that raised funds to make salads for the homeless so they could enjoy a healthier lunch. She also spearheaded a project that distributed 700 dictionaries to area third-graders.

 

And at work, she taught yoga classes, with all proceeds going to programs benefiting youth, people on the autism spectrum and disabled veterans.

 

“It’s one of the most fulfilling parts of my life,” Mansi says of her volunteerism.

 

All told, Mansi has logged or organized more than 1,000 volunteer hours and raised more than $25,000 through donations and volunteer grants during her time at Phillips 66.

 

She’s not alone. Every day, Phillips 66 employees around the world carry forth the Company’s vision of providing energy and improving lives.

 

They do so by living out the Company’s values of safety, honor and commitment, and through Our Energy in Action, a set of behaviors that empowers them to work for the greater good, create an environment of trust, seek different perspectives and achieve excellence.

 

Employee volunteers logged a record 88,000 hours in 2019. Since 2012, the Company has contributed $180 million to worthy causes, including nearly $40 million through gift-matching programs and volunteer grants.

 

At the refinery, Mansi designs and upgrades instrumentation critical to ensuring safe and reliable operations. Her work is key in helping Phillips 66 achieve operating excellence while remaining an industry leader in safety.

 

“People here are so genuinely smart and humble,” says Mansi. “They took the time to make sure I understood the technical learning curve. I feel like they are my family.”

 

In the community, she represents Phillips 66 on the boards of the local YMCA and the Rahway Community Action Organization, and in 2019 she became the youngest chairwoman of the Linden Rotary Satellite Club.

 

Mansi brings a unique perspective. Born and raised in western India, she immigrated to the U.S. as a teenager and went to high school in New Jersey before attending Rutgers University.

 

She was no stranger to volunteerism prior to joining Phillips 66, but it was at Bayway that she felt empowered to do more through the refinery’s employee resource groups and the support she found from both management and peers.

 

“It just ignited something,” Mansi says. “Millennials, we want to feel like we are making an impact, and I feel fully supported.”

 

“Good is needed in the world. Any little thing you can do can make a huge difference in a person’s life.”

   LOGO

 

 


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LOGO

2331 CityWest Blvd.

Houston, Texas 77042

 

 NOTICE OF 2020 ANNUAL MEETING

 

 OF SHAREHOLDERS

 

To Phillips 66 Shareholders:  Phillips 66 will hold its 2020 Annual Meeting of Shareholders on Wednesday, May 6, 2020, at 9:00 a.m. Central Daylight Time. The meeting will be a completely “virtual meeting” of shareholders. You will be able to attend, vote, review a list of shareholders entitled to vote, and submit your questions during the live webcast of the meeting by visiting www.virtualshareholdermeeting.com/PSX2020 and entering the 16-digit control number included in our notice of internet availability of the proxy materials, on your proxy card or in the instructions that accompanies your proxy materials. At the meeting, you will hear a report on our business and will vote on the following items:

 

   

Election of directors

 

   

Ratification of Ernst & Young LLP as independent auditors

 

   

Advisory vote to approve executive compensation

 

   

A shareholder proposal contained in this proxy statement

In addition, we will transact any other business properly presented at the meeting, including any adjournment or postponement thereof, by or at the direction of the Board of Directors.

Who can vote:  Shareholders at the close of business on March 11, 2020 (the record date). Each share of common stock is entitled to one vote for each director and one vote for each other proposal.

Your vote is important.  We encourage you to submit your proxy as soon as possible by internet, by telephone, or by signing, dating and returning all proxy cards or instruction forms provided to you.

Please see ABOUT THE ANNUAL MEETING for information about how to join the meeting online and voting.

By Order of the Board of Directors

 

LOGO

Paula A. Johnson

Corporate Secretary

March 25, 2020

The Company will provide the Notice of Internet Availability, electronic delivery of the proxy materials or mailing of the 2020 Proxy Statement, the 2019 Annual Report on Form 10-K and a proxy card to shareholders beginning on March 25, 2020.


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     Page  
PROXY SUMMARY      1  
PROXY STATEMENT   
PROPOSAL 1: ELECTION OF DIRECTORS      5  
CORPORATE GOVERNANCE AT PHILLIPS 66      9  
Director Qualifications and Nomination Process      9  
Board Leadership Structure      12  
Board Meetings, Committees and Membership      13  
Board’s Role in Risk Oversight      16  
Related Party Transactions      17  
Compensation Committee Interlocks and Insider Participation      17  
Shareholder and Community Engagement      17  
Corporate Responsibility and Sustainability      18  
Code of Business Ethics and Conduct      20  
Communications with the Board      20  
PROPOSAL 2: RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP      21  
Audit and Finance Committee Report      22  
PROPOSAL 3: ADVISORY APPROVAL OF EXECUTIVE COMPENSATION      23  
COMPENSATION DISCUSSION AND ANALYSIS      24  
2019 Company Performance Summary      24  
Executive Compensation Program Summary      24  
Executive Compensation Program Details      27  
Other Benefits and Perquisites      36  
Executive Compensation Governance      38  
Role of the Human Resources and Compensation Committee      40  
Human Resources and Compensation Committee Report      41  
EXECUTIVE COMPENSATION TABLES      42  
Summary Compensation Table      42  
Grants of Plan-Based Awards      44  
Outstanding Equity Awards at Fiscal Year End      45  
Option Exercises and Stock Vested for 2019      46  
Pension Benefits as of December 31, 2019      47  
Nonqualified Deferred Compensation      48  
Potential Payments upon Termination or Change in Control      49  
CEO Pay Ratio      51  

 

 

2020 PROXY STATEMENT    1


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PROXY SUMMARY

This summary highlights information contained elsewhere in this proxy statement. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement before voting.

Voting Matters

 

      Proposals    Board Recommendation

 

Item 1

 

  

 

Election of three director nominees

 

  

 

FOR (each nominee)

 

 

Item 2

 

  

 

Ratification of the appointment of our independent registered public accounting firm

 

  

 

FOR

 

 

Item 3

 

  

 

Approval, on an advisory basis, of compensation paid to our named executive officers

 

  

 

FOR

 

 

Item 4

 

  

 

Shareholder proposal, if properly presented

 

  

 

AGAINST

 

Your Company

Phillips 66 is a diversified energy manufacturing and logistics company. With a unique portfolio of assets in the midstream, chemicals, refining, and marketing and specialties businesses, we process, transport, store and market fuels and products globally. At Phillips 66, we provide energy that improves lives and contributes to meeting the world’s growing energy needs. Affordable, reliable and abundant energy is essential to sustaining human health and well-being and improving the global standard of living. We believe climate change is a global issue that requires long-term commitment, action by every segment of society, technology and free-market solutions. We accept the climate challenge and are making investments that advance a lower carbon future. We are advancing climate solutions through our operating excellence and environmental stewardship.

Governance and Board Highlights

We recognize that strong corporate governance contributes to long-term shareholder value. We are committed to sound governance practices, including those described below.

 

Percentage of independent directors

  90%   

Oversight of corporate culture and human capital management

 

Percentage of female directors

  30%   

Clawback policy for short- and long-term incentives

 

Directors attended at least 75% of meetings

    

Commitment to diverse candidate pools

 

Majority voting for directors

    

Risk oversight by the full Board and committees

 

Proxy access (3%, 3 years, 20%)

    

Commitment to sustainability and social responsibility

 

Robust Lead Director duties

    

Stock ownership guidelines for executives and directors

 

Regular executive sessions of independent directors

    

Prohibition on pledging and hedging of Company stock

 

Annual Board and committee evaluations

    

Annual evaluation of CEO by independent directors

 

Our directors exhibit an effective mix of diversity, experience and perspective:

 

LOGO              LOGO              LOGO

 

 

2020 PROXY STATEMENT    1


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PROXY SUMMARY

 

Snapshot of 2020 Director Nominees

The following table provides summary information about each director nominee. For more information about our directors, see PROPOSAL 1: ELECTION OF DIRECTORS.

 

                Name

 

  Director  

Since

 

Independent

 

Committee Memberships

  

Other Current

Public Boards

 

AFC

 

HRCC

 

NGC

 

PPC

 

EC

 

Charles M. Holley

 

 

 

2019

 

 

 

 

 

 

 

     

 

 

    

 

1

 

 

Glenn F. Tilton

 

 

 

2012

 

 

 

 

   

 

 

 

 

LOGO

 

 

 

 

 

 

 

  

 

2

 

 

Marna C. Whittington

 

 

2012

 

 

 

 

     

 

LOGO

 

 

 

 

 

 

 

 

 

 

  

 

2

 

 

 

AFC = Audit and Finance Committee            HRCC = Human Resources and Compensation Committee

NGC = Nominating and Governance Committee            PPC = Public Policy Committee

EC = Executive Committee

 

 

= Member

  

 

LOGO  = Chair

2019 Performance Highlights

 

 

LOGO

 

*

TRR is total recordable rate.

Executive Compensation Highlights

We link compensation to Company performance and use metrics that we believe will provide long-term shareholder value. Additionally, we align the interests of our executives with our shareholders through our equity compensation program. Below is a summary of some of the compensation best practices we follow:

 

  Target the majority of named executive officer (“NEO”) compensation to be performance based

  Link NEO compensation to shareholder value creation by having a significant portion of compensation at risk

  Apply multiple performance metrics aligned with our corporate strategy to measure our performance

  Cap maximum payouts under our Variable Cash Incentive Program (“VCIP”) and equity programs

  Employ a “double trigger” for severance benefits and equity awards under our Key Employee Change in Control Severance Plan

  Include absolute and relative metrics in our Long-Term Incentive (“LTI”) programs

  Maintain stock ownership guidelines for executives—CEO 6x base salary; other NEOs 3-5x base salary

  Balance, monitor and manage compensation risk through regular assessments and robust clawback provisions

  Have extended vesting periods on stock awards, with a minimum one-year vesting period

  Maintain a fully independent Compensation Committee

 

 

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  Retain an independent compensation consultant

  Hold a Say-on-Pay vote annually

Key Elements of Compensation Programs

We provide our named executive officers with short- and long-term compensation opportunities that encourage performance to increase stockholder value while avoiding excessive risk-taking. Our compensation plans tie a substantial portion of our named executive officers’ overall target compensation to the achievement of performance goals and include equity-based compensation that aligns our executives’ interests with our shareholders.

Compensation Mix

Our executives’ compensation includes base salary, an annual bonus opportunity under our Variable Compensation Incentive Plan (“VCIP”), and equity-based compensation comprised of stock options, restricted stock units (“RSUs”) and awards under our Performance Share Program (“PSP”).

 

CEO

 

 

LOGO

 

Other NEOs

 

 

LOGO

 

 

Variable Compensation Incentive Plan

The VCIP program is designed to align annual bonus awards with shareholder interests and execution of our corporate strategy. Performance under the VCIP is based on both operational and financial metrics. In 2019, 45% of VCIP is weighted to operational metrics (high-performing organization and operating excellence) and 55% is weighted to financial metrics (adjusted EBITDA and adjusted controllable costs).

 

 

LOGO

 

 

2020 PROXY STATEMENT    3


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Long-Term Incentive Programs

Our long-term incentives include PSP awards, stock options and RSUs. We believe these equity-based awards, and the mix of awards, promote retention, drive behaviors and actions consistent with shareholder interests and are appropriate for the cyclical nature of our business.

LOGO

 

 

Corporate Responsibility and Sustainability

Our vision is to provide energy in ways that improve lives, which we reinforce through our core company values of safety, honor and commitment. Operational, economic, social and environmental sustainability is at the heart of how we deliver on our vision. By maintaining strong operating excellence, we are committed to safety, reliability and environmental stewardship while protecting shareholder value. We also are committed to achieving a high-performing organization that is focused on culture, inclusion and diversity as well as building community through volunteerism, financial support, and engagement, including community awareness and education. More information can be found in the CORPORATE RESPONSIBILITY AND SUSTAINABILITY section of this proxy statement.

 

 

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PROPOSAL 1: ELECTION OF DIRECTORS

Our governing documents provide that directors are divided into three classes, with one class being elected each year for a three-year term. Based on the recommendation of the Nominating and Governance Committee, the Board has nominated each of the director nominees set forth below to stand for election at the Annual Meeting. The term for the directors to be elected this year will expire at the annual meeting of shareholders held in 2023. Each nominee requires the affirmative vote of a majority of the votes cast in person or by proxy at the meeting.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” EACH OF CHARLES M. HOLLEY, GLENN F. TILTON AND MARNA C. WHITTINGTON.

Our Board of Directors

Each of our directors is elected to serve until his or her successor is duly elected and qualified. If a nominee is unavailable for election, proxy holders may vote for another nominee proposed by the Board of Directors or, as an alternative, the Board of Directors may reduce the number of directors to be elected at the Annual Meeting.

Any director vacancies created between annual shareholder meetings (such as by a current director’s death, resignation or removal for cause or an increase in the number of directors) may be filled by a majority vote of the remaining directors then in office. Any director appointed in this manner would hold office for a term expiring at the annual meeting of shareholders at which the term of office of the class to which he or she has been appointed expires. If a vacancy results from an action of our shareholders, only our shareholders would be entitled to elect a successor.

Director Biographies

Set forth below is information as of March 11, 2020, regarding the nominees for election. We have provided the most significant experiences and qualifications that led to the conclusion that each director or director nominee should serve as one of our directors. No family relationship exists among any of our directors, director nominees or executive officers. There is no arrangement between any director or director nominee and any other person pursuant to which he or she was, or is to be, selected as a director or director nominee.

Director Nominees

The following three directors will seek election at this year’s Annual Meeting for a term expiring in 2023.

 

 

LOGO

Charles M. Holley

 

Age 63

Director since 2019

Board Committees: Audit and Finance, Public Policy

 

 

•   Executive Vice President and Chief Financial Officer of Walmart Inc. from 2010 to 2015

 

•   Director of Amgen, Inc. since 2017

 

Director Qualifications: Mr. Holley has several years of experience as an executive at one of the largest U.S. corporations, providing him with expertise in finance, senior management, risk and asset management, strategic planning and capital markets. He also has extensive experience in international operations and technology platforms.

 

 

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PROPOSAL 1: ELECTION OF DIRECTORS

 

 

 

LOGO

Glenn F. Tilton

Lead Director

 

Age 71

Director since 2012

Board Committees: Human Resources and Compensation, Nominating and Governance (Chair), Public Policy, Executive

 

 

•   Chairman of the Midwest of JPMorgan Chase & Co. from 2011 to 2014

 

•   Director of Abbott Laboratories since 2017

 

•   Lead Director of AbbVie Inc. since 2013

 

•   Non-Executive Chairman of the Board of United Continental Holdings Inc. from 2010 to 2013

 

Director Qualifications: Mr. Tilton has strong management experience overseeing complex multinational businesses operating in highly regulated industries. He also has extensive experience in the energy industry through his more than 30 years in increasingly senior roles with Texaco Inc., including Chairman and CEO in 2001, as well as expertise in finance and capital markets matters.

 

LOGO

Marna C. Whittington

 

Age 72

Director since 2012

Board Committees: Human Resources and Compensation (Chair), Nominating and Governance, Public Policy, Executive

 

 

•   CEO of Allianz Global Investors Capital, a diversified global investment firm, from 2002 until 2012

 

•   Director of Macy’s, Inc. since 1993

 

•   Director of Oaktree Capital Group, LLC since 2012

 

•   Director of Rohm & Haas Company from 1989 to 2009

 

Director Qualifications: Dr. Whittington has many years of leadership experience and expertise as a former senior executive in the investment management industry. She has extensive knowledge of and substantial experience in management, and in financial, investment and banking matters and provides valuable insight from her previous experience serving as a public company board member.

Directors Whose Terms Expire at the 2021 Annual Meeting

 

 

 

LOGO

J. Brian Ferguson

 

Age 65

Director since 2012

Board Committees: Audit and Finance (Chair), Nominating and Governance, Public Policy, Executive

 

 

•   Chairman of Eastman Chemical Company, a global chemical company engaged in the manufacture and sale of a broad portfolio of chemicals, plastics and fibers, from 2002 to 2010

 

•   Director of Owens Corning since 2011

 

•   Director of NextEra Energy, Inc. from 2005 to 2013

 

Director Qualifications: Mr. Ferguson joined Eastman in 1977 and led several of its businesses in the U.S. and Asia, which, in addition to his Chairman and CEO roles, provides him with over 30 years of leadership experience in international business, industrial operations, strategic planning and capital raising strategies.

 

 

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PROPOSAL 1: ELECTION OF DIRECTORS

 

 

LOGO

Harold W. McGraw III

 

Age 71

Director since 2012

Board Committees: Human Resources and Compensation, Public Policy

 

 

•   Chairman of S&P Global Inc. (previously McGraw Hill Financial) from 1999 to 2015 and CEO of S&P Global from 1998 to 2013

 

•   Honorary Chairman of the International Chamber of Commerce (ICC) since 2016

 

•   Chairman of the ICC from 2013 to 2016

 

•   Director of United Technologies Corporation since 2003

 

Director Qualifications: Mr. McGraw’s experience leading a large, global public company with a significant role in the financial reporting industry provides him with valuable global financial, corporate governance and operational expertise.

 

LOGO

Victoria J. Tschinkel

 

Age 72

Director since 2012

Board Committees: Audit and Finance, Public Policy

 

 

•   Former Chair of 1000 Friends of Florida, a non-profit to promote a sustainable Florida by building better communities and supporting preservation and restoration activities

 

•   State Director of the Florida Nature Conservancy from 2003 to 2006

 

•   Senior environmental consultant to Landers & Parsons, a Tallahassee, Florida law firm, from 1987 to 2002

 

•   Secretary of the Florida Department of Environmental Regulation from 1981 to 1987

 

•   Former director of the National Fish and Wildlife Foundation

 

Director Qualifications: Ms. Tschinkel’s extensive environmental regulatory experience makes her well qualified to serve as a member of the Board. In addition, her relationships and experience working within the environmental community position her to advise the Board on the impact of our operations in sensitive areas.

Directors Whose Terms Expire at the 2022 Annual Meeting

 

 

LOGO

Greg C. Garland

 

Age 62

Director since 2012

Board Committees:

Executive (Chair)

 

 

•   Chairman and CEO of Phillips 66 since 2012

 

•   Senior Vice President, Exploration and Production-Americas for ConocoPhillips from 2010 to 2012

 

•   President and CEO of Chevron Phillips Chemical Company LLC from 2008 to 2010

 

•   Director of Amgen Inc. since 2013

 

•   Director of Phillips 66 Partners GP LLC, the general partner of Phillips 66 Partners LP, since 2013

 

Director Qualifications: Mr. Garland has extensive knowledge of all aspects of our business. Through his years of service with the Company and more than 35 years of experience in the energy industry, Mr. Garland is well qualified to serve both as a director and Chairman of the Board.

 

 

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PROPOSAL 1: ELECTION OF DIRECTORS

 

 

LOGO

Gary K. Adams

 

Age 69

Director since 2016

Board Committees: Human Resource and Compensation, Public Policy

 

 

•   Chief Advisor - Chemicals for IHSMarkit from 2011 to 2017

 

•   President, CEO and Chairman of the Board of Chemical Market Associates, Inc. (CMAI) from 1997 until 2011

 

•   Director of Trecora Resources since 2012

 

•   Director of Westlake Chemical Partners LP from 2014 to 2016

 

•   Director of Phillips 66 Partners LP from 2013 to 2016

 

Director Qualifications: Mr. Adams has a lengthy tenure and extensive experience in the energy industry, including leadership experience with operating responsibilities as well as in-depth knowledge of the global chemicals market, including 15 years at Union Carbide in various positions.

 

LOGO

John E. Lowe

 

Age 61

Director since 2012

Board Committees: Audit and Finance, Public Policy (Chair), Executive

 

 

•   Assistant to the CEO of ConocoPhillips from 2008 until 2012

 

•   Executive Vice President, Exploration and Production of ConocoPhillips from 2007 to 2008

 

•   Senior Executive Advisor to Tudor, Pickering, Holt & Co. since 2012

 

•   Director of TC Energy (formerly TransCanada) since 2015

 

•   Director of Apache Corporation since 2013 (Non-Executive Chairman since 2015)

 

•   Director of Agrium Inc. from 2010 to 2015

 

Director Qualifications: Mr. Lowe has over 30 years of experience in the oil and gas industry. In addition to relevant industry financial expertise, he has extensive experience identifying, assessing and minimizing risks faced by companies in the energy industry.

 

LOGO

Denise L. Ramos

 

Age 63

Director since 2016

Board Committees: Audit and Finance, Nominating and Governance, Public Policy

 

 

•   Chief Executive Officer, President and a director of ITT Inc., a diversified manufacturer of critical components and customized technology solutions, from 2011 to 2018

 

•   Director of Bank of America Corporation since 2019

 

•   Director of United Technologies Corporation since 2018

 

•   Director of Praxair, Inc. from 2014 to 2016

 

Director Qualifications: Ms. Ramos has extensive experience in the oil and gas industry through her more than 20 years in various finance positions at Atlantic Richfield Company, as well as experience in retail and customer-centric industries. In addition to her financial expertise, she has extensive operational and manufacturing experience with industrial companies.

 

 

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CORPORATE GOVERNANCE AT PHILLIPS 66

Phillips 66 is committed to effective corporate governance and high ethical standards. We believe that corporate governance, including our values of safety, honor and commitment, is the foundation for financial integrity, investor confidence and sustainable performance. Our values guide how our 14,500 employees conduct business every day and how the Board of Directors oversees and counsels management in the long-term interest of the Company, our shareholders and other stakeholders. We continuously strive to meet our vision of providing energy and improving lives, guided by our four pillars of sustainability:

 

   

Operational Excellence

 

   

Environmental Commitment

 

   

Social Responsibility

 

   

Economic Performance

Our Board of Directors has adopted Corporate Governance Guidelines that establish a common set of expectations to assist the Board and its committees in performing their duties. The Board reviews the Guidelines and updates them as necessary to reflect changing regulatory requirements, evolving best practices and input from shareholders and other stakeholders. Our key corporate governance documents, including our Corporate Governance Guidelines, Charters of our Board’s committees, our By-Laws, and our Code of Business Ethics and Conduct, can be found on the Company’s website (www.phillips66.com) in the “Investors” section, under the “Corporate Governance” caption. We also disclose information about our environmental, social and governance (“ESG”) efforts on our website under the “Sustainability” caption. There, interested parties can find data and information on programs and projects that demonstrate how we fulfill our vision of providing energy and improving lives.

DIRECTOR QUALIFICATIONS AND NOMINATION PROCESS

Skills and Qualifications We Seek in Directors

In evaluating potential candidates for nomination to the Board, as well as evaluating the Board’s overall composition, the Nominating and Governance Committee and the Board consider several factors. All directors are expected to possess the highest personal and professional ethics, integrity and values and be committed to representing the long-term interests of the Company’s shareholders. Directors also are expected to devote sufficient time and effort to their duties as a director.

The Nominating and Governance Committee believes that the Board should reflect a range of talents, ages, skills, experiences, diversity, and expertise sufficient to provide sound and prudent guidance with respect to the Company’s strategic and operational objectives. The Board has committed to seeking women and minority candidates, as well as candidates with diverse backgrounds, skills and experiences, as part of the search process for new directors.

The following are key skills and qualifications considered in evaluating director nominees and Board composition as a whole. The Board determined that a mix of these skills and qualifications provides the composition necessary to effectively oversee the Company’s execution of its strategy.

 

 

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LOGO

Board Refreshment

The Board strives to maintain an appropriate balance of tenure, turnover, diversity, skills and experience.

The Board does not maintain term limits, but our Governance Guidelines include a mandatory director retirement age of 75. The Board believes that continuity of service can provide stability and valuable insight, based on experience and understanding of the Company. The average tenure of all of our directors is 6.2 years and the average age of all of our directors is 66.9 years.

The Board ensures refreshment and continued effectiveness through evaluation, nomination, and other policies, processes and practices. For example:

 

   

The Nominating and Governance Committee annually reviews with the Board the qualifications for Board members and the composition of the Board as a whole.

 

   

The Nominating and Governance Committee annually reviews each director nominee’s continuation on the Board and makes recommendations to the full Board.

 

   

The Company’s Corporate Governance Guidelines provide that any director whose principal outside responsibilities have changed since election to the Board should volunteer to resign to give the Board the opportunity to review the appropriateness of continued Board membership under the circumstances.

 

 

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Additionally, each committee of the Board performs an annual self-assessment, and the Nominating and Governance Committee and Lead Director oversee an annual self-assessment of the full Board. The self-assessment includes an evaluation survey and individual discussions between the Lead Director and each other director. A summary of the results of each committee’s self-assessment is presented to the committee and discussed in executive session. The Lead Director presents a summary of the results of the Board evaluation to the Board in executive session. Any matters requiring further action are identified and action plans developed to address the matter.

To further ensure continued Board effectiveness, the Nominating and Governance Committee periodically considers Board committee rotations, including in the event of a change in the composition of the Board. Additionally, the Nominating and Governance Committee’s charter provides that in all cases, committee rotations will be considered every three years for all committees other than Audit and Finance, the rotation of which will be considered every three to six years.

How We Select Our Director Nominees

The Board is responsible for nominating directors and filling vacancies that may occur between annual meetings, based upon the recommendation of the Nominating and Governance Committee. The Nominating and Governance Committee considers the Company’s current needs and long-term and strategic plans to determine the skills, experience and characteristics needed by our Board. The Nominating and Governance Committee identifies, considers and recommends director candidates to the Board of Directors with the goal of creating a balance of knowledge, experience and diversity. Generally, the Nominating and Governance Committee identifies candidates through the use of a search firm or the business and organizational contacts of directors and management. In 2018, the Board formalized its commitment to seeking women and minority candidates, as well as candidates with diverse backgrounds, skills and experiences, as part of the search process for new directors.

When evaluating candidates, the Nominating and Governance Committee takes into consideration the key qualifications and skills described above. The Nominating and Governance Committee also considers whether potential candidates will likely satisfy independence standards for service on the Board and its committees.

Shareholder Recommendation of Candidates and Nomination of Candidates

The Nominating and Governance Committee will consider director candidates recommended by shareholders. A shareholder wishing to recommend a candidate for nomination by the Nominating and Governance Committee should follow the same procedures referred to below for nominations to be made directly by a shareholder. In addition, the shareholder should provide such other information deemed relevant to the Nominating and Governance Committee’s evaluation. Candidates recommended by the Company’s shareholders are evaluated on the same basis as candidates recommended by the Company’s directors, management, third-party search firms or other sources.

Our By-Laws permit proxy access for shareholders. Shareholders who wish to nominate directors for inclusion in our proxy statement or directly at an annual meeting in accordance with our By-Laws should follow the procedures described under SUBMISSION OF FUTURE SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS.

Majority Voting

To be elected, a director must receive a majority of the votes cast with respect to that director at the meeting. Our By-Laws provide that if the number of shares voted “for” a nominee who is serving as a director (an incumbent) does not exceed 50% of the votes cast with respect to that director, he or she will tender his or her resignation to the Board of Directors. The Nominating and Governance Committee will then make a recommendation to the Board on whether to accept or reject the resignation, or whether other action should be taken. Within 90 days of the certification of the shareholder vote, the Board is required to decide whether to accept the resignation and publicly disclose its decision-making process.

In a contested election, where the number of nominees exceeds the number of directors to be elected, the required vote would be a plurality of votes cast.

 

 

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Director Independence

Our Corporate Governance Guidelines contain director independence standards, which are consistent with the standards set forth in the NYSE listing standards. These standards assist the Board of Directors in determining the independence of the Company’s directors. The Board of Directors has affirmatively determined that each director, except Mr. Garland, meets our independence standards. Mr. Garland is not considered independent because he is an executive officer of the Company.

In making independence determinations, the Board specifically considered the fact that many of our directors are directors or otherwise affiliated with companies with which we conduct business. Additionally, some of our directors may purchase products, such as gasoline from our retail sites, from the Company. In all cases, it was determined that the nature of the business conducted and the interest of the director by virtue of such position were immaterial both to the Company and to the director.

Executive Sessions of Independent Directors

The independent directors hold regularly scheduled executive sessions of the Board and its committees without Company management present. These executive sessions are chaired by the Lead Director at Board meetings or by the Committee Chairs at Committee meetings.

BOARD LEADERSHIP STRUCTURE

Chairman and CEO Roles

The Board of Directors believes that no single organizational model is the most effective in all circumstances. As a consequence, the Board periodically considers whether the offices of Chairman and CEO should continue to be combined and who should serve in such capacities.

Although the Board of Directors has the authority to separate the positions of Chairman and CEO if it deems appropriate, the Board believes it is in the best interest of the Company’s shareholders to combine them. Doing so enables one person to guide the Board in setting priorities for the Company and in addressing the risks and challenges the Company faces. The Board of Directors believes that, while its non-employee directors bring a diversity of skills and perspectives to the Board, the Company’s CEO, by virtue of his day-to-day involvement in managing the Company, currently is best suited to serve as Chairman and perform this unified role.

Independent Director Leadership

Glenn Tilton has served as our Lead Director since February 2016. In appointing a Lead Director, the Board of Directors considered it useful and appropriate to designate an independent director to serve in a lead capacity to coordinate the activities of the non-employee directors and to perform such other duties and responsibilities as the Board of Directors may determine. In his role as Lead Director, Mr. Tilton:

 

   

advises the Chairman on an appropriate schedule of Board meetings, seeking to ensure that the non-employee directors can perform their duties responsibly without interfering with operations;

 

   

provides the Chairman with input on the preparation of the agenda for each Board meeting and assures that there is sufficient time for discussion of all agenda items;

 

   

advises the Chairman on the quality, quantity and timeliness of the flow of information from management to the non-employee directors in order that they may perform their duties effectively and responsibly, including specifically requesting certain materials be provided to the Board;

 

   

recommends to the Chairman the retention of consultants who report directly to the Board of Directors;

 

   

interviews all Board candidates and makes nomination recommendations to the Nominating and Governance Committee and the Board of Directors;

 

   

assists the Board of Directors and Company officers in assuring compliance with and implementation of the Corporate Governance Guidelines;

 

 

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ensures that he, or another appropriate director, is available for engagement with shareholders when warranted;

 

   

calls meetings of the non-employee directors as needed, develops the agenda for and moderates any such meetings and executive sessions of the non-employee directors;

 

   

acts as principal liaison between the non-employee directors and the Chairman on sensitive issues;

 

   

participates with the Human Resources and Compensation Committee (“Compensation Committee”) in the periodic discussion of CEO performance;

 

   

ensures the Board of Directors conducts an annual self-assessment and meeting with the CEO to discuss the results of the annual self-assessment; and

 

   

works with the Nominating and Governance Committee to recommend the membership of the various Board committees, as well as selection of the committee chairs.

The Board of Directors believes that its current structure and processes encourage its non-employee directors to be actively involved in guiding its work. The chairs of the Board’s committees review their respective agendas and committee materials in advance of each meeting, communicating directly with other directors and members of management as each deems appropriate. Moreover, each director may suggest agenda items and raise matters that are not on the agenda at Board and committee meetings.

BOARD MEETINGS, COMMITTEES, AND MEMBERSHIP

The Board of Directors met six times in 2019. All of our directors attended at least 75% of the meetings of the Board and committees on which they served.

Recognizing that director attendance at the Company’s annual meeting can provide the Company’s shareholders with an opportunity to communicate with the directors about issues affecting the Company, the Company actively encourages directors to attend the annual meetings of Shareholders. All of our directors, other than Mr. Holley, who was not yet serving on the Board, attended the 2019 Annual Meeting of Shareholders.

BOARD COMMITTEE MEMBERSHIP

The table below shows the membership of each of the Board’s committees, as well as information about each committee’s primary responsibilities.

 

Audit and Finance

 

Met 9 times in 2019

 

Current Members:

 

J. Brian Ferguson (Chair)

Charles M. Holley

John E. Lowe

Denise L. Ramos

Victoria J. Tschinkel

 

Primary Responsibilities:

 

•   Discusses, with management, the independent auditors and the internal auditors the integrity of the Company’s accounting policies, internal controls, financial statements, and financial reporting practices, and select financial matters, covering the Company’s capital structure, complex financial transactions, financial risk management, retirement plans and tax planning.

 

•   Reviews significant corporate risk exposures and steps management has taken to monitor, control and report such exposures.

 

•   Monitors the qualifications, independence and performance of our independent auditors and internal auditors.

 

•   Monitors our compliance with legal and regulatory requirements, including our Code of Business Ethics and Conduct.

 

•   Maintains open and direct lines of communication with the Board and our management, internal auditors and independent auditors.

 

Financial Expertise, Financial Literacy and Independence:

 

The Board has determined that Messrs. Ferguson, Holley, Lowe and Ms. Ramos satisfy the SEC’s criteria for “audit committee financial experts.” Additionally, the Board has determined that each member of the Audit and Finance Committee is independent pursuant to SEC and NYSE requirements and is financially literate within the meaning of the NYSE listing standards.

 

 

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Human Resources and Compensation

 

Met 6 times in 2019

 

Current Members:

 

Marna C. Whittington (Chair)

Gary K. Adams

Harold W. McGraw III

Glenn F. Tilton

 

Primary Responsibilities:

 

•   Oversees our executive compensation policies, plans, programs and practices.

 

•   Assists the Board in discharging its responsibilities relating to the fair and competitive compensation of our executives and other key employees.

 

•   Reviews at least annually the performance (together with the Lead Director) and sets the compensation of the CEO.

 

Independence:

 

The Board has determined that each member of the Compensation Committee is independent under the Company’s Corporate Governance Guidelines and the NYSE listing standards for directors and compensation committee members.

 

Additional information about the Compensation Committee can be found in the COMPENSATION DISCUSSION AND ANALYSIS.

Nominating and Governance

 

Met 4 times in 2019

 

Current Members:

 

Glenn F. Tilton (Chair)

J. Brian Ferguson

Denise L. Ramos

Marna C. Whittington

 

Primary Responsibilities:

 

•   Selects and recommends director candidates to the Board to be submitted for election at annual meetings and to fill any vacancies on the Board.

 

•   Recommends committee assignments to the Board.

 

•   Reviews and recommends to the Board compensation and benefits policies for our non-employee directors.

 

•   Reviews and recommends to the Board appropriate corporate governance policies and procedures for our Company.

 

•   Conducts an annual assessment of the qualifications and performance of the Board.

 

•   Reviews and reports to the Board annually on succession planning for the CEO.

 

Independence:

 

The Board has determined that each member of the Nominating and Governance Committee is independent under the Company’s Corporate Governance Guidelines and the NYSE listing standards for directors.

Public Policy

 

Met 4 times in 2019

 

Current Members:

 

John E. Lowe (Chair)

Gary K. Adams

J. Brian Ferguson

Charles M. Holley
Harold W. McGraw III

Denise L. Ramos

Glenn F. Tilton

Victoria J. Tschinkel

Marna C. Whittington

 

Primary Responsibilities:

 

•   Advises the Board on current and emerging domestic and international public policy issues.

 

•   Assists the Board with the development, review and approval of policies and budgets for charitable and political contributions and activity.

 

•   Advises the Board on compliance with policies, programs and practices regarding social risks and health, safety and environmental protection.

 

Independence:

 

The Board has determined that each member of the Public Policy Committee is independent under the Company’s Corporate Governance Guidelines and the NYSE listing standards for directors.

Executive

 

Did not meet in 2019

 

Current Members:

 

Greg C. Garland (Chair)

J. Brian Ferguson

John E. Lowe

Glenn F. Tilton

Marna C. Whittington

 

Primary Responsibilities:

 

•   Exercises the authority of the full Board, if necessary, in intervals between regularly scheduled Board meetings.

 

•   The power and authority of the committee does not extend to (1) those matters expressly delegated to another committee of the Board, (2) the adoption, amendment or repeal of any of our By-Laws and (3) those matters that cannot be delegated to a committee under statute or our Certificate of Incorporation or By-Laws.

 

 

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The charters for our Audit and Finance Committee (the “Audit Committee”), Human Resources and Compensation Committee (the “Compensation Committee”), Nominating and Governance Committee, Public Policy Committee and Executive Committee can be found in the “Investors” section on the Phillips 66 website (www.phillips66.com) under the “Corporate Governance” caption. Shareholders may also request printed copies of these charters by following the instructions located under AVAILABLE INFORMATION.

 

 

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BOARD’S ROLE IN RISK OVERSIGHT

The Company’s management is responsible for the day-to-day conduct of our businesses and operations, including management of risks the Company faces. To fulfill this responsibility, our management has established an enterprise risk management (“ERM”) program. The program is designed to identify and facilitate the management of significant risks facing the Company as well as the approaches to addressing risks.

The Board of Directors has broad oversight responsibility over the Company’s ERM program and receives management updates on its development and implementation. In this oversight role, the Board of Directors is responsible for satisfying itself that the risk management processes designed and implemented by the Company’s management are functioning as intended, and that necessary steps are taken to foster a culture of risk-adjusted decision making throughout the organization.

The Board of Directors exercises its oversight responsibility for risk assessment and risk management directly and through its committees. However, the full Board maintains responsibility for oversight of strategic risks. Setting the strategic course of the Company and providing oversight of strategic risks involves a high level of constructive engagement between management and the Board. The Board regularly discusses the strategic priorities of the Company and the risks to the Company’s successful execution of its strategy, including global economic and other significant trends, as well as changes in the energy industry and regulatory initiatives.

The Board of Directors receives regular updates from its committees on individual areas of risk falling within each committee’s area of oversight and expertise, as outlined below.

Committee Risk Oversight Responsibilities

Audit and Finance Committee

The Audit Committee discusses the guidelines and policies to govern the process by which ERM is handled and has been delegated responsibility to facilitate coordination among the Board’s committees with respect to the Company’s risk management programs.

The Audit Committee is responsible for overseeing the integrity of the Company’s financial statements; the independent auditors’ qualifications and independence; the performance of the Company’s internal audit function; and its system of internal control over financial reporting. The Audit Committee also reviews and receives briefings concerning information technology (including cybersecurity), compliance with laws and regulatory requirements, and major financial exposures.

Human Resources and Compensation Committee

The Compensation Committee oversees the Company’s compensation and talent management programs. The Compensation Committee evaluates whether our compensation programs and practices create excessive risks and determines whether any changes to those programs and practices are warranted. The Compensation Committee also ensures that our compensation programs align with long-term interests of shareholders and are effective in retaining top talent. Finally, the Compensation Committee ensures the development of a diverse talent pool with respect to CEO and senior management succession planning.

Nominating and Governance Committee

The Nominating and Governance Committee reviews policies and practices in the areas of corporate governance and is responsible for overseeing Board composition and director qualifications through the nomination process. Additionally, the Committee is responsible for CEO succession planning.

Public Policy Committee

The Public Policy Committee assists the Board in identifying, evaluating and reviewing social, political and environmental trends and related risks. It also reviews management’s proposed actions to anticipate and adjust to such trends and manage risks to achieve the Company’s long-term business goals. The Public Policy Committee reviews and makes recommendations to the full Board on the Company’s policies, programs and practices relating to health, safety and environmental protection, government relations and political contributions, corporate philanthropy, and corporate responsibility.

 

 

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RELATED PARTY TRANSACTIONS

Our Code of Business Ethics and Conduct requires all directors and executive officers to promptly report any transactions or relationships that reasonably could be expected to constitute a related party transaction. The transaction or relationship is reviewed by the Company’s management and the appropriate committee of the Board to ensure that it does not constitute a conflict of interest and is appropriately disclosed.

Additionally, the Nominating and Governance Committee conducts an annual review of related party transactions between each director and the Company and its subsidiaries in making recommendations to the Board regarding the continued independence of each director. Since January 1, 2019, there have been no related party transactions in which the Company or a subsidiary was a participant and in which any director, executive officer, or any of their immediate family members had a direct or indirect material interest.

The Nominating and Governance Committee also considered relationships that, while not constituting related party transactions where a director had a direct or indirect material interest, nonetheless involved transactions between the Company and an organization with which a director is affiliated, either directly or as a partner, shareholder or officer. The Nominating and Governance Committee determined that there were no transactions impairing the independence of any member of the Board.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee consists of Marna C. Whittington, Gary K. Adams, Harold W. McGraw III and Glenn F. Tilton, each of whom is an independent director. None of the members of the Compensation Committee during fiscal year 2019 or as of the date of this proxy statement is or has been an officer or employee of Phillips 66 and no executive officer of Phillips 66 served on the compensation committee or board of any company that employed any member of Phillips 66’s Compensation Committee or Board.

SHAREHOLDER AND COMMUNITY ENGAGEMENT

At Phillips 66, we believe that we succeed together as a team, leveraging our diverse experiences and thoughts in an environment that thrives on collaboration. We embrace engagement as an important tenet of good governance and value the views of our shareholders and other stakeholders. We believe that positive dialogue builds informed relationships that promote transparency and accountability. Although the Lead Director or other members of the Board are available to participate in meetings with shareholders as appropriate, management has the principal responsibility for shareholder communication.

The communities in which our assets are located and in which we operate are critical stakeholders. We consistently and regularly engage with our local communities and seek their feedback. Our refining operations have community advisory councils or panels that include both Company representatives and community members. These panels meet at least quarterly with refinery management to provide feedback, discuss topics of local concern and share insights on plans and activities. Our pipeline business units have year-round community awareness, education and listening panels to stay connected with those involved with and affected by our extensive pipeline network.

We also believe that engagement and good governance involve participating in political or public policy activities that advance the Company’s goals, are consistent with Company values, and improve the communities where we work and live. A number of federal, state and local laws govern corporate involvement in such activities, and we maintain policies, procedures and programs to comply with these laws. Additional information about our involvement in political or public policy activities is available on our website.

Shareholder Engagement

For several years, Phillips 66 has conducted a formal shareholder outreach program to listen to investor perspectives on our business strategy, corporate governance, executive compensation program, ESG, and other matters that are important to our investors. We solicit feedback from a range of investors, including institutional investors, asset managers, public and labor union pension funds, and socially responsible investors.

 

 

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Information and feedback received through our engagement activities are shared with our executive leadership team and the Board of Directors, which help inform their decisions. In 2019, we engaged with representatives of many of our top institutional shareholders to discuss strategy, ESG, board composition, refreshment and tenure, risk management, climate change and sustainability efforts, governance practices, and executive compensation.

We are committed to continued engagement. Over the last few years, we have made changes and taken action in response to shareholder feedback as well as our commitment to ongoing improvement. Examples of these improvements include:

 

Year

  

Action Taken

2015    Adopted proxy access by-law giving shareholders holding at least 3% of our shares for at least 3 years the right to include in the proxy statement director nominees for up to 20% of the Board (but not less than two nominees).

2015, 2016,

2018

   Encouraged shareholders to approve charter amendment to eliminate classified board structure and permit all directors to be elected annually. Proposal did not receive the required vote to pass in any of the three years it was submitted to a vote. We continue to assess the proposal and its potential for adoption in the future.
2016    Increased size of our Board and added two new independent directors, Mr. Adams and Ms. Ramos, further increasing the independence and diversity of the Board.
2017, 2019    Published on our website a sustainability report to provide a comprehensive resource for interested parties to learn about our sustainability policies and programs, with links to a suite of Company information, including policies, positions, educational information, and other reports. The report is updated regularly.
2018    Amended our Corporate Governance Guidelines to specify that the Board will seek women and minority candidates, as well as candidates with diverse backgrounds, skills and experiences, as part of the search process for new directors.
2018    Published on our website a Task Force on Climate-related Disclosures (“TCFD”) informed report to help investors understand our risk management, scenario planning and assumptions on energy policy risks. We also published on our website our Inclusion and Diversity Brochure, outlining our commitment to an inclusive and diverse workplace.
2019    Launched Our Energy in Action, a program to identify and shape our corporate culture for the greater good, built on trust, seeking diverse perspectives and achieving excellence.

CORPORATE RESPONSIBILITY AND SUSTAINABILITY

Phillips 66 is dedicated to meeting the world’s energy needs responsibly, efficiently and sustainably. For us, sustainability means manufacturing and delivering affordable, clean products in a safe and environmentally sound manner. Our sustainability efforts are built on four pillars: operational excellence, environmental commitment, social responsibility and economic performance. Our Board of Directors oversees these efforts, including through the work of its committees. For more information, see BOARD’S ROLE IN RISK OVERSIGHT.

We recognize the climate challenge and are making investments that advance a lower carbon future. We are focused on implementing best-in-class sustainability practices today and into the future and are seeking solutions for tomorrow’s energy needs. We are conducting research on energy of the future, including renewable fuels, organic photovoltaics, current and next generation batteries, and solid oxide fuel cells. In addition, we have a portfolio of renewable fuel projects in development that comply with low-carbon fuel standards. We are leveraging our existing infrastructure, supply network and capabilities. Below are some of the things we are doing today, as well as some of the projects we are pursuing to position Phillips 66 to be competitive long-term.

 

   

Producing renewable diesel from used cooking oil at our Humber Refinery

 

   

Supplying the feedstock to make anodes and lithium ion batteries for electric vehicles and electronic devices

 

   

Testing alternative fuels at our franchise marketing sites on the U.S. West Coast

 

   

Installed our first hydrogen pump station in Switzerland, with plans to add two to three more per year

 

   

Manufacturing the next generation of low viscosity heavy duty engine oil to improve fuel economy by 1% to 2%

 

   

Providing supply and offtake for two third-party renewable diesel facilities under construction in Nevada

 

 

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Developing a renewable diesel project at our San Francisco Refinery

 

   

Evaluating solar energy to power our pipelines and refineries

 

   

Progressing an industrial scale renewable hydrogen project at our Humber Refinery

Corporate Culture

We believe that our success depends on our employees and that our people and our culture provide a significant strategic advantage in helping us achieve our objectives for our stakeholders. In 2019, we launched Our Energy in Action, a set of behavioral expectations that preserve what make us great and challenge us to evolve in ways that make us better and keep us competitive. Our Energy in Action is how we treat each other, our customers and our communities.

 

 

LOGO

We also believe that we must protect, nurture and celebrate our differences as a competitive advantage that positions us for success in our industry. The talented people who make up our Company are widely divergent in their visible and invisible differences: in gender, race, ethnicity, age, national origin, disability, sexual orientation, gender identity, veteran status, education and religion. Because of this diversity, it is critical that we have an environment where the experiences and perspectives of all employees are valued and respected. While both sides of the diversity and inclusion equation hold equal importance, it is our belief that in the absence of inclusion, diversity cannot thrive. For this reason, we lead with inclusion in our Inclusion & Diversity (I&D) efforts. In 2019 we established an Executive Inclusion and Diversity Council, chaired by our Chairman and CEO, to focus on advancing our strategic vision, evaluating progress and monitoring emerging topics that could influence where we prioritize our efforts. To further demonstrate leaderships’ commitment, we transitioned to an enterprise leadership structure for our Employee Resource Groups (“ERGs”), networks that focus on professional development, networking, raising cultural awareness and community involvement. Each of our ERGs now has an Executive Champion from our Executive Leadership Team.

Community Involvement

We are committed to creating value for our communities through economic development, philanthropy, volunteerism and advocacy, and by operating our business in a socially and environmentally responsible way. Phillips 66 provided $28 million in financial support to organizations promoting education, environmental sustainability, and community safety and preparedness. We value volunteerism, and to promote and support community service, we provide eligible employees two paid days for volunteering in the community. In 2019, our employees volunteered a record-breaking 88,000 hours to organizations in their local communities. We also support our employees’ causes through matching gift and volunteer grants, and provided $7.2 million in matching gifts, volunteer grants and dependent scholarships in 2019.    

 

 

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CODE OF BUSINESS ETHICS AND CONDUCT

Our values are our foundation—our guiding principles for how we conduct our business day in and day out. We also recognize that questions arise in today’s increasingly complex global business environment. We have adopted a Code of Business Ethics and Conduct designed to provide guidance on how to act legally and ethically while performing work for Phillips 66. Our Code of Business Ethics and Conduct covers topics including, but not limited to, conflicts of interest, insider trading, competition and fair dealing, discrimination and harassment, confidentiality, payments to government personnel, anti-boycott laws, U.S. embargoes and sanctions, compliance procedures and employee complaint procedures. All of our directors and employees are required to comply with the Code of Business Ethics and Conduct. We also have adopted an additional Code of Ethics that applies to senior financial officers. Both Codes can be found on our website and are available in print to any shareholder upon request. We intend to disclose any amendment to, or waiver from, either of the Codes by posting such information on our website.

COMMUNICATIONS WITH THE BOARD

To support shareholder engagement, the Company maintains a process for shareholders and interested parties to communicate with the Board of Directors. Shareholders and interested parties may communicate with the non-employee directors or with the entire Board of Directors, as indicated by such shareholder or interested party, by contacting our Corporate Secretary, Paula A. Johnson, as provided below:

 

Mailing Address:   

Corporate Secretary

Phillips 66

P.O. Box 421959

Houston, TX 77242-1959

Phone Number:    (281) 293-6600
Internet:    Investors” section of the Company’s website (www.phillips66.com) under the “Corporate Governance” caption

Communications to the non-employee directors should be addressed to “Board of Directors (independent members)” in care of our Corporate Secretary as provided above.

Relevant communications are distributed to the Board of Directors or to any individual director or directors, as appropriate, depending on the facts and circumstances outlined in the communication. In that regard, the Board has requested that certain items unrelated to its duties and responsibilities not be distributed, such as: business solicitations or advertisements; junk mail and mass mailings; new product suggestions; product complaints; product inquiries; résumés and other forms of job inquiries; spam; and surveys. In addition, material that is considered hostile, threatening, illegal or similarly unsuitable will be excluded.

 

 

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PROPOSAL 2: RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP

The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent registered public accounting firm retained to audit the Company’s financial statements. The Audit Committee has appointed Ernst & Young LLP to serve as the Company’s independent registered public accounting firm for fiscal year 2020. Ernst & Young has acted as the Company’s independent registered public accounting firm continuously since 2011.

The Audit Committee annually considers the independence of the Company’s independent auditors prior to the firm’s engagement, and periodically considers whether a regular rotation of the independent auditors is necessary to assure continuing independence. The Audit Committee and its Chairman are directly involved in the selection of Ernst & Young’s lead engagement partner.

The Audit Committee and the Board of Directors believe that the continued retention of Ernst & Young is in the best interests of the Company and its shareholders. We are asking you to vote on a proposal to ratify the appointment of Ernst & Young.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP.

The submission of this matter for approval by shareholders is not legally required, but the Board and the Audit Committee believe it provides an opportunity for shareholders to vote on an important aspect of corporate governance. If the shareholders do not ratify the selection of Ernst & Young, the Audit Committee will reconsider the selection of that firm as the Company’s independent registered public accounting firm. Even if the selection is ratified, the Audit Committee in its discretion may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and its shareholders.

Services Provided by the Independent Registered Public Accounting Firm

Audit services of Ernst & Young for fiscal year 2019 included an audit of our consolidated financial statements, an audit of the effectiveness of the Company’s internal control over financial reporting, and services related to periodic filings made with the SEC. Additionally, Ernst & Young provided certain other services as described below. In connection with the audit of the 2019 consolidated financial statements, we entered into an engagement agreement with Ernst & Young that set forth the terms by which Ernst & Young performed audit services for us.

The Audit Committee is responsible for negotiating the audit fee associated with its retention of Ernst & Young. Ernst & Young’s fees for professional services totaled $14.5 million for 2019 and $13.2 million for 2018, which consisted of the following:

 

Fees (in millions)

  

2019

    

2018

 

Audit Fees(1)

     $13.0        $12.1  

Audit-Related Fees(2)

     1.2        0.8  

Tax Fees(3)

     0.1        0.1  

All Other Fees

     0.2        0.2  

Total

  

$14.5

    

$13.2

 
(1)

Fees for audit services related to the fiscal year consolidated audit, the audit of the effectiveness of internal controls over financial reporting, quarterly reviews, registration statements, comfort letters, statutory and regulatory audits and accounting consultations. Includes audit fees of Phillips 66 Partners LP of $1.3 million for each of 2019 and 2018, which were approved by the Audit Committee of the General Partner of Phillips 66 Partners LP.

 

(2)

Fees for audit-related services related to audits in connection with proposed or consummated dispositions, benefit plan audits, other subsidiary audits, special reports, and accounting consultations.

 

(3)

Fees for tax services related to tax compliance services and tax planning and advisory services.

The Audit Committee has considered whether the non-audit services provided to Phillips 66 by Ernst & Young impaired the independence of Ernst & Young and concluded they did not.

The Audit Committee has adopted a pre-approval policy that provides guidelines for the audit, audit-related, tax and other non-audit services that Ernst & Young may provide to the Company. All of the fees in the table above were approved in accordance with this policy. The policy (a) identifies the guiding principles that the Audit Committee must consider in approving services to ensure that Ernst & Young’s independence is not impaired; (b) describes the audit, audit-related, tax and other services that may be provided and the non-audit services that are prohibited; and (c) sets forth pre-approval requirements for all permitted services. Under the policy, the Audit Committee must pre-approve all services to be provided by Ernst & Young. The

 

 

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PROPOSAL 2: RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP

 

Audit Committee has delegated authority to approve permitted services to its Chair. Such approval must be reported to the entire Audit Committee at its next scheduled meeting.

One or more representatives of Ernst & Young are expected to be present at the Annual Meeting. The representatives will have an opportunity to make a statement if they desire and will be available to respond to appropriate questions from shareholders.

AUDIT AND FINANCE COMMITTEE REPORT

The Audit Committee assists the Board of Directors in fulfilling its responsibility to provide independent, objective oversight of the financial reporting functions and internal control systems of Phillips 66. The Audit Committee currently consists of five non-employee directors. The Board has determined that each member of the Audit Committee satisfies the requirements of the NYSE as to independence, financial literacy and expertise. The Board has further determined that each of J. Brian Ferguson, Charles M. Holley, John E. Lowe, and Denise L. Ramos is an audit committee financial expert as defined by the SEC. The responsibilities of the Audit Committee are set forth in the written charter adopted by the Board of Directors, which is available in the “Investors” section of the Company’s website under the caption “Corporate Governance.” One of the Audit Committee’s primary responsibilities is to assist the Board in its oversight of the integrity of the Company’s financial statements. The following report summarizes certain of the Audit Committee’s activities in this regard for 2019.

Review with Management. The Audit Committee has reviewed and discussed with management the audited consolidated financial statements of Phillips 66 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, included therein.

Discussions with Independent Registered Public Accounting Firm. The Audit Committee has discussed with Ernst & Young LLP, independent registered public accounting firm for Phillips 66, the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board and the SEC. The Audit Committee has received the written disclosures and the letter from Ernst & Young required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence, and has discussed with that firm its independence from Phillips 66.

Recommendation to the Phillips 66 Board of Directors. Based on its review and discussions noted above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements of Phillips 66 be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

AUDIT AND FINANCE COMMITTEE

J. Brian Ferguson, Chairman

Charles M. Holley

John E. Lowe

Denise L. Ramos

Victoria J. Tschinkel

 

 

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PROPOSAL 3: ADVISORY APPROVAL OF EXECUTIVE COMPENSATION

In accordance with Section 14A of the Securities Exchange Act of 1934, as amended, shareholders are being asked to vote on the following advisory (non-binding) resolution:

RESOLVED, that the shareholders approve the compensation of Phillips 66’s Named Executive Officers (NEOs) as described in this proxy statement in the COMPENSATION DISCUSSION AND ANALYSIS section and in the EXECUTIVE COMPENSATION TABLES (together with the accompanying narrative disclosures).

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE ADVISORY APPROVAL OF THE COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS.

Approval of this proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the proposal.

As required by SEC rules, Phillips 66 is providing shareholders with the opportunity to vote on an advisory resolution, commonly known as “Say-on-Pay,” considering approval of the compensation of its NEOs.

The Compensation Committee, which is responsible for the compensation of our CEO and Senior Officers (as defined in ROLE OF THE HUMAN RESOURCES AND COMPENSATION COMMITTEE), has overseen the development of compensation programs designed to attract, retain and motivate executives who enable us to achieve our strategic and financial goals. The COMPENSATION DISCUSSION AND ANALYSIS and the EXECUTIVE COMPENSATION TABLES, together with the accompanying narrative disclosures, allow you to view the trends in compensation and application of our compensation philosophies and practices for the years presented.

The Board of Directors believes that the Phillips 66 executive compensation programs align the interests of our executives with those of our shareholders. Our compensation programs are guided by the philosophy that the Company’s ability to provide sustainable value is driven by superior individual performance. The Board believes that a company must offer competitive compensation to attract and retain experienced, talented and motivated employees. In addition, the Board believes employees in leadership roles within the organization are motivated to perform at their highest levels when performance-based pay represents a significant portion of their compensation. The Board believes that our philosophy and practices have resulted in executive compensation decisions that are aligned with Company and individual performance, are appropriate in value, and have benefited the Company and its shareholders.

Because your vote is advisory, it will not be binding upon the Board of Directors. Nevertheless, the Compensation Committee and the Board will consider the outcome of the vote when evaluating future executive compensation arrangements. However, votes for or against our compensation programs will not necessarily inform the Compensation Committee and the Board about which elements of those programs shareholders approve or disapprove. For this reason, the Board encourages shareholders to engage with us to allow the Compensation Committee to understand shareholders’ views and consider that feedback when making decisions.

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis details our executive compensation programs and describes the decisions the Compensation Committee made regarding our named executive officers’ compensation for 2019.

COMPANY PERFORMANCE SUMMARY

Our performance results and strategic highlights are presented below. Some of these results are not measures of financial performance under U.S. generally accepted accounting principles (GAAP), for which more information is available in Appendix A.

 

LOGO  

Top

Quartile

     Top-quartile performance achieved for personal safety metrics - combined Total Recordable Rate at 0.15 and combined Lost Workday Case Rate at 0.03.
 

Energy

Star

     Four refineries awarded U.S. EPA Energy Star status.
  Industry Recognized     

Six refineries recognized in 2019 by the American Fuel & Petrochemical Manufacturers association for exemplary safety performance. One received the Distinguished Safety Award—our industry’s highest level of safety recognition.

 

LOGO  

900,000

BPD

    

Initial startup of Gray Oak Pipeline which will provide 900,000 barrels per day (BPD) of capacity to transport crude oil from the Permian and Eagle Ford to Texas Gulf Coast.

 

  Organic Growth      Progressed significant 50-50 joint venture pipelines - Red Oak Pipeline will provide shippers access to Texas Gulf Coast from Cushing, Oklahoma, and the Permian, and Liberty Pipeline will serve producers in the Bakken and Rockies.
 

 

550,000

BPD

     We are expanding the Sweeny Hub with the addition of three 150,000 BPD fractionators which are supported by long-term customer commitments. Upon completion, the Sweeny Hub will have 550,000 BPD of fractionation capacity.
LOGO  

 

$3.1

billion

     We achieved earnings of $3.1 billion, operating at 97% Olefins and Polyolefins utilization in Chemicals and 94% utilization in Refining.
  Renewable Fuels      Developing renewable fuels projects - Humber Refinery (renewable diesel), San Francisco Refinery (renewable diesel), and supply and offtake agreements for two third-party facilities under construction in Nevada (renewable diesel).
  Product Placement      Company entered into a retail marketing joint venture that operates approximately 580 sites, primarily on the U.S. West Coast. This enables increased long-term placement of Phillips 66 refinery production and exposure to retail margins.
LOGO   12.5%      We increased our quarterly dividend by 12.5% - our ninth increase in seven years. The three-year compound annual growth rate of our dividend is 13%, and since our inception in 2012 is 25%.
 

$26

billion

     Distributions to shareholders through dividends and share repurchases is a continued priority, and these totaled $3.2 billion in 2019. Since inception in 2012, we have returned over $26 billion, including share exchanges.
  320%      Our cumulative Total Shareholder Return (TSR) since inception is 320% - outperforming both our peer group average and the S&P 100. For 2019, our TSR was 34%.
LOGO  

 

$1.2

billion

     We made significant progress on AdvantEdge66 initiatives in 2019 and expect to deliver $1.2 billion of total enhancements by 2022.
  Corporate Culture      Launched Our Energy in Action which defines the behaviors we hold ourselves accountable for as we strive to deliver differentiated returns for our shareholders.
 

88,000

hours

     Last year, our employees volunteered 88,000 hours to organizations in their local communities. Additionally, Phillips 66 provided $28 million in financial support to organizations promoting education, environmental sustainability, and community safety and preparedness.

EXECUTIVE COMPENSATION PROGRAM SUMMARY

Although we operate in a volatile industry, our diversified portfolio enables us to be resilient through industry cycles. Through our disciplined capital allocation model, we increase our enterprise value by strategically investing capital in our higher-valued businesses while returning a significant portion of capital to shareholders through dividends and share repurchases.

Since our inception in 2012, we have operated with clear objectives—enable our high-performing workforce to execute our corporate strategy efficiently and effectively, while remaining vigilant and focused on safety and operating excellence, in order to deliver profitable growth, enhance returns, and provide a secure, competitive and growing dividend.

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Our NEOs for 2019 were:

 

Name

  

Title

Greg Garland    Chairman and Chief Executive Officer
Kevin Mitchell    Executive Vice President, Finance and Chief Financial Officer
Robert Herman    Executive Vice President, Refining
Paula Johnson    Executive Vice President, Legal and Government Affairs, General Counsel and Corporate Secretary
Tim Roberts    Executive Vice President, Midstream

Philosophy and Overriding Principles

Our compensation philosophy remains unchanged and supports our vision of providing energy and improving lives.

 

   

Ensure executive compensation drives behaviors and actions consistent with shareholder interests, prudent risk-taking and a long-term perspective.

 

   

Ensure executive compensation allows us to attract, retain, motivate, and reward high-performing executive talent, as well as support succession planning. We target reasonable and competitive compensation, aligned with market median levels.

 

   

Differentiate based on performance relative to targets, peers and market conditions. Executives have a significant portion of compensation tied to the achievement of annual and long-term goals that promote shareholder value creation.

 

   

Emphasize Phillips 66 stock ownership by requiring stock ownership levels for our executives.

 

   

Limit executive perquisites to items that serve a reasonable business purpose and are common in our peer group.

 

   

Regularly engage with shareholders on corporate governance topics, including executive compensation.

Additionally, we provide executives the same group benefit programs as we provide other employees, on substantially the same terms.

Compensation Programs

The following table summarizes the principal elements of executive compensation and the performance drivers of each element.

 

KEY ELEMENTS OF PAY

 

DELIVERED VIA

 

TARGET AMOUNT

  

PERFORMANCE DRIVERS

(AND WEIGHTINGS)

Base Salary

  Cash   Benchmarked to compensation peer group median; adjusted for experience, responsibility, performance and potential    Annual fixed cash compensation to attract and retain NEOs

Annual Incentive

  Variable Cash Incentive Program (VCIP)  

Percentage of base salary

benchmarked to peer group

  

Adjusted EBITDA (40%)

Operating Excellence (35%)
Adjusted Controllable Costs (15%)
High-Performing Organization (10%)

Individual Modifier (+/- 50% of target)

Long-Term Incentives (LTI)

 

Performance Share Program (PSP)

(3-year performance period)

50% of LTI Target

 

Percentage of base salary

benchmarked to peer group

  

Absolute ROCE (25%)

Relative ROCE (25%)
Relative TSR (50%)

 

Stock Option Program (1)

25% of LTI Target

   Long-term stock price appreciation
   

Restricted Stock Unit (RSU) Program

25% of LTI Target

   Long-term stock price appreciation
(1)

The Compensation Committee believes that stock options are inherently performance-based, as options have no initial value and grantees only realize benefits if the value of our stock increases above the option price following the date of grant. This practice is intended to ensure that the interests of our NEOs are aligned with those of our shareholders.

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Compensation Mix Puts Significant Pay at Risk

Consistent with our philosophy that executive compensation should be linked to Company performance and directly aligned with shareholder value creation, a significant portion of NEO compensation is at risk and based on performance metrics tied to our corporate strategy. “At risk” means there is no guarantee that the target value of the awards will be realized. Based on its evaluation of performance, the Compensation Committee has authority to reduce, and even award nothing for, the performance-based payouts and individual performance adjustments under each of the VCIP and PSP. Stock options can expire with zero value if the Company stock price does not appreciate above the grant date price over the 10-year term of the options. RSUs may lose value depending on stock price performance. Therefore, for NEOs to earn and sustain competitive compensation, the Company must meet its strategic objectives, perform well relative to peers, and deliver market-competitive returns to shareholders.

CEO target compensation mix is 91% at risk and 74% performance-based. The target mix for the other NEOs is 84% at risk and 69% performance-based. Further, LTI awards make up 76% of the CEO and 69% of other NEOs target compensation mix. For both the CEO and other NEOs, target mix percentages are commensurate with their levels of responsibility. Further detail on all of these programs is provided in EXECUTIVE COMPENSATION PROGRAM DETAILS.

The target mix of the compensation program elements for the CEO and other NEOs is shown below. The charts outline the relative size, in percentage terms, of each element of target compensation.

 

CEO Target Mix

 

LOGO

Other NEO Target Mix

 

LOGO

 

Aligned with Best Practices

The following best practices are reflected in our executive compensation programs:

 

 

WE DO

 

  Target the majority of NEO compensation to be performance-based

  Link NEO compensation to shareholder value creation by having a significant portion of compensation at risk

  Apply multiple performance metrics aligned with our corporate strategy to measure our performance

  Cap maximum payouts under our VCIP and PSP

  Employ a “double trigger” for severance benefits and equity awards under our Key Employee Change in Control Severance Plan (CICSP)

  Include absolute and relative metrics in our LTI programs

  Maintain stock ownership guidelines for executives—CEO 6x base salary; other NEOs 3-5x base salary

  Balance, monitor and manage compensation risk through regular assessments and robust clawback provisions

  Have extended vesting periods on stock awards, with a minimum one-year vesting period required for stock and stock option awards

  Maintain a fully independent Compensation Committee

  Retain an independent compensation consultant

  Hold a Say-on-Pay vote annually

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

WE DO NOT

 

×  Provide excise tax gross-ups to our NEOs under our CICSP

×  Reprice stock options without shareholder approval

×  Price stock options below grant date fair market value

×  Allow share recycling for stock options

×  Include evergreen provisions in our active equity plans

×  Allow hedging or pledging of Phillips 66 stock

×  Pay dividends during the performance period on unearned PSPs

×  Allow transfer of equity awards (except in the case of death)

×  Provide separate supplemental executive retirement benefits for individual NEOs

×  Maintain individual change-in-control agreements

×  Have an employment agreement with the CEO

×  Provide excessive perquisites

EXECUTIVE COMPENSATION PROGRAM DETAILS

Base Salary

Base salary is designed to provide a competitive and fixed rate of pay recognizing employees’ different levels of responsibility and performance. As the majority of our NEO compensation is performance-based and tied to long-term programs, base salary represents a less significant component of total compensation. In setting each NEO’s base salary, the Compensation Committee considers factors including, but not limited to, the responsibility level for the position held, market data from the compensation peer group for comparable roles, experience and expertise, individual performance and business results.

Below is a summary of the annualized base salary for each NEO for 2019. Because these amounts reflect each NEO’s annualized salary as of the dates indicated, this information may vary from the information provided in the SUMMARY COMPENSATION TABLE, which reflects actual base salary earnings in 2019, including the effect of salary changes during the year.

 

Name

  

Salary as of 1/1/2019
($)

    

Salary as of 12/31/2019
($)

 

Greg Garland

     1,675,008        1,675,008  

Kevin Mitchell

     832,032        867,000  

Robert Herman (1)

     714,288        850,008  

Paula Johnson

     775,920        805,416  

Tim Roberts (1)

     714,288        850,008  
(1)

Mr. Herman and Mr. Roberts each received promotions and base salary increases from $740,016 to $850,008 effective August 1, 2019.

Annual base salary increases were effective March 1, 2019, as part of the annual merit cycle for all employees. Base salary increases realign the NEO with the respective compensation peer group levels and reflect each NEO’s achievement of established performance objectives corresponding to his or her role. The Compensation Committee determined the adjustments that were made were appropriate to maintain our competitiveness in the market.

Variable Cash Incentive Program (VCIP)

The VCIP, which is our annual incentive program, is designed to provide variability and differentiation based on corporate and individual performance. Through our metrics, we designed our VCIP program to align annual awards with shareholder interests and execution of our corporate strategy. We do not tie NEO VCIP awards to the performance of any individual business unit. We believe this structure serves the best interests of shareholders as it promotes collaboration across the organization.

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Eligible earnings, which is base salary earned during the year, are multiplied by a percentage that is based on each NEO’s salary grade level to derive the NEO’s target award. At the end of the performance period, the Compensation Committee reviews the Company’s performance to determine the Corporate Payout Percentage. This percentage is based on a mix of operational and financial metrics, the details and weighting of which are described below. The Compensation Committee can award a Corporate Payout Percentage of zero up to the maximum of 200%.

The target award is multiplied by the Corporate Payout Percentage, after which the Compensation Committee takes into account the individual accomplishments of each NEO when determining applicable Individual Performance Adjustments. Individual Performance Adjustments can range from +/–50% of the target award. Adjustments are based on measurable performance of the individual NEO that drives shareholder value.

 

 

LOGO

The Compensation Committee used the same metrics as it has in prior years as they believe these metrics are the most appropriate to align compensation with our corporate strategy. This mix of financial and operational metrics was designed to ensure a balanced view of Company performance and drive results over the near term.

 

2019 VCIP METRICS

 

LOGO

Adjusted EBITDA

We believe Adjusted EBITDA is effective in evaluating our annual core operating performance and is how we determine enterprise value. Our threshold represents the Adjusted EBITDA required to cover our sustaining capital and shareholder dividend commitments. To ensure we continue to deliver on our growth strategy, the target and maximum for Adjusted EBITDA represent returns that are 1.5% and 3.0% above our Weighted Average Cost of Capital (WACC), respectively.

Based on actual Company performance being 16% above target and 4% above maximum, the Compensation Committee determined that a payout of 200% of target was earned for this metric. Adjusted EBITDA, as used for VCIP, is a non-GAAP financial measure. See Appendix A for additional information.

 

 

LOGO

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Operating Excellence

Operating excellence, including personal and process safety, environmental stewardship and asset availability, is foundational in meeting our corporate strategy of growth, returns and distributions. We measure ourselves against others in our industry for safety metrics and target sustained performance in environmental stewardship and effective management of unplanned downtime.

For metrics for which comparative data was available, like Total Recordable Rate (TRR), Lost Workday Case Rate (LWCR), and Process Safety Event (PSE) Rate, we benchmarked ourselves against companies with the strongest safety records in our industry. Generally, these companies fall within the top two quartiles of all companies reported. We then established our threshold, target, and maximum goals based on the 25th, 50th, and 75th percentiles of this group of companies.

For metrics for which comparative data was not available, like asset availability and environmental events, we established our threshold, target, and maximum goals based on our own historical performance, with a goal of continuous improvement. For asset availability, we incorporate all of the lines of our business, and then weight them by EBITDA.

In 2019, we exceeded our maximum level of performance for TRR and LWCR. We exceeded our target for PSE Rate, environmental events, and asset availability. Taking these factors into consideration, the Compensation Committee approved an overall payout for Operating Excellence of 161% of target.

 

   

Combined TRR and LWCR: While 200% of target was earned for Combined TRR, the Compensation Committee reduced the payout by 15% due to impairment relative to last year, resulting in a payout of 185% of target. Our performance in LWCR was 40% improved versus target, achieving a payout of 200%.

 

   

PSE Rate: Our PSE Rate was 14% improved versus our target. The Compensation Committee determined that a payout of 133% of target was earned.

 

   

Environmental Events: The Compensation Committee considered that in the industries in which we operate there is increasingly stringent regulation and scrutiny on environmental performance. While the 200% of target was earned for Environmental Events, the Compensation Committee reduced the payout by 15% due to impairment relative to last year, resulting in a payout of 185% of target.

 

   

Asset Availability: Our availability of 96.3% across all of our lines of business was 0.7 percentage points above target, which resulted in a payout of 141% of target.

 

    

Payout Levels Based on Performance

    

2019

Results

    

Payout

%

 
     

0%

    

50%

    

100%

    

200%

 

Combined TRR

     > 0.31           0.31           0.26           0.19           0.15           185%  

Combined LWCR

     > 0.10           0.10           0.05           0.04           0.03           200%  

Process Safety Event Rate

     > 0.11           0.11           0.07           0.04           0.06           133%  

Environmental Events

     > 157           157           123           < 116           115           185%  

Asset Availability

     < 93.9%        93.9%        95.6%        97.3%        96.3%        141%  

Combined Operating Excellence

                                     

161%

 

 

 

LOGO

Adjusted Controllable Costs

Adjusted Controllable Costs focuses on operating excellence and our ability to deliver differentiated returns to shareholders. Our targets for threshold, target, and maximum are based on our budget for the current year. For threshold performance, Adjusted Controllable Costs could not exceed budget by more than 3%, target performance was based on achieving budget, and maximum performance required being at least 3% under budget.

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

In 2019, we were 2% improved versus our budget, resulting in a payout of 164%. The primary drivers to our lower costs relative to budget were related to lower environmental and staff expenses. Adjusted Controllable Costs is a non-GAAP financial measure. See Appendix A for additional information.

 

 

LOGO

High-Performing Organization

We believe maintaining and enhancing a high-performing organization is critical to our success. Our employees promote our culture and are integral to achieving our strategic goals and maximizing long-term shareholder value. We measure our High-Performing Organization performance relative to the following:

 

Culture

foster behaviors that promote

our unique culture

  

Capability

build depth and breadth

in our skills

  

Performance  

deliver exceptional,    

sustainable results    

launched Our Energy in Action,
a set of core behaviors we hold
ourselves accountable for to
deliver differentiated returns

 

established executive Inclusion
and Diversity (I&D) council
focused on setting strategic vision, advancing I&D impact,
and demonstrating leadership
commitment

 

grew an inclusive and
diverse workforce;
strong diversity hires

 

  

drove employee development through
technical training and rotational moves

 

sharpened managerial skills through

targeted development programs and
promotional moves

 

identified strong successors for 100% of
corporate key positions

 

continued quarterly sessions with executives to
monitor and guide leadership development

 

  

realized strong retention of    

top talent    

 

advanced the effectiveness of our    
performance management process    

 

Significant progress on AdvantEdge66 initiatives in 2019 by leveraging technology, process improvements, and data analytics.

 

We strive for continuous improvement of our high-performing organization, as we believe it is our employees that differentiate us in the market place. Based on our performance, the Compensation Committee determined that 175% of target was earned for High-Performing Organization.

 

 

LOGO

Total Corporate Payout

The formulaic result of our individual metrics was a Total Corporate Payout of 180%, as summarized in the following table.

 

Metric

  

Payout Percentage

      

Weight

    

Corporate Amount

 

Adjusted EBITDA

     200%          40%        80%  

Operating Excellence

     161%          35%        57%  

Adjusted Controllable Costs

     164%          15%        25%  

High-Performing Organization

     175%          10%        18%  

Total Corporate Payout

                  

180%

 

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Individual Performance Highlights

The Compensation Committee has the authority to adjust our NEOs’ individual VCIP payouts by +/–50% of the formula-based target payout. The Compensation Committee may apply an individual performance adjustment to reflect project-based accomplishments that drove or detracted from shareholder value or for market-based considerations to more closely align the payout with shareholder returns. This flexibility allows us to reflect our unique business strategy and portfolio of assets as well as differentiate individual executive performance. The Compensation Committee made adjustments to individual VCIP payouts for NEOs based on their responsibility for the success of projects and initiatives that lead to the successful execution of our strategy. These projects and initiatives, as shown in the following table, significantly contributed to our overall success and produced the results as shown in our Company Performance Summary.

 

LOGO

The Compensation Committee considered the magnitude and impact of these initiatives on company results and approved total payouts for each of our NEOs as shown in the table below.

 

     

2019 Eligible
Earnings
($)

    

Target VCIP
Percentage
(%)

    

Corporate Payout
Percentage
(%)

    

Individual
Performance
Adjustment
(%)

    

Total Payout
($)

 

Greg Garland

     1,675,008        160%        180%        15%        5,226,025  

Kevin Mitchell

     861,172        100%        180%        20%        1,722,344  

Robert Herman

     781,558        87%        180%        10%        1,293,153  

Paula Johnson

     800,500        90%        180%        20%        1,440,900  

Tim Roberts

     781,558        87%        180%        25%        1,395,244  

Long-Term Incentive Programs

We deliver 50% of long-term target value as awards from our Performance Share Program, 25% in the form of stock options, and 25% in the form of RSUs.

 

 

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We believe this mix of awards is aligned with our compensation philosophy, reflects the cyclical nature of our business, promotes retention of our high-performing talent, supports succession planning and is consistent with market practice.

 

2019 LTI PROGRAMS

 

 

LOGO

Performance Share Program (PSP)

Each PSP has a three-year performance period, and therefore three PSPs are in progress at any time. By delivering 50% of LTI through the PSP, a significant portion of NEO compensation is tied to Company and individual performance.

Target Shares at Beginning of Performance Period. The Compensation Committee uses the Compensation Peer Group to benchmark LTI and establish base salary multiples for similar roles at peer organizations. The number of target shares is determined by dividing the multiple by the average of the stock’s fair market value for the 20 days prior to the start of the performance period, less anticipated dividends during the performance period.

The Compensation Committee assesses the individual performance of each NEO, and based on that assessment may adjust an award by up to +/–30% of the target amount at grant. The CEO provides input regarding awards made to all NEOs (other than himself). The Compensation Committee evaluates the individual performance of the CEO. The Compensation Committee believes in applying performance adjustments to the number of target shares at the beginning of the performance period, rather than the end, so that performance-adjusted compensation is subject to Company performance and market volatility throughout the performance period, aligning executive compensation with shareholder interests.

 

   

Target shares may be adjusted during the performance period for significant changes in responsibility that occur during the performance period.

 

   

NEOs hired after the start of the performance period may receive prorated target shares in ongoing PSP cycles, at the discretion of the Compensation Committee, so that their interests are immediately aligned with the Company long-term goals and shareholder interests.

Performance Metrics. The performance metrics used for all three current PSP programs are after-tax return on capital employed (ROCE) and total shareholder return (TSR) that is based on 20-day average closing prices. After-tax ROCE accounts for 50% and is equally weighted between absolute and relative performance. The remaining 50% is our TSR relative to peers.

The Compensation Committee considers ROCE an important measure of Company growth and overall performance. The Compensation Committee evaluates our results relative to our Performance Peer Group as well as absolute targets based on our WACC.

 

   

The absolute ROCE threshold is a return percentage equivalent to the Adjusted EBITDA required to cover our sustaining capital and shareholder dividend commitments during the three-year performance period.

 

   

The absolute ROCE target delivers 1.5% above our WACC over the performance period.

 

   

The absolute ROCE maximum delivers 3.0% above WACC over the performance period.

 

 

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The Compensation Committee also recognizes that relative TSR is the most common standard for relative comparisons to peers. Our performance is evaluated as compared to our Performance Peer Group and the S&P 100 Index. Further information regarding our Performance Peer Group is provided in Peer Group Comparisons.

These metrics translate into the following goals:

 

    

Performance Share Program 2017-2019

 

Metric

  

Weight

  

Threshold (1)

  

Target (2)

  

Maximum (3)

Absolute ROCE

   25%   

2.7%

 

average of 2017 (2.8%),

2018 (2.4%), and 2019 (2.8%)

 

delivers sustaining capital and shareholder dividend commitments over 3-year period

  

9.5%

 

average of 2017 (9.9%),

2018 (9.4%), and 2019 (9.2%)

 

delivers WACC +1.5%

over 3-year period

  

11.0%

 

average of 2017 (11.4%),

2018 (10.9%), and 2019 (10.7%)

 

delivers WACC +3.0%

over 3-year period

Relative ROCE

   25%   

above 10th percentile

of Performance Peers

  

median

of Performance Peers

  

above 90th percentile

of Performance Peers

Relative TSR

   50%   

above 10th percentile

of Performance Peers

  

median

of Performance Peers

  

above 90th percentile

of Performance Peers

(1)

Threshold for PSP 2018-2020 will be an average of 2018 (2.4%), 2019 (2.8%), and 2020 (3.6%). Threshold for PSP 2019-2021 will be an average of 2019 (2.8%), 2020 (3.6%), and the ROCE necessary to deliver sustaining capital and dividend commitments in 2021. The 2021 number will be known by end of 2020.

 

(2)

Target for PSP 2018-2020 will be an average of 2018 (9.4%), 2019 (9.2%), and 2020 (8.8%). Target for PSP 2019-2021 will be an average of 2019 (9.2%), 2020 (8.8%), and the ROCE necessary to deliver WACC plus 1.5% in 2021. The 2021 number will be known by end of 2020.

 

(3)

Maximum for PSP 2018-2020 will be an average of 2018 (10.9%), 2019 (10.7%), and 2020 (10.3%). Maximum for PSP 2019-2021 will be an average of 2019 (10.7%), 2020 (10.3%), and the ROCE necessary to deliver WACC plus 3.0% in 2021. The 2021 number will be known by end of 2020.

Settlement. Awards under all of the current PSP programs are denominated in shares, but are paid in cash at the end of their respective performance periods. Performance can range from 0-200% of target.

Active PSP Programs. The programs in effect during 2019 were the PSP 2017-2019, PSP 2018-2020, and PSP 2019-2021.

After the close of the PSP 2017-2019, the Compensation Committee considered the following results when approving the payout of 155% of target.

 

   

Absolute ROCE: Absolute ROCE for the three-year performance period was 12.4%, or 2.9 percentage points above target and 1.4 percentage points above maximum, resulting in a payout of 200% of target, weighted at 25%. ROCE, as used in our PSP program, is a non-GAAP financial measure. See Appendix A for additional information.

 

 

LOGO

 

   

Relative ROCE: Relative ROCE performance for the three-year performance period was 3rd out of 14, including 13 peer companies and Phillips 66. This performance resulted in a payout of 180% for relative ROCE, weighted at 25%.

 

 

LOGO

 

 

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Relative TSR: TSR for the three-year performance period was 42.9%, which placed 7th out of 15 on a relative basis, made up of 13 peer companies, the S&P 100 Index, and Phillips 66. This performance resulted in a payout of 117% of target for relative TSR, weighted at 50%.

 

 

LOGO

Accordingly, the Compensation Committee approved payouts for all of our NEOs for PSP 2017-2019. The payment was made in February 2020 and is described further in the footnotes of the SUMMARY COMPENSATION TABLE.

Stock Option Program

In 2019, 25% of the LTI target value was delivered to executives in the form of stock options. These awards are inherently performance-based, as the stock price must increase before the executive can realize any value. We believe stock options drive behaviors and actions that enhance long-term shareholder value.

Stock options are typically granted in February each year. The number of options awarded is calculated based on the Black-Scholes-Merton model. The exercise price of stock options is set at 100% of the fair market value of our common stock on the date of grant. Stock options granted to our NEOs in February 2019 vest ratably over a three-year period and have a ten-year term. Stock options do not have voting rights and are not entitled to receive dividends.

Restricted Stock Units

In 2019, 25% of the LTI target value was delivered to executives in the form of RSUs. The Compensation Committee believes maintaining RSUs in our LTI program complements the overall compensation mix for our executives by:

 

   

driving the right behaviors and actions consistent with creating shareholder value;

 

   

providing diversification of compensation in recognition of the cyclical nature of our industry;

 

   

resulting in actual share ownership aligned with our stock ownership guidelines; and

 

   

supporting executive retention.

RSUs are typically granted in February each year. The number of RSUs is determined based on the fair market value of Company stock on the date of grant. RSUs awarded to our NEOs in February 2019 cliff vest at the end of the three-year holding period and will be delivered to the NEOs in the form of Company stock. These RSUs do not carry voting rights but do earn dividend equivalents during the vesting period. The Compensation Committee assesses the individual performance of each NEO, and based on that assessment may adjust an award by up to +/–30% of the target amount at grant. The CEO provides input regarding awards made to all NEOs (other than himself). The Compensation Committee evaluates the individual performance of the CEO.

2019 LTI Compensation

The Compensation Committee approved the following LTI for the NEOs for 2019. The Compensation Committee considered the individual performance of each NEO as outlined above when determining the target values. These values may not match the accounting values presented in the GRANTS OF PLAN-BASED AWARDS table.

 

NAME

  

PSP 2019-2021 (1)

($)

    

STOCK OPTIONS (2)

($)

    

RSUs (3)

($)

    

TOTAL TARGET

($)

 

Greg Garland

     6,281,280        3,140,640        3,140,640        12,562,560  

Kevin Mitchell

     2,059,279        936,036        1,029,640        4,024,955  

Robert Herman

     1,328,576        553,573        664,288        2,546,437  

Paula Johnson

     1,408,295        640,134        704,147        2,752,576  

Tim Roberts

     1,217,861        553,573        608,931        2,380,365  
(1)

PSP 2019-2021 targets include individual adjustments for Mr. Mitchell (+10%), Mr. Herman (+20%), Ms. Johnson (+10%), and Mr. Roberts (+10%).

 

(2)

The Compensation Committee did not approve any individual adjustments to stock option targets.

 

(3)

RSU targets include individual adjustments for Mr. Mitchell (+10%), Mr. Herman (+20%), Ms. Johnson (+10%), and Mr. Roberts (+10%).

 

 

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Peer Group Comparisons

We utilize both a compensation peer group and a performance peer group due to the size of our Company and diversification of assets. The Compensation Committee reviews these peer groups annually and adjusts as necessary. We benchmark against large companies, as measured by asset value and market capitalization, to set target compensation using the compensation peer group. We assess our relative performance against peers in the industries in which we operate using the performance peer group. While our unique portfolio of assets provides an advantage to investors, it does necessitate using two peer groups to appropriately align compensation and assess performance.

Compensation Peer Group

Relative analysis. We use the compensation peer group to evaluate and determine compensation levels for our NEOs, including base salary adjustments and targets for our annual bonus and LTI programs.

Criteria for selection. Our compensation peer group consists of companies that have similar jobs and job scope as our NEOs. The compensation peer group primarily consists of large companies with significant capital investments and complex international operations.

Our compensation peer group includes companies that are comparable to Phillips 66 based on three primary criteria — assets, market capitalization, and business operations. Revenue is a secondary criterion due to the nature of our operations. The Compensation Committee believes each of these criteria is necessary to fully reflect the complex nature of our business and determine the optimal group of companies with which to compare Phillips 66.

Companies included. The table below shows the companies in our 2019 compensation peer group. At the time the compensation peer group was determined, we were at the 43rd percentile in assets, 44th percentile in market value, and 73rd percentile in revenue.

 

2019 Compensation Peer Group

           

Anadarko Petroleum Corporation

   Enterprise Products Partners L.P.    Honeywell International Inc.

Archer-Daniels-Midland Company

   Exxon Mobil Corporation    LyondellBasell Industries N.V.

Chevron Corporation

   Ford Motor Company    Marathon Petroleum Corporation

ConocoPhillips

   General Motors Company    Schlumberger Limited

DowDuPont Inc.

   Halliburton Company    Valero Energy Corporation

Changes for 2020. As part of its annual review of peer group composition, the Compensation Committee approved the following changes to better align the peer group with our portfolio of assets, beginning in 2020:

 

   

replace DowDuPont with Dow Inc. and add Occidental Petroleum Corporation and The Williams Companies, Inc.

 

   

remove Anadarko Petroleum and Enterprise Products Partners L.P.

The table below shows the compensation peer group that will be used beginning in 2020. At the time of the review and approval of the changes to the compensation peer group, we were, in comparison to the new group, at the 47th percentile in assets, 47th percentile in market value, and 73rd percentile in revenue.

 

2020 Compensation Peer Group

           

Archer-Daniels-Midland Company

   Ford Motor Company    Marathon Petroleum Corporation

Chevron Corporation

   General Motors Company    Occidental Petroleum Corporation

ConocoPhillips

   Halliburton Company    Schlumberger Limited

Dow Inc.

   Honeywell International Inc.    Valero Energy Corporation

Exxon Mobil Corporation

   LyondellBasell Industries N.V.    The Williams Companies, Inc.

 

 

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Performance Peer Group

Relative analysis. The performance peer group is used to evaluate relative business results in our Performance Share Program. This includes both relative TSR and relative ROCE. We also evaluate our relative TSR performance against the S&P 100 Index, which the Compensation Committee believes is an appropriate comparison for performance purposes because the index reflects the companies with which we compete for capital in the broader market.

Criteria for selection. Phillips 66 is uniquely positioned in the energy industry, with a large refining and marketing base, a growing midstream NGL business and significant petrochemical exposure. To reflect our unique portfolio of assets, we include companies operating in each of our three major businesses. We believe that our performance peer group is representative of the companies that investors use for relative performance comparisons.

Companies included. The table below shows the performance peer group that was established for evaluating both relative TSR and relative ROCE for the three-year performance period ended December 31, 2019.

 

Refining and Marketing

   Midstream    Chemicals

Delek US Holdings, Inc.

   Energy Transfer Equity, L.P.    Celanese Corporation

HollyFrontier Corporation

   Enterprise Products Partners L.P.    The Dow Chemical Company

Marathon Petroleum Corporation

   ONEOK, Inc.    Eastman Chemical Company

PBF Energy Inc.

   Targa Resources Corp.    Huntsman Corporation

Tesoro Corporation

      Westlake Chemical Corporation

Valero Energy Corporation

     

Western Refining Inc.

         

During the performance period, the following mergers and acquisitions occurred which impacted our peer group:

 

   

In June 2017, Tesoro Corporation acquired Western Refining Inc. and the combined company changed its name to Andeavor. In October 2018, Marathon Petroleum Corporation acquired Andeavor. Each of Tesoro, Western Refining, and Marathon were in our performance peer group; after the acquisition, we included the combined company.

 

   

In August 2017, The Dow Chemical Company and E. I. du Pont de Nemours and Company completed their merger, forming DowDuPont. In April 2019, DowDuPont separated its Material Science Division, creating Dow Inc. In June 2019, plans were announced to separate its Agricultural and Specialty Products Divisions, creating Corteva Agriscience. The Dow Chemical Company was previously in our performance peer group; following these corporate changes, we removed the company from the performance peer group.

Changes for 2020. For performance periods beginning in 2020, the Compensation Committee reviewed the current performance peers and approved the following changes:

 

   

replace Celanese, Eastman, and Huntsman with Dow Inc.

 

   

replace Enterprise Products Partners L.P. with Magellan Midstream Partners, MPLX LP, and The Williams Companies, Inc.

OTHER BENEFITS AND PERQUISITES

Below is a summary of other compensation elements available to our NEOs:

Broad-Based Employee Benefit Programs

NEOs participate in the same basic benefits package available to our other U.S. salaried employees. This package includes qualified pension; 401(k) plan; medical, dental, vision, life, and accident insurance plans, as well as flexible spending arrangements for health care and dependent care expenses; and our matching gift program.

 

 

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Additional Executive Perquisites

Consistent with our compensation philosophy to provide compensation and benefits aligned with market practice, we provide our NEOs financial planning and executive health benefits. These benefits were imputed to the executives and included in All Other Compensation in the SUMMARY COMPENSATION TABLE. We did not provide a gross-up for these benefits.

Comprehensive Security Program

The Board has adopted a comprehensive security program to address the increased security risks for certain senior executives. Mr. Garland was the only NEO in 2019 designated by the Board as requiring increased security under this program. The program allows for certain additional security measures in specific situations when the senior executive is traveling by car or airplane. An additional security review of the NEO’s personal residences is also included. Any additional costs to the Company for these activities are reported as All Other Compensation and included in the SUMMARY COMPENSATION TABLE.

Executive Retirement Plans

We maintain the following supplemental retirement plans for our NEOs.

 

   

Phillips 66 Key Employee Deferred Compensation Plan (KEDCP) — This voluntary deferred compensation plan provides tax-efficient retirement savings by allowing executives to voluntarily defer both the receipt and taxation of a portion of their base salary and annual bonus until a specified date or when they leave the Company. Further information is provided in the NONQUALIFIED DEFERRED COMPENSATION table.

 

   

Phillips 66 Defined Contribution Make-Up Plan (DCMP) — This defined contribution restoration plan restores benefits capped under our qualified defined contribution plan due to Internal Revenue Code (IRC) limits. Further information is provided in the NONQUALIFIED DEFERRED COMPENSATION table.

 

   

Phillips 66 Key Employee Supplemental Retirement Plan (KESRP) — This defined benefit restoration plan restores Company-sponsored benefits capped under the qualified defined benefit pension plan due to IRC limits. Further information is provided in the PENSION BENEFITS AS OF DECEMBER 31, 2019 table.

Executive Life Insurance

We provide life insurance policies to all U.S.-based employees with a face value approximately equal to their annual base salary. For our NEOs, the face value of this coverage is approximately two times their annual base salary.

Executive Severance and Change in Control Plans

We do not maintain individual severance or change in control (CIC) agreements with our executives. However, we maintain the Phillips 66 Executive Severance Plan (ESP) and the Phillips 66 CICSP to accomplish several specific objectives, including:

 

   

ensuring shareholder interests are protected during business transactions by providing benefits that promote senior management stability;

 

   

providing and preserving an economic motivation for participating executives to consider a business combination that might result in an executive’s job loss; and

 

   

competing effectively in attracting and retaining executives in an industry that features frequent acquisitions and divestitures.

Executives may not participate in both plans as a result of the same severance event. Among other benefits, the ESP provides a payment equal to one and one-half or two times the executive’s base salary, depending on salary grade level, and the executive’s current target annual bonus if he or she is involuntarily terminated without cause. The CICSP provides a payment equal to two or three times the sum of the executive’s base salary and the greater of his or her target bonus or average of the last two bonus payments, depending on salary grade level. The executive must be involuntarily terminated without cause in connection with a change in control or terminate employment for good reason within two years after the change in control to be

 

 

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eligible for a CICSP payment. We believe this “double trigger” requirement is in the best interest of shareholders and is considered a best practice.

Details of potential payments under these plans are outlined in the POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL section. These plans do not provide any excise tax gross-up protections.

Personal Use of Company Aircraft

The primary purpose of our corporate aircraft is to facilitate Company business. In the course of conducting Company business, executives may occasionally invite a family member or other personal guest to travel with them to attend a meeting or function. When such travel is deemed taxable to the executive, we provide further payments to reimburse the costs of the inclusion of this item in his or her taxable income.

EXECUTIVE COMPENSATION GOVERNANCE

Clawback Provisions

Short- and long-term compensation, deferred compensation and nonqualified retirement benefits received by any executive are subject to clawback provisions if financial or other data is materially misstated due to negligence or misconduct on the part of the executive, as determined by the Compensation and Audit Committees.

Stock Ownership

The Compensation Committee believes requiring executives to retain shares of Phillips 66 common stock helps align executive performance with shareholder value creation and mitigates compensation risk. Our stock ownership guidelines require executives to own Phillips 66 common stock, valued as a multiple of the executive’s base salary, within five years from the date the executive becomes subject to the guidelines, as shown below:

 

EXECUTIVE LEVEL

  

SALARY MULTIPLE

 

Chairman and CEO

     6  

Executive Vice President

     3-5  

Shares of Phillips 66 common stock owned and RSUs are included when determining whether an executive has met the required ownership levels. Compliance with the stock ownership guidelines is reviewed annually. All NEOs currently comply with these stock ownership guidelines or are on track to comply within the applicable five-year period.

Tax Considerations—Internal Revenue Code Section 162(m)

IRC Section 162(m) places a $1 million limit on compensation that we may deduct for federal income tax purposes in any one year with respect to certain “covered employees.” Prior to the passage of the Tax Cuts and Jobs Act in December 2017, such covered employees included our chief executive officer and our three other most highly compensated executive officers (excluding our chief financial officer). The $1 million deduction limitation was subject to an exemption for performance-based compensation.

With the enactment of the Tax Cuts and Jobs Act, the Section 162(m) performance-based compensation exemption has been repealed and the $1 million deduction limit now applies to our chief financial officer, as well as our chief executive officer and our three other most highly compensated executive officers. Further, once an executive officer becomes a “covered employee” the $1 million deduction limit continues to apply to compensation paid to such executive officer at any time, including any future roles within the company, any termination or retirement payments, and payments occurring after their death. The Tax Cuts and Jobs Act rules generally applied to us starting with our taxable year that commenced January 1, 2018, but do not apply to compensation provided pursuant to written binding contracts in effect on November 2, 2017, that are not materially modified after that date.

 

 

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We monitor the application of Section 162(m) and the associated Treasury regulations on an ongoing basis and the advisability of qualifying executive compensation for deductibility. Notwithstanding the repeal of the exemption for “performance-based compensation,” the Compensation Committee intends to maintain its commitment to structuring the Company’s executive compensation programs in a manner designed to align pay with performance.

Trading Policies

Our insider trading policy prohibits all employees and directors from trading Company stock while in possession of material, non-public information. This policy requires executives and directors, as well as employees with regular access to insider information, to follow specific pre-clearance procedures before entering into transactions in our stock.

Hedging or Pledging of Company Stock

Our insider trading policy also prohibits hedging transactions and pledging of our stock. These prohibitions apply to all employees and directors of the Company, and cover any transactions in our stock, whether acquired pursuant to our compensation plans, owned directly, or otherwise. The prohibitions on hedging transactions include purchasing any financial instruments, or otherwise engaging in any transactions, that hedge or offset any decrease in the market value of our stock or limit an employee or director’s ability to profit from an increase in the market value of our stock. The prohibition on pledging includes holding Phillips 66 stock in a margin account or pledging our stock as collateral for a loan.

Independent Compensation Consultant

The primary role of the independent executive compensation consultant retained by the Compensation Committee is to advise the Compensation Committee on:

 

   

our compensation programs and processes relative to external corporate governance standards;

 

   

the appropriateness of our executive compensation programs in comparison to those of our peers; and

 

   

the effectiveness of the compensation programs in accomplishing the objectives set by the Compensation Committee with respect to executives.

In 2019, the Compensation Committee retained Mercer as its independent executive compensation consultant. The Compensation Committee evaluated whether Mercer’s work raised any conflict of interest and determined that no such conflict existed. During 2019, fees paid to Mercer in its role as the independent compensation consultant for the Compensation Committee totaled $245,519. In addition, the Company paid fees to Mercer totaling $1,468,486 during 2019 for all other services performed for the Company. These services can be broken down as 14% related to administration of pension liabilities in international locations that have been sold, 32% related to administration of ongoing international benefit plans, 13% related to Human Resources consulting engagements, and 41% related to insurance and surety bonds.

Compensation Risk Assessment

The Compensation Committee oversees management’s risk assessment of all elements of our compensation programs, policies and practices for all employees. Management has concluded that our compensation programs, policies and practices are not reasonably likely to have a material adverse effect on the Company. Relevant provisions of our programs include, but are not limited to:

 

   

VCIP and LTI metrics are aligned with our corporate strategy to ensure continued focus on actions that drive shareholder value.

 

   

VCIP and LTI compensation targets increase with each pay grade, further emphasizing long-term value creation and alignment with shareholder interests.

 

   

Maximum payouts under VCIP and PSP programs are appropriately limited to balance risk-taking with long-term strategic goals.

 

 

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Maintaining a level of discretion in the performance-based programs, which enables the Compensation Committee to award zero payouts to executives who perform poorly or when warranted by Company performance.

 

   

Clawback provisions that allow for reduction in awards for executives who expose the Company to undue risk.

 

   

LTI design that provides incentives for executive retention and Company and individual performance.

 

   

Stock ownership guidelines, anti-pledging policies, and anti-hedging policies that align executive interests with those of shareholders.

The Compensation Committee considers senior management succession planning a core part of the Company’s risk management program. The Compensation Committee regularly reviews with the CEO succession planning for senior leadership positions (other than the CEO position itself, for which succession planning is reviewed by the Nominating and Governance Committee), and the timing and development required to ensure continuity of leadership over the short- and long-terms, to manage risk in this area.

ROLE OF THE HUMAN RESOURCES AND COMPENSATION COMMITTEE

Authority and Responsibilities

The Compensation Committee is responsible for providing independent, objective oversight of our executive compensation programs and determining the compensation for our CEO and anyone who meets our definition of a Senior Officer. Currently, our internal guidelines define a Senior Officer as an officer of the Company who reports directly to the CEO or any other officer of the Company who is either a Senior Vice President or above or a reporting officer under Section 16(b) of the Exchange Act. As of December 31, 2019, we had 10 Senior Officers. In addition, the Compensation Committee acts as plan administrator of the compensation programs and benefit plans for our CEO and Senior Officers and as an avenue of appeal for current and former Senior Officers regarding disputes over compensation and benefits.

The Compensation Committee oversees the Company’s executive compensation philosophy, policies, plans and programs for our CEO and Senior Officers to ensure:

 

   

alignment of our executive compensation programs with the long-term economic interests of shareholders;

 

   

competitiveness of compensation within the markets in which Phillips 66 competes for talent;

 

   

retention of top talent; and,

 

   

development of a diverse talent pool with respect to CEO and Senior Officer succession planning.

One of the Compensation Committee’s responsibilities is to assist the Board in its oversight of the integrity of the Company’s COMPENSATION DISCUSSION AND ANALYSIS. The HUMAN RESOURCES AND COMPENSATION COMMITTEE REPORT summarizes certain Compensation Committee activities concerning compensation earned during 2019 by our NEOs.

A complete listing of the authority and responsibilities of the Compensation Committee is set forth in its written charter adopted by the Board of Directors, which is available in the “Investors” section of our website under the caption “Corporate Governance.”

Members

The Compensation Committee consists of four members who meet all requirements for “non-employee,” “independent” and “outside” director status under the Exchange Act, NYSE listing standards, and the IRC, respectively. The members of the Compensation Committee and the member to be designated as Chair, like the members and Chairs of all the Board committees, are reviewed periodically by the Nominating and Governance Committee, which recommends committee appointments to the full Board. The Board of Directors has final approval of the committee structure of the Board.

 

 

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Meetings

The Compensation Committee holds regularly scheduled meetings in association with regular Board meetings and meets by teleconference between such meetings as necessary to discharge its duties. The Compensation Committee reserves time at each regularly scheduled meeting to review matters in executive session without management present except as specifically requested by the Compensation Committee. In 2019, the Compensation Committee had five regularly scheduled meetings and one additional telephonic meeting. More information regarding the Compensation Committee’s activities at such meetings can be found in the COMPENSATION DISCUSSION AND ANALYSIS.

Continuous Improvement

The Compensation Committee is committed to a process of continuous improvement in exercising its responsibilities. To that end, the Compensation Committee:

 

   

receives ongoing training regarding best practices for executive compensation;

 

   

regularly reviews its responsibilities and governance practices in light of ongoing changes in the legal and regulatory arena and trends in corporate governance;

 

   

annually reviews its charter and proposes any desired changes to the Board of Directors;

 

   

annually conducts a self-assessment of its performance that evaluates the effectiveness and seeks ideas to improve its processes and oversight;

 

   

regularly reviews and assesses whether the Company’s executive compensation programs are having the desired effects without encouraging an inappropriate level of risk; and

 

   

regularly reviews all its activities, including its self-assessment and a compensation risk assessment, with the full Board of Directors.

HUMAN RESOURCES AND COMPENSATION COMMITTEE REPORT

Review with Management. The Human Resources and Compensation Committee has reviewed and discussed with management the COMPENSATION DISCUSSION AND ANALYSIS presented in this proxy statement.

Discussions with Independent Executive Compensation Consultant. The Human Resources and Compensation Committee has discussed with Mercer, an independent executive compensation consulting firm, the executive compensation programs of the Company, as well as specific compensation decisions made by the Human Resources and Compensation Committee for 2019. Mercer was retained directly by the Human Resources and Compensation Committee, independent of the management of the Company. The Human Resources and Compensation Committee has received written disclosure from Mercer confirming the consultant’s independence, has discussed with Mercer its independence from Phillips 66, and believes Mercer to be independent of management.

Recommendation to the Phillips 66 Board of Directors. Based on its review and discussions noted above, the Human Resources and Compensation Committee recommended to the Board of Directors that the COMPENSATION DISCUSSION AND ANALYSIS be included in the Phillips 66 proxy statement on Schedule 14A and the Phillips 66 Annual Report on Form 10-K for the year ended December 31, 2019.

HUMAN RESOURCES AND COMPENSATION COMMITTEE

Dr. Marna C. Whittington, Chair

Gary K. Adams

Harold W. McGraw III

Glenn F. Tilton

 

 

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EXECUTIVE COMPENSATION TABLES

The following tables and accompanying narrative disclosures provide information concerning total compensation earned by our CEO and other NEOs as of December 31, 2019, for services to Phillips 66 or any of our subsidiaries during 2019, 2018 and 2017.

SUMMARY COMPENSATION TABLE

The following table summarizes the compensation for our NEOs for fiscal years 2019, 2018 and 2017.

 

NAME AND POSITION

  YEAR     SALARY(1)
($)
    BONUS(2)
($)
    STOCK
AWARDS(3)
($)
    OPTION
AWARDS(4)
($)
    NON-EQUITY
INCENTIVE
PLAN
COMPENSATION(5)
($)
   

CHANGE IN
PENSION
VALUE AND
NONQUALIFIED
DEFERRED
COMPENSATION
EARNINGS(6)

($)

    ALL OTHER
COMPENSATION(7)
($)
    TOTAL
($)
   

TOTAL
WITHOUT
CHANGE IN
PENSION
VALUE(8)

($)

 

Greg Garland

Chairman and

Chief Executive Officer

    2019       1,675,008             10,806,257       3,141,546       5,226,025       9,936,893       1,115,149       31,900,878       21,963,985  
    2018       1,675,008             9,353,917       3,041,430       4,958,024             249,956       19,278,335       19,278,335  
    2017       1,666,676             8,785,668       2,951,040       3,733,354       6,270,030       244,128       23,650,896       17,380,866  

Kevin Mitchell

Executive Vice President,

Finance and Chief Financial

Officer

    2019       861,172             3,542,763       937,014       1,722,344       264,245       354,754       7,682,292       7,418,047  
    2018       826,696             3,046,107       902,084       1,777,396       138,280       116,580       6,807,143       6,668,863  
    2017       709,456             1,597,830       537,632       934,708       124,156       93,540       3,997,322       3,873,166  

Robert Herman

Executive Vice President,

Refining

    2019       781,558             2,575,994       553,770       1,293,153       340,714       441,201       5,986,390       5,645,676  
    2018       710,820             1,819,033       537,940       1,299,024       124,871       652,145       5,143,833       5,018,962  
    2017       689,568             1,701,495       520,672       820,586       208,340       1,572,730       5,513,391       5,305,051  

Paula Johnson

Executive Vice President,

Legal and Government

Affairs, General Counsel and

Corporate Secretary

    2019       800,500             2,422,811       641,670       1,440,900       2,108,413       272,165       7,686,459       5,578,046  
    2018       771,544             2,093,245       618,631       1,388,779       368,541       81,585       5,322,325       4,953,784  
    2017       742,148             1,904,666       581,728       1,035,296       1,125,884       82,714       5,472,436       4,346,552  
                            

Tim Roberts

Executive Vice President,

Midstream

    2019       781,558             2,385,489       553,770       1,395,244       29,621       275,030       5,420,712       5,391,091  
    2018       710,260             1,810,213       535,871       1,298,000       107,410       75,521       4,537,275       4,429,865  
    2017                                                        
(1)

Includes any amounts that were voluntarily deferred under our KEDCP.

 

(2)

Because our annual bonus program (VCIP) has mandatory performance measures that must be achieved before any payout can be made to our NEOs, VCIP payments are shown in the Non-Equity Incentive Plan Compensation column of the table rather than the Bonus column.

 

(3)

Amounts shown represent the aggregate grant date fair value of RSU and PSP awards determined in accordance with U.S. GAAP. Assumptions used in calculating these amounts are included in Note 20—Share-Based Compensation Plans in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2019 (our “2019 Form 10-K”).

 

  

The PSP target award included in 2017 has a performance period that ends in 2019. The PSP target award included in 2018 has a performance period that ends in 2020. The PSP target award included in 2019 has a performance period that ends in 2021.

 

  

Amounts shown relating to PSP are targets because target is the probable outcome for the applicable performance period, consistent with the accounting treatment under GAAP. If the maximum payout were used for the PSP awards the amounts shown relating to PSP would double, although the value of the actual payout would depend on the stock price at the time of the payout. If the minimum payout were used, the amounts for PSP awards would be reduced to zero. Actual payouts with regard to the targets set for the performance period that ended in 2019 were approved by the Compensation Committee at its February 2020 meeting. Those payouts were as follows (with values shown at fair market value on the date of payout): Mr. Garland, $12,994,928; Mr. Mitchell, $2,844,060; Mr. Herman, $2,628,183; Ms. Johnson, $2,817,230; and Mr. Roberts, $2,399,228. Earned payouts under the PSP 2017-2019 have been, and under the PSP 2018-2020 and PSP 2019-2021 are expected to be, made in cash at the end of the applicable performance period and will be forfeited if the NEO is terminated prior to the end of the performance period (other than for death or following disability or after a change in control). If the NEO retires after age 55 and with five years of service, the NEO is entitled to a prorated award for any ongoing program in which he or she participated for at least 12 months.

 

(4)

Amounts shown represent the aggregate grant date fair value of awards determined in accordance with GAAP. Assumptions used in calculating these amounts are included in Note 20—Share-Based Compensation Plans in the Notes to Consolidated Financial Statements in our 2019 Form 10-K.

 

(5)

These are amounts paid under our annual bonus program (VCIP), including bonus amounts that were voluntarily deferred under our KEDCP. See note (2) above. These amounts were paid in February 2020, following the performance year.

 

(6)

Reflects the actuarial increase in the present value of the benefits under our pension plans determined using interest rate and mortality rate assumptions consistent with those used in our financial statements. There are no deferred compensation earnings reported in this column, as our nonqualified deferred compensation plans do not provide above-market or preferential earnings.

 

 

42    2020 PROXY STATEMENT


Table of Contents

 

EXECUTIVE COMPENSATION TABLES

 

(7)

We offer limited perquisites to our NEOs, which, together with Company contributions to our qualified savings and nonqualified defined contribution plans, are reflected in the All Other Compensation column as summarized below:

 

NAME

   COMPANY
CONTRIBUTIONS
TO
NONQUALIFIED
DEFINED
CONTRIBUTION
PLANS(a)
($)
    

EXECUTIVE
GROUP LIFE
INSURANCE
PREMIUMS(b)

($)

    

WELLNESS
PROGRAMS
AND
EXECUTIVE
HEALTH
PHYSICAL(c)

($)

    

FINANCIAL
COUNSELING(d)

($)

    

MATCHING
CONTRIBUTIONS
UNDER THE
TAX-QUALIFIED
SAVINGS PLAN(e)

($)

    

MATCHING
GIFT
PROGRAM(f)

($)

     MISCELLANEOUS
PERQUISITES
AND TAX
PROTECTION(g)
($)
     PERSONAL
USE OF
COMPANY
AIRCRAFT(h)
($)
 

Greg Garland

     758,198        13,266        787        16,401        14,000        30,000        156,701        125,796  

Kevin Mitchell

     295,365        2,377        1,187        16,475        16,800        15,000        7,550         

Robert Herman

     229,034        6,190        1,282        16,270        16,800        15,000        156,625         

Paula Johnson

     244,519        4,131                      16,800        5,100        1,615         

Tim Roberts

     228,922        4,033                      16,800        15,000        10,275         
  (a)

Under the terms of our nonqualified defined contribution plans, we make contributions to the accounts of all eligible employees, including the NEOs. See the NONQUALIFIED DEFERRED COMPENSATION table and accompanying narrative and notes for more information.

 

  (b)

We maintain life insurance policies and/or death benefits for all our U.S.-based salaried employees (at no cost to the employee) with a face value approximately equal to the employee’s annual salary. We maintain group life insurance policies on each of our NEOs equal to approximately two times his or her annual salary. The amounts shown are for premiums paid by us to provide the additional group life insurance above what is provided to the broad-based employees.

 

  (c)

Costs associated with executive physicals.

 

  (d)

Costs associated with financial counseling and estate planning services with approved provider.

 

  (e)

Under the terms of our tax-qualified defined contribution plans, we make contributions to the accounts of all eligible employees, including the NEOs.

 

  (f)

We maintain a Matching Gift Program under which certain gifts by employees to qualified educational or charitable institutions are matched by the Company. The program matches up to $15,000 annually. The amounts shown reflect the actual payments made by us in 2019, which due to processing delays can include contributions in 2018 that were matched by the Company in 2019 and are therefore reported in this proxy statement.

 

  (g)

The amounts shown primarily reflect payments by us relating to certain taxes incurred by the NEOs. Mr. Herman received tax assistance after he exercised stock options that he had been granted while an expatriate employee prior to becoming an NEO ($149,060). All expatriate employees receive this tax assistance. We also provide tax assistance when we request family members or other guests to accompany an NEO to a Company function and, as a result, the NEO is deemed to make personal use of Company assets such as Company aircraft and thereby incurs imputed income. We believe this type of expense is appropriately characterized as a business expense and, if the NEO incurs imputed income in accordance with applicable tax laws, we will generally reimburse the NEO for any increased tax costs (Mr. Garland $18,313; Mr. Mitchell $6,727; Mr. Herman $6,506; Ms. Johnson $1,382; and Mr. Roberts $9,510). We also occasionally provide small gifts with tax assistance (such as duffel bags, jackets, and ornaments received as a member of the Board or the Executive Leadership Team) and companion travel expenses. The total cost of these benefits and their tax assistance are as follows: Mr. Garland $1,065; Mr. Mitchell $823; Mr. Herman $1,059; Ms. Johnson $233; and Mr. Roberts $765.

 

    

Also included are benefits required for employees covered under our Comprehensive Security Program, which currently includes only Mr. Garland. Under the Comprehensive Security Program Mr. Garland is provided with the use of a car and driver when security deems it required and home security fees that are in excess of the cost of a system typical for homes in his neighborhood ($137,323).

 

  (h)

The Phillips 66 Comprehensive Security Program requires in certain circumstances that Mr. Garland fly on Company aircraft. The amount presented above represents the approximate incremental cost to Phillips 66 for personal use of the aircraft. Approximate incremental cost has been determined by calculating the variable costs for each aircraft during the year, dividing that amount by the total number of miles flown by that aircraft, and multiplying the result by the miles flown for personal use during the year. Incremental costs for flights to the hangar or other locations without passengers, commonly referred to as “deadhead” flights, are included in the calculation.

 

(8)

To show how year-over-year changes in pension value impact total compensation, as determined under SEC rules, we have included this column to show total compensation without pension value changes. The amounts reported in this column are calculated by subtracting the change in pension value reported in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column, as described in footnote 6 to this table, from the amounts reported in the Total column. The amounts reported in this column differ substantially from, and are not a substitute for, the amounts reported in the Total column.

 

 

2020 PROXY STATEMENT    43


Table of Contents

 

EXECUTIVE COMPENSATION TABLES

 

GRANTS OF PLAN-BASED AWARDS

The following table provides additional information about plan-based compensation disclosed in the SUMMARY COMPENSATION TABLE. This table includes both equity and non-equity awards.

 

         

ESTIMATED FUTURE PAYOUTS UNDER
NON-EQUITY INCENTIVE

PLAN AWARDS(2)

    ESTIMATED FUTURE PAYOUTS
UNDER EQUITY INCENTIVE
PLAN AWARDS(3)
    ALL OTHER
STOCK
AWARDS:
NUMBER
OF SHARES
OF STOCK
OR UNITS(4)
(#)
    ALL OTHER
OPTION
AWARDS:
NUMBER OF
SECURITIES
UNDERLYING
OPTIONS
(#)
    EXERCISE
OR BASE
PRICE OF
OPTION
AWARDS
($/SH)
    GRANT
DATE FAIR
VALUE OF
STOCK
AND
OPTION
AWARDS(5)
($)
 

NAME

  GRANT
DATE(1)
    THRESHOLD
($)
    TARGET
($)
    MAXIMUM
($)
    THRESHOLD
(#)
    TARGET
(#)
    MAXIMUM
(#)
 

Greg Garland

            2,680,013       6,700,033                                            
    2/5/2019                                           33,071                   3,140,670  
    2/5/2019                               80,718       161,436                         7,665,587  
    2/5/2019                                                 178,700       94.9675       3,141,546  

Kevin Mitchell

            861,172       2,152,930                                            
    2/5/2019                                           10,842                   1,029,638  
    2/5/2019                               26,463       52,926                         2,513,125  
    2/5/2019                                                 53,300       94.9675       937,014  

Robert Herman

            680,607       1,701,518                                            
    2/5/2019                                           6,995                   664,298  
    2/5/2019                               20,130       40,260                         1,911,696  
    2/5/2019                                                 31,500       94.9675       553,770  

Paula Johnson

            720,450       1,801,125                                            
    2/5/2019                                           7,415                   704,184  
    2/5/2019                               18,097       36,194                         1,718,627  
    2/5/2019                                                 36,500       94.9675       641,670  

Tim Roberts

            680,607       1,701,518                                            
    2/5/2019                                           6,412                   608,932  
    2/5/2019                               18,707       37,414                         1,776,557  
    2/5/2019                                                 31,500       94.9675       553,770  
(1)

The grant date shown is the date on which the Compensation Committee approved the target awards.

 

(2)

Threshold and maximum awards are based on the provisions in the VCIP. Actual awards earned can range from 0 to 200% of the target awards, with a further possible adjustment of +/–50% of the target award depending on individual performance. The Compensation Committee retains the authority to make awards under the program and to use its judgment in adjusting awards, including making awards greater than the amounts shown in the table above, provided the award does not exceed amounts permitted under the 2013 Omnibus Stock and Performance Incentive Plan of Phillips 66. Actual payouts under the annual bonus program for 2019 are calculated using base salary earned in 2019 and reflected in the “Non-Equity Incentive Plan Compensation” column of the SUMMARY COMPENSATION TABLE.

 

(3)

Threshold and maximum awards are based on the provisions of the PSP. Actual awards earned can range from 0 to 200% of the target awards. Performance periods under the PSP cover a three-year period, and since a new three-year period commences each year, there could be three overlapping performance periods ongoing at any time. In 2019, targets for each NEO were set with respect to an award for the three-year performance period beginning in 2019 and ending in 2021. The Compensation Committee retains the authority to make awards under the PSP using its judgment, including making awards greater than the maximum payout shown in the table above, provided the award does not exceed amounts permitted under the 2013 Omnibus Stock and Performance Incentive Plan of Phillips 66.

 

(4)

RSUs were granted in 2019 and will vest in 2022.

 

(5)

For equity incentive plan awards, these amounts represent the grant date fair value at target level under the PSP as determined in accordance with GAAP. For Stock Option awards, these amounts represent the grant date fair value of the option awards using a Black-Scholes-Merton-based methodology. Actual value realized upon option exercise depends on market prices at the time of exercise. For other stock awards, these amounts represent the grant date fair value of the RSU awards determined in accordance with GAAP. See Note 20—Share-Based Compensation Plans in the Notes to Consolidated Financial Statements in our 2019 Form 10-K, for a discussion of the relevant assumptions used in this determination.

 

 

44    2020 PROXY STATEMENT


Table of Contents

 

EXECUTIVE COMPENSATION TABLES

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

The following table lists outstanding Phillips 66 equity grants for each NEO as of December 31, 2019.

 

            OPTION AWARDS(1)      STOCK AWARDS  

NAME

   GRANT
DATE
     NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
EXERCISABLE(2)
(#)
    

NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
UNEXERCISABLE

(#)

     OPTION
EXERCISE
PRICE
($)
     OPTION
EXPIRATION
DATE
     NUMBER OF
SHARES OR
UNITS OF
STOCK THAT
HAVE NOT
VESTED(3)
(#)
     MARKET
VALUE OF
SHARES OR
UNITS OF
STOCK THAT
HAVE NOT
VESTED
($)
     EQUITY
INCENTIVE
PLAN
AWARDS:
NUMBER OF
UNEARNED
SHARES,
UNITS OR
OTHER
RIGHTS THAT
HAVE NOT
VESTED(4)
(#)
     EQUITY
INCENTIVE
PLAN
AWARDS:
MARKET OR
PAYOUT
VALUE OF
UNEARNED
SHARES,
UNITS OR
OTHER RIGHTS
THAT HAVE
NOT VESTED
($)
 

Greg Garland

     2/7/2013        158,500               62.170        2/7/2023                              
     2/6/2014        126,300               72.255        2/6/2024                              
     2/3/2015        146,700               74.135        2/3/2025                              
     2/2/2016        169,400               78.620        2/2/2026                              
     2/7/2017        116,000        58,000        78.475        2/7/2027                              
     2/6/2018        49,000        98,000        94.850        2/6/2028                              
     2/5/2019               178,700        94.968        2/5/2029                              
                                    297,381        33,131,217        294,568        32,817,821  

Kevin Mitchell

     2/3/2015        9,900               74.135        2/3/2025                              
     2/2/2016        30,800               78.620        2/2/2026                              
     2/7/2017        21,133        10,567        78.475        2/7/2027                              
     2/6/2018        14,533        29,067        94.850        2/6/2028                              
     2/5/2019               53,300        94.968        2/5/2029                              
                                    28,115        3,132,292        96,280        10,726,555  

Robert Herman

     2/7/2013        12,300               62.170        2/7/2023                              
     2/6/2014        11,400               72.255        2/6/2024                              
     2/3/2015        23,500               74.135        2/3/2025                              
     2/2/2016        28,800               78.620        2/2/2026                              
     2/7/2017        20,466        10,234        78.475        2/7/2027                              
     2/6/2018        8,666        17,334        94.850        2/6/2028                              
     2/5/2019               31,500        94.968        2/5/2029                              
                                    67,101        7,475,722        69,538        7,747,229  

Paula Johnson

     2/7/2013        12,000               62.170        2/7/2023                              
     2/6/2014        19,600               72.255        2/6/2024                              
     2/3/2015        25,100               74.135        2/3/2025                              
     2/2/2016        32,800               78.620        2/2/2026                              
     2/7/2017        22,866        11,434        78.475        2/7/2027                              
     2/6/2018        9,966        19,934        94.850        2/6/2028                              
     2/5/2019               36,500        94.968        2/5/2029                              
                                    49,125        5,473,016        65,986        7,351,500  

Tim Roberts

     4/4/2016        28,400               85.973        4/4/2026                              
     2/7/2017        20,466        10,234        78.475        2/7/2027                              
     2/6/2018        8,633        17,267        94.850        2/6/2028                              
     2/5/2019               31,500        94.968        2/5/2029                              
                                            19,232        2,142,637        66,620        7,422,134  
(1)

All options shown in the table have a maximum term for exercise of ten years from the grant date. Under certain circumstances, the terms for exercise may be shorter, and in certain circumstances, the options may be forfeited and cancelled. All awards shown in the table have associated restrictions upon transferability.

 

 

2020 PROXY STATEMENT    45


Table of Contents

 

EXECUTIVE COMPENSATION TABLES

 

(2)

The options shown in this column vested and became exercisable in 2019 or prior years (although under certain termination circumstances, the options may still be forfeited). Options become exercisable in one-third increments on the first, second and third anniversaries of the grant date.

 

(3)

These amounts include unvested restricted stock and RSUs awarded under the PSP for performance periods that ended on or before December 31, 2014, and awarded as annual awards. All awards for performance periods that ended on or before December 31, 2014, continue to have restrictions upon transferability. Restrictions on PSP awards for performance periods that ended on or before December 31, 2010, lapse upon separation from service. Restrictions on PSP awards for later performance periods lapse five years from the grant date unless the NEO elected prior to the beginning of the performance period to defer lapsing of the restrictions until separation from service. Awards are subject to forfeiture if, prior to lapsing, the NEO separates from service for a reason other than death, disability, layoff, retirement after reaching age 55 with five years of service, or after a change of control, although the Compensation Committee has the authority to waive forfeiture. The awards have no voting rights, but do entitle the holder to receive dividend equivalents in cash. The value of the awards reflects the closing price of our common stock, as reported on the NYSE, on December 31, 2019 ($111.41).

 

(4)

Reflects potential awards from ongoing performance periods under the PSP for performance periods ending December 31, 2020, and December 31, 2021. These awards are shown at maximum; however, there is no assurance that awards will be granted at, below or above target after the end of the relevant performance periods, as the determination to make a grant and the amount of any grant is within the judgment of the Compensation Committee. Until an actual grant is made, these unearned awards pay no dividend equivalents. The value of these unearned awards reflects the closing price of our common stock, as reported on the NYSE, on December 31, 2019 ($111.41).

OPTION EXERCISES AND STOCK VESTED FOR 2019

The following table summarizes the value received from stock option exercises and stock grants vested during 2019:

 

     OPTION AWARDS      STOCK AWARDS(1)  

NAME

   NUMBER OF SHARES
ACQUIRED ON EXERCISE
(#)
     VALUE REALIZED UPON
EXERCISE
($)
     NUMBER OF SHARES
ACQUIRED ON VESTING
(#)
     VALUE REALIZED UPON
VESTING
($)
 

Greg Garland

     42,728        2,802,154        333,687        33,714,892  

Kevin Mitchell

                   32,494        3,531,910  

Robert Herman

     47,433        3,374,428        30,056        3,267,034  

Paula Johnson

                   51,943        5,373,632  

Tim Roberts

                   27,323        2,971,096  
(1)

Stock awards include RSUs that vested during the year, as well as the PSP 2017-2019 award that vested on December 31, 2019, and was paid out in cash in early 2020. The PSP awards were as follows: Mr. Garland, 115,275 units valued at $12,994,928; Mr. Mitchell, 25,229 units valued at $2,844,060; Mr. Herman, 23,314 units valued at $2,628,183; Ms. Johnson, 24,991 units valued at $2,817,230; and Mr. Roberts, 21,283 units valued at $2,399,228.

 

 

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EXECUTIVE COMPENSATION TABLES

 

PENSION BENEFITS AS OF DECEMBER 31, 2019

Our defined benefit pension plan covering NEOs, the Phillips 66 Retirement Plan, consists of multiple titles with different terms. NEOs are only eligible to participate in one title at any time, but may have frozen benefits under one or more other titles.

 

      TITLE I    TITLE II (1)    TITLE IV

Current Eligibility

   Mr. Garland    Mr. Herman (4), Mr. Mitchell, Mr. Roberts    Ms. Johnson

Normal Retirement

   Age 65    Age 65    Age 65

Early Retirement (2)

   Age 55 with five years of service or if laid off during or after the year in which the participant reaches age 50    Executives may receive their vested benefit upon termination of employment at any age    Age 50 with ten years of service

Benefit Calculation (2)

   Calculated as the product of 1.6% times years of credited service multiplied by the final average eligible earnings    Based on monthly pay and interest credits to a nominal cash balance account created on the first day of the month after an executive’s hire date. Pay credits are equal to a percentage of total salary and annual bonus.    Calculated as the product of 1.6% times years of credited service multiplied by the final average eligible earnings

Final Average Earnings Calculation

   Calculated using the three highest compensation years in the last ten calendar years before retirement plus the year of retirement    N/A    Calculated using the higher of the highest three years of compensation or the highest 36 months of compensation

Eligible Pension Compensation (3)

   Includes salary and annual bonus    Includes salary and annual bonus    Includes salary and annual bonus

Benefit Vesting

   All participants are vested in this title    Employees vest after three years of service    All participants are vested in this title

Payment Types

   Allows payments in the form of several annuity types or a single lump sum   

IRS limitations

   Benefits under all Titles are limited by the IRC. In 2019, the compensation limit was $280,000. The IRC also limits the annual benefit available under these Titles expressed as an annuity. In 2019, that limit was $225,000 (reduced actuarially for ages below 62).

 

(1)

NEOs whose combined years of age and service total less than 44 receive a 6% pay credit, those with 44 through 65 receive a 7% pay credit and those with 66 or more receive a 9% pay credit. Interest credits are applied to the cash balance account each month. This credit is calculated by multiplying the value of the account by the interest credit rate, based on 30-year U.S. Treasury security rates adjusted quarterly.

 

(2)

An early benefit reduction is calculated on Title I by reducing the benefit 5% for each year before age 60 that benefits are paid. An early benefit reduction is calculated on Title III by reducing the benefit 6.67% for each year before age 60 that benefits are paid, unless the participant has at least 85 points awarded, with one point for each year of age and one point for each year of service. Title IV early benefit reduction is calculated by reducing the benefit by 5% per year for each year before age 57 that benefits are paid and 4% per year for benefits that are paid between ages 57 and 60. The benefit calculation for Titles I, III and IV is reduced by the product of 1.5% of the annual primary social security benefit multiplied by years of credited service, although a reduction limit of 50% of the primary Social Security benefit may apply.

 

(3)

Under Title I, if an executive receives layoff benefits, then the eligible compensation calculation also includes the annualized salary for the year of layoff (rather than the actual salary for that year) and years of service are increased by any period for which layoff benefits are calculated.

 

(4)

Mr. Herman has a frozen benefit under Title III from prior years of service with predecessor companies. Under Title III, normal retirement is age 65 and early retirement is age 55 with 10 years of service. Title III is similar to Title I, except that bonus is not eligible pension compensation and payout is made in the form of an annuity.

 

 

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EXECUTIVE COMPENSATION TABLES

 

The following table lists the pension program participation and actuarial present value of each NEO’s defined benefit pension as of December 31, 2019.

 

NAME

  PLAN NAME   NUMBER OF YEARS
CREDITED SERVICE(1)
(#)
    PRESENT VALUE OF
ACCUMULATED
BENEFIT ($)
    PAYMENTS DURING
LAST FISCAL YEAR
($)
 

Greg Garland

  Phillips 66 Retirement Plan - Title I     30       1,891,256        
  Phillips 66 Key Employee Supplemental Retirement Plan (2)           45,151,254        

Kevin Mitchell

  Phillips 66 Retirement Plan - Title II     6       134,673        
  Phillips 66 Key Employee Supplemental Retirement Plan (2)           549,659        

Robert Herman

  Phillips 66 Retirement Plan - Title II     14       393,783        
  Phillips 66 Retirement Plan - Title III     22       634,293        
  Phillips 66 Key Employee Supplemental Retirement Plan (2)           1,045,467        

Paula Johnson

  Phillips 66 Retirement Plan - Title IV     17       923,584        
  Phillips 66 Key Employee Supplemental Retirement Plan (2)           6,049,191        

Tim Roberts

  Phillips 66 Retirement Plan - Title II     4       49,568        
    Phillips 66 Key Employee Supplemental Retirement Plan (2)           202,306        

 

(1)

Years of credited service include service recognized under the predecessor ConocoPhillips plans from which these plans were spun off effective May 1, 2012. Credited Service displays the number of years the NEO was in each applicable formula.

 

(2)

The Phillips 66 Key Employee Supplemental Retirement Plan restores Company-sponsored benefits capped under the qualified defined benefit pension plan due to IRC limits. All employees, including our NEOs, are eligible to participate in the plan.

NONQUALIFIED DEFERRED COMPENSATION

Our NEOs are eligible to participate in two nonqualified deferred compensation plans, the Phillips 66 KEDCP and the Phillips 66 DCMP.

The KEDCP allows NEOs to defer up to 50% of their salary and up to 100% of their VCIP. The default distribution option is a lump sum payment paid at least six months after separation from service. NEOs may elect to defer payments from one to five years, and to receive annual, semiannual or quarterly payments for a period of up to fifteen years. NEOs may also elect to defer their VCIP to a specific date in the future.

The DCMP is a nonqualified restoration plan for employer contributions that cannot be made to our 401(k) plan either due to an NEO’s salary deferral under the KEDCP or due to the IRC annual limit on compensation that may be taken into account under a qualified plan. Distributions are made as a lump sum six months after separation from service, unless the NEO elects to receive one to fifteen annual payments beginning at least one year after separation from service.

Each NEO directs investments of his or her individual accounts under the KEDCP and DCMP. Both plans provide a broad range of market-based investments, that may be changed daily. No investment provides above-market returns. The aggregate performance of these investments is reflected in the NONQUALIFIED DEFERRED COMPENSATION table below.

Benefits due under these plans are paid from our general assets, although we also maintain rabbi trusts that may be used to pay benefits. The trusts and the funds held in them are Company assets. In the event of our bankruptcy, NEOs would be unsecured general creditors.

 

 

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EXECUTIVE COMPENSATION TABLES

 

The following table provides information on nonqualified deferred compensation as of December 31, 2019:

 

NAME

  APPLICABLE PLAN(1)   BEGINNING
BALANCE
($)
    EXECUTIVE
CONTRIBUTIONS
IN LAST FISCAL
YEAR
($)
    COMPANY
CONTRIBUTIONS
IN THE LAST
FISCAL YEAR(2)
($)
    AGGREGATE
EARNINGS IN
LAST FISCAL
YEAR(3)
($)
   

AGGREGATE

WITHDRAWALS/

DISTRIBUTIONS
($)

    AGGREGATE
BALANCE
AT LAST
FISCAL
YEAR END(4)
($)
 

Greg Garland

  Phillips 66 Defined Contribution Make-Up Plan     1,272,963             758,198       347,642             2,378,803  
  Phillips 66 Key Employee Deferred Compensation Plan     1,252,805                   177,789             1,430,593  

Kevin Mitchell

  Phillips 66 Defined Contribution Make-Up Plan     118,094             295,365       50,689             464,147  
  Phillips 66 Key Employee Deferred Compensation Plan                                    

Robert Herman

  Phillips 66 Defined Contribution Make-Up Plan     397,058             229,034       109,656             735,748  
  Phillips 66 Key Employee Deferred Compensation Plan     1,982,729                   519,720             2,502,448  

Paula Johnson

  Phillips 66 Defined Contribution Make-Up Plan     255,929             244,519       102,899             603,347  
  Phillips 66 Key Employee Deferred Compensation Plan                                    

Tim Roberts

  Phillips 66 Defined Contribution Make-Up Plan     69,936             228,922       29,018             327,876  
    Phillips 66 Key Employee Deferred Compensation Plan                                    

 

(1)

We have two defined contribution deferred compensation programs for our executives — the DCMP and the KEDCP. As of December 31, 2019, participants in these plans had 36 investment options — 28 of the options were the same as those available in our 401(k) plan and the remaining options were other mutual funds approved by the plan administrator.

 

(2)

These amounts represent Company contributions under the DCMP. These amounts are also included in the “All Other Compensation” column of the SUMMARY COMPENSATION TABLE.

 

(3)

These amounts represent earnings on plan balances from January 1 to December 31, 2019. These amounts are not included in the SUMMARY COMPENSATION TABLE.

 

(4)

The total reflects contributions by our NEOs, contributions by us, and earnings on balances prior to 2019; plus contributions by our NEOs, and earnings from January 1, 2019, through December 31, 2019 (shown in the appropriate columns of this table, with amounts that are included in the SUMMARY COMPENSATION TABLE). The total includes all contributions by our NEOs and by us reported in this proxy statement and our proxy statements from prior years as follows: $1,571,126 for Mr. Garland; $388,403 for Mr. Mitchell; $310,404 for Mr. Herman; $456,237 for Ms. Johnson; and $253,103 for Mr. Roberts.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

Each of our NEOs is expected to receive amounts earned during his or her period of employment unless he or she voluntarily resigns prior to becoming retirement-eligible or is terminated for cause. Although normal retirement age under our benefit plans is 65, early retirement provisions allow receipt of benefits at earlier ages if vesting requirements are met. For our incentive compensation programs (VCIP, RSU, Stock Options, and PSP), early retirement is generally defined as termination at or after the age of 55 with five years of service.

As of December 31, 2019, Mr. Garland, Mr. Herman, and Ms. Johnson were retirement-eligible under both our benefit plans and our compensation programs. Therefore, as of December 31, 2019, a voluntary resignation of Mr. Garland, Mr. Herman, or Ms. Johnson, would have been treated as a retirement, and each would have retained all awards earned under the current and earlier programs. As such, awards under these programs are not included in the amounts reflected in the table below. Please see the OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END table for more information. Our compensation programs provide for the following upon retirement:

Cash Payments. Cash payments include VCIP earned during the fiscal year, amounts contributed and vested under our defined contribution plans, and amounts accrued and vested under our pension plans.

Equity. Equity considerations include grants under the PSP for ongoing performance periods in which the executive participated for at least one year, previously granted restricted stock and RSUs, and previously granted stock option awards exercisable through the original term.

 

 

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EXECUTIVE COMPENSATION TABLES

 

The table at the end of this section summarizes the potential additional value of the benefits to be received by each NEO as of December 31, 2019, through the Phillips 66 ESP due to an involuntary termination without cause or through the Phillips 66 CICSP due to a change in control event. Benefits that would be available generally to all or substantially all salaried employees on the U.S. payroll are not included in the amounts shown. Executives are not entitled to receive benefits under both the ESP and the CICSP as a result of the same event. These two plans have the following in common:

 

   

amounts payable under both are offset by any payments or benefits payable under any of our other plans;

 

   

benefits under both may also be reduced in the event of willful and bad faith conduct demonstrably injurious to the Company; and

 

   

both are Company plans under which awards and payments are subject to clawback provisions and to forfeiture or recoupment, in whole or in part, under applicable law, including the Sarbanes-Oxley Act and the Dodd-Frank Act.

Executive Severance Plan

The ESP provides that if an NEO separates due to an involuntary termination without cause, the executive will receive the following benefits, which may vary depending on salary grade level.

Cash Severance Payments. ESP cash severance payments include:

 

   

a lump sum payment equal to one and one-half or two times the sum of the executive’s base salary and current target annual bonus;

 

   

a lump sum payment equal to the present value of the increase in pension benefits that would result from crediting the executive with an additional one and one-half or two years of age and service under the pension plan; and

 

   

a lump sum payment generally equal to the Company contribution for active employees toward the cost of certain welfare benefits for an additional one and one-half or two years.

Accelerated Equity. Layoff treatment under our compensation plans generally allows the executive to retain a prorated portion of grants held less than one year and full grants held for one year or more of Restricted Stock, RSUs, and Stock Options, and maintain eligibility for prorated PSP awards for ongoing periods in which he or she had participated for at least one year.

Change in Control Severance Plan

The CICSP provides that if, within two years of a change in control of the Company, an executive’s employment is terminated by the employer other than for cause, or by the executive for good reason, the executive will receive the following benefits, which may vary depending on salary grade level. CICSP benefits include:

Cash Severance Payments. CICSP cash severance payments include:

 

   

a lump sum payment equal to two or three times the sum of the executive’s base salary and the higher of the current target annual bonus or the average of the annual bonuses paid for the previous two years;

 

   

a lump sum payment equal to the present value of the increase in pension benefits that would result from crediting the executive with an additional two or three years of age and service under the pension plan; and,

 

   

a lump sum payment generally equal to the Company contribution for active employees toward the cost of certain welfare benefits for an additional two or three years.

Accelerated Equity. CICSP benefits include the vesting of all equity awards and lapsing of any restrictions.

 

 

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EXECUTIVE COMPENSATION TABLES

 

Death or Disability

For completeness, payments that would be payable to each NEO upon separation as a result of disability or to each NEO’s estate as a result of death are likewise provided.

 

      

EXECUTIVE BENEFITS AND PAYMENTS UPON TERMINATION

 
      

INVOLUNTARY
NOT-FOR-CAUSE
TERMINATION
(NOT CIC)
($)

      

INVOLUNTARY OR
GOOD REASON
TERMINATION
(CIC)
($)

      

DEATH
($)

      

DISABILITY
($)

 

Greg Garland

                   

Severance Payment

    

 

11,930,806

 

    

 

22,893,237

 

    

 

 

    

 

 

Accelerated Equity

    

 

 

    

 

 

    

 

 

    

 

 

Life Insurance

    

 

 

    

 

 

    

 

3,350,016

 

    

 

 

TOTAL

    

11,930,806

      

22,893,237

      

3,350,016

      

 

Kevin Mitchell

                   

Severance Payment

    

 

3,818,224

 

    

 

7,194,493

 

    

 

 

    

 

 

Accelerated Equity (1)

    

 

10,516,893

 

    

 

10,683,636

 

    

 

10,516,893

 

    

 

10,516,893

 

Life Insurance

    

 

 

    

 

 

    

 

1,734,000

 

    

 

 

TOTAL

    

14,335,117

      

17,878,129

      

12,250,893

      

10,516,893

 

Robert Herman

                   

Severance Payment

    

 

3,550,519

 

    

 

6,210,172

 

    

 

 

    

 

 

Accelerated Equity

    

 

 

    

 

 

    

 

 

    

 

 

Life Insurance

    

 

 

    

 

 

    

 

1,700,016

 

    

 

 

TOTAL

    

3,550,519

      

6,210,172

      

1,700,016

      

 

Paula Johnson

                   

Severance Payment

    

 

4,869,860

 

    

 

8,811,801

 

    

 

 

    

 

 

Accelerated Equity

    

 

 

    

 

 

    

 

 

    

 

 

Life Insurance

    

 

 

    

 

 

    

 

1,610,832

 

    

 

 

TOTAL

    

4,869,860

      

8,811,801

      

1,610,832

      

 

Tim Roberts

                   

Severance Payment

    

 

3,480,398

 

    

 

6,229,801

 

    

 

 

    

 

 

Accelerated Equity (1)

    

 

7,374,303

 

    

 

7,472,887

 

    

 

7,374,303

 

    

 

7,374,303

 

Life Insurance

    

 

 

    

 

 

    

 

1,700,016

 

    

 

 

TOTAL

    

10,854,701

      

13,702,688

      

9,074,319

      

7,374,303

 

 

(1)

For the PSP, amounts for PSP 2017-2019 are shown based on the cash amount received in February 2020, while amounts for other periods are prorated to reflect the portion of the performance period completed by the end of 2019 and shown at target payout levels. These amounts reflect the closing price of our common stock as reported on the NYSE on December 31, 2019 ($111.41).

 

  

Restricted Stock and RSU amounts reflect the closing price of our common stock as reported on the NYSE on December 31, 2019 ($111.41).

 

  

Stock Option amounts reflect the intrinsic value as if the options had been exercised on December 31, 2019, but only for options the NEO would have retained for the specific termination event.

CEO PAY RATIO

As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information about the ratio of the annual total compensation, calculated in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, of our median employee and the annual total compensation of our CEO.

For 2019, the annual total compensation of our CEO was 169 times that of the median of the annual total compensation of all employees, based on annual total compensation of $31,927,081 for the CEO and $188,738 for the median employee.

 

 

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EXECUTIVE COMPENSATION TABLES

 

This ratio is based on an October 1, 2017, employee population of 14,316, which excluded 412 non-U.S. employees in Germany (270), Singapore (71), Austria (39), Canada (30), and the United Arab Emirates (2). In 2017, the median employee was identified using annual base pay, overtime pay, annual bonus, and target LTI compensation using data as of September 30, 2017. Given that there was no material change to our employee population, the median employee’s compensation programs, or the median employee’s compensation, we are reporting the same employee as first reported in 2018. The annual total compensation for our CEO includes both the amount reported in the “Total” column of the SUMMARY COMPENSATION TABLE of $31,900,878 and the estimated value of our CEO’s health and welfare benefits of $26,203.

The SEC’s rules for identifying the median compensated employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their employee populations and compensation practices. As a result, the pay ratio reported by other companies may not be comparable to the pay ratio reported above, as other companies have different employee populations and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios.

 

 

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NON-EMPLOYEE DIRECTOR COMPENSATION

The primary elements of our non-employee director compensation program are equity compensation and cash compensation, the current levels of which have been in place since January 1, 2016.

OBJECTIVES AND PRINCIPLES

Compensation for non-employee directors is reviewed annually by the Nominating and Governance Committee, with the assistance of such third-party consultants as the Nominating and Governance Committee deems advisable, and set by action of the Board of Directors. The Board’s goal in designing such compensation is to provide a competitive package that will enable it to attract and retain highly skilled individuals with relevant experience and reflects the time and talent required to serve on the board of a complex, multinational corporation. The Board seeks to provide sufficient flexibility in the form of payment to meet individual needs while ensuring that a substantial portion of director compensation is linked to the long-term success of the Company. In furtherance of our commitment to be a socially responsible member of the communities in which we participate, the Board believes that it is appropriate to extend the Phillips 66 matching gift program to charitable contributions made by individual directors.

Equity Compensation

In 2019, each non-employee director received a grant of RSUs with an aggregate value of $200,000 on the date of grant. Restrictions on the units issued to a non-employee director will lapse in the event of retirement, disability, death, or a change of control, unless the director has elected to receive the underlying shares after a stated period of time. Directors forfeit the units if, prior to the lapse of restrictions, the Board finds sufficient cause for forfeiture (although no such finding can be made after a change in control). Before the restrictions lapse, directors cannot sell or otherwise transfer the units, but the units are credited with dividend equivalents in the form of additional RSUs. When restrictions lapse, directors will receive unrestricted shares of Company stock as settlement of the RSUs.

Cash Compensation

In 2019, each non-employee director received $125,000 in cash compensation for service as a director. Non-employee directors serving in specified committee or leadership positions also received the following additional cash compensation:

 

     

LEAD / CHAIR

    

MEMBER

 

Lead Director

     $50,000        N/A  

Audit and Finance Committee

     $25,000        $10,000  

Human Resources and Compensation Committee

     $25,000        $10,000  

All Other Committees

     $10,000        N/A  

The total annual cash compensation is payable in monthly cash installments. Directors may elect, on an annual basis, to receive all or part of their cash compensation in unrestricted stock or in RSUs (such unrestricted stock or RSUs are issued on the last business day of the month valued using the average of the high and low prices of Phillips 66 common stock as reported on the NYSE on such date), or to have the amount credited to the director’s deferred compensation account as described below. The RSUs issued in lieu of cash compensation are subject to the same restrictions as the annual RSUs described above under EQUITY COMPENSATION.

Deferral of Compensation

Non-employee directors can elect to defer their cash compensation under the Phillips 66 Deferred Compensation Program for non-Employee Directors (the “Director Deferral Plan”). Deferred amounts are deemed to be invested in various mutual funds and similar investment choices (including Phillips 66 common stock) selected by the director from a list of investment choices available under the Director Deferral Plan.

The future payment of any compensation deferred by non-employee directors of Phillips 66 may be funded in a grantor trust designed for this purpose.

 

 

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NON-EMPLOYEE DIRECTOR COMPENSATION

 

Directors’ Matching Gift Program

All active and retired non-employee directors are eligible to participate in the Directors’ Annual Matching Gift Program. This provides a dollar-for-dollar match of gifts of cash or securities, up to a maximum during any one calendar year of $15,000 per donor for active directors and $7,500 per donor for retired directors, to charities and educational institutions (excluding certain religious, political, fraternal, or collegiate athletic organizations) that are tax-exempt under Section 501(c)(3) of the IRC or meet similar requirements under the applicable law of other countries. Amounts representing these matching contributions are contained in the “All Other Compensation” column of the NON-EMPLOYEE DIRECTOR COMPENSATION TABLE.

Other Compensation

The Board believes that it is important for significant others of directors and executives to attend certain meetings to enhance the collegiality of the Board. The cost of such attendance is treated by the Internal Revenue Service as income and is taxable to the recipient. The Company reimburses directors for the cost of resulting income taxes. Amounts representing this reimbursement are contained in the “All Other Compensation” column of the NON-EMPLOYEE DIRECTOR COMPENSATION TABLE.

Stock Ownership

Each director is expected to own an amount of Company stock equal to at least the aggregate value of the annual equity grants during their first five years on the Board. Directors are expected to reach this level of target ownership within five years of joining the Board. Actual shares of stock, Restricted Stock, or RSUs, including deferred stock units, may be counted in satisfying the stock ownership guidelines. All current directors are in compliance, or on track to comply, with the guidelines.

NON-EMPLOYEE DIRECTOR COMPENSATION TABLE

Phillips 66 benchmarks its non-employee director compensation design and pay levels against a group of peer companies. The Company targets the median of this peer group for all elements of non-employee director compensation.

The following table summarizes the compensation for our non-employee directors for 2019 (for compensation paid to our sole employee director, Mr. Garland, please see EXECUTIVE COMPENSATION TABLES).

 

NAME

   FEES
EARNED
OR PAID
IN CASH(1)
($)
     STOCK
AWARDS(2)
($)
     OPTION
AWARDS
($)
     NON-EQUITY
INCENTIVE PLAN
COMPENSATION
($)
     CHANGE IN
PENSION
VALUE AND
NONQUALIFIED
DEFERRED
COMPENSATION
EARNINGS
($)
     ALL OTHER
COMPENSATION(3)
($)
     TOTAL
($)
 

Gary K. Adams

     135,000        200,059                             4,004        339,063  

J. Brian Ferguson

     150,000        200,059                             1,470        351,529  

Charles M. Holley (4)

     16,331        64,940                                    81,271  

John E. Lowe

     145,000        200,059                             14,018        359,077  

Harold W. McGraw III

     135,000        200,059                             263        335,322  

Denise L. Ramos

     135,000        200,059                             1,782        336,841  

Glenn F. Tilton

     195,000        200,059                             17,985        413,044  

Victoria J. Tschinkel

     135,051        200,059                             32,617        367,727  

Marna C. Whittington

     150,000        200,059                             16,833        366,892  
(1) 

Reflects 2019 base cash compensation of $125,000 payable to each non-employee director. In 2019, non-employee directors serving in specified committee positions also received the additional cash compensation described previously. Mr. Holley joined the Board in October 2019 and elected to receive 50% of his prorated 2019 compensation in RSUs. Compensation amounts reflect adjustments related to various changes in committee assignments by Board members throughout the year, if any. Amounts shown include any amounts that were voluntarily deferred to the Director Deferral Plan.

 

 

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NON-EMPLOYEE DIRECTOR COMPENSATION

 

(2)

Amounts represent the grant date fair market value of RSUs. Under our non-employee director compensation program, non-employee directors received a 2019 grant of RSUs with an aggregate value of $200,000 on the date of grant, based on the average of the high and low prices for Phillips 66 common stock, as reported on the NYSE, on such date. These grants are made in whole shares with fractional share amounts rounded up, resulting in shares with a value of $200,059 being granted on January 15, 2019 ($48,446 granted on October 4, 2019 for Mr. Holley’s pro-rated grant). Mr. Holley elected to receive 50% of his 2019 compensation in RSUs, which is reflected on a pro-rata basis as of October 4, 2019, resulting in shares with values of $10,856 granted on November 1, 2019 and $5,638 granted on December 2, 2019.

 

(3)

All Other Compensation is made up primarily of certain gifts by directors to charities and educational institutions (excluding certain religious, political, fraternal, or collegiate athletic organizations) that are tax-exempt under Section 501(c)(3) of the IRC or meet similar requirements under the applicable law of other countries that we match under our Matching Gifts Program (Mr. Lowe $13,000; Mr. Tilton $15,000; Ms. Tschinkel $15,000; and Dr. Whittington $15,000). For active directors, the program matches up to $15,000 with regard to each program year. The amounts shown reflect the actual payments made by us in 2019. All Other Compensation also includes any personal flights, automobile transportation expenses, smaller gifts (such as books, ornaments, and jackets) as well as associated tax protection, and tax assistance when we request family members or other guests to accompany a director to a Company function and, as a result, the director is deemed to make personal use of Company assets such as Company aircraft and thereby incurs imputed income.

 

(4)

Amounts shown represent compensation paid to Mr. Holley following his election to the Board in October 2019.

 

 

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EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information about Phillips 66 common stock that may be issued under all existing equity compensation plans as of December 31, 2019:

 

PLAN CATEGORY

  

NUMBER OF SECURITIES TO BE
ISSUED UPON EXERCISE OF
OUTSTANDING OPTIONS,

WARRANTS AND RIGHTS(1,2)

(a)

    

WEIGHTED-AVERAGE

EXERCISE PRICE OF

OUTSTANDING OPTIONS,

WARRANTS AND RIGHTS(3)

(b)

    

NUMBER OF SECURITIES REMAINING

AVAILABLE FOR FUTURE ISSUANCE UNDER
EQUITY COMPENSATION PLANS (EXCLUDING
SECURITIES REFLECTED IN COLUMN (a))(4)

(c)

 

Equity compensation plans approved by security holders

     9,111,577        72.55        31,117,414  

Equity compensation plans not approved by security holders

 

                          

 

Total

  

 

 

 

9,111,577

 

 

  

 

 

 

72.55

 

 

  

 

 

 

31,117,414

 

 

(1)

Includes awards issued under the Omnibus Stock and Performance Incentive Plan of Phillips 66 and awards issued under the 2013 Omnibus Stock and Performance Incentive Plan of Phillips 66.

 

(2)

Includes an aggregate of 4,779,404 Incentive Stock Options and Nonqualified Stock Options issued to employees, 6,082 Restricted Stock Awards granted under historical LTI plans, and 1,460,157 PSUs. The number of securities to be issued includes 2,865,934 RSUs, of which 177,397 were issued to non-employee directors. Some awards held by ConocoPhillips employees at our spin-off were adjusted or substituted with a combination of ConocoPhillips and Phillips 66 equity. Awards representing a total of 13,071,435 shares were issued to ConocoPhillips employees, of which 2,137,944 remain outstanding as of December 31, 2019. The awards issued to ConocoPhillips employees are included in the outstanding awards listed above.

 

(3)

The weighted-average exercise price reflects the weighted-average price for outstanding Incentive Stock Options and Nonqualified Stock Options only. It does not include stock awards outstanding.

 

(4)

Total includes forfeited shares under the Omnibus Stock and Performance Incentive Plan of Phillips 66 that are now available for grant under the 2013 Omnibus Stock and Performance Incentive Plan of Phillips 66.

HOLDINGS OF MAJOR SHAREHOLDERS

The following table sets forth information regarding persons who we know to be the beneficial owners of more than five percent of our issued and outstanding common stock as of March 11, 2020, based on a review of publicly available statements of beneficial ownership filed with the SEC:

 

     COMMON STOCK  

NAME AND ADDRESS

   NUMBER OF SHARES      PERCENT OF CLASS  

The Vanguard Group(1)

100 Vanguard Blvd.

Malvern, PA 19335

     38,321,650        8.75

State Street Corporation(2)

One Lincoln Street

Boston, MA 02111

     22,688,552        5.18

BlackRock, Inc.(3)

55 East 52nd Street

New York, NY 10055

     30,410,948        6.94
(1)

Based solely on an Amendment to Schedule 13G filed with the SEC on February 12, 2020, by The Vanguard Group on behalf of itself, Vanguard Fiduciary Trust Company, and Vanguard Investments Australia, Ltd. The Amendment to Schedule 13G reports sole voting power for 664,641 shares of common stock, shared voting power for 132,317 shares of common stock, sole dispositive power for 37,567,079 shares of common stock and shared dispositive power for 754,571 shares of common stock.

 

(2)

Based solely on a Schedule 13G filed with the SEC on February 13, 2020, by State Street Corporation on behalf of itself, State Street Bank And Trust Company, SSGA Funds Management, Inc, State Street Global Advisors Limited (UK), State Street Global Advisors Ltd (Canada), State Street Global Advisors, Australia Limited, State Street Global Advisors (Japan) Co., Ltd, State Street Global Advisors Asia Ltd, State Street Global Advisors Singapore Ltd, State Street Global Advisors GmbH, State Street Global Advisors Ireland Limited, and State Street Global Advisors Trust Company. The Schedule 13G reports sole voting power for no shares of common stock, shared voting power for 20,500,940 shares of common stock, sole dispositive power for no shares of common stock and shared dispositive power for 22,642,663 shares of common stock.

 

(3)

Based solely on an Amendment to Schedule 13G filed with the SEC on February 5, 2020, by BlackRock, Inc. on behalf of itself, BlackRock Advisors, LLC, BlackRock Financial Management, Inc., BlackRock Investment Management, LLC, BlackRock Investment Management (Australia) Limited, BlackRock Investment Management (UK) Limited, BlackRock (Luxembourg) S.A., BlackRock (Netherlands) B.V., BlackRock Fund Managers Ltd, BlackRock Life Limited, BlackRock Asset Management Canada Limited, BlackRock Asset Management Ireland Limited, BlackRock Asset Management Schweiz AG, BlackRock (Singapore) Limited, BlackRock Advisors (UK) Limited, BlackRock Fund Advisors, BlackRock International Limited, BlackRock Institutional Trust Company, National Association, BlackRock Japan Co. Ltd., BlackRock Asset Management Canada Limited, FutureAdvisor, Inc., and BlackRock Asset Management North Asia Limited. The Amendment to Schedule 13G reports sole voting power for 25,482,410 shares of common stock, no shared voting power for shares of common stock, sole dispositive power for 30,410,948 shares of common stock and no shared dispositive power for shares of common stock.

 

 

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SECURITIES OWNERSHIP OF OFFICERS AND DIRECTORS

 

SECURITIES OWNERSHIP OF OFFICERS AND DIRECTORS

The following table sets forth the number of shares of our common stock beneficially owned as of March 11, 2020, by each Phillips 66 director, by each NEO and by all of our directors and executive officers as a group. Together these individuals beneficially own less than one percent of our common stock. The table also includes information about stock options, restricted stock, RSUs and deferred stock units credited to the accounts of our directors and executive officers under various compensation and benefit plans. For purposes of this table, shares are considered to be “beneficially” owned if the person, directly or indirectly, has sole or shared voting or investment power with respect to such shares. In addition, a person is deemed to beneficially own shares if that person has the right to acquire such shares within 60 days of March 11, 2020.

 

     NUMBER OF SHARES OR UNITS  

NAME OF BENEFICIAL OWNER

  

TOTAL COMMON STOCK

BENEFICIALLY OWNED

    

RESTRICTED/

DEFERRED

STOCK UNITS(1)

    

OPTIONS EXERCISABLE

WITHIN 60 DAYS(2)

 

Mr. Garland

     512,643        100,094        932,466  

Mr. Herman

     35,763        69,528        134,533  

Ms. Johnson

     72,668        22,945        155,899  

Mr. Mitchell

     42,755        33,525        119,232  

Mr. Roberts

     7,645        22,864        86,866  

Mr. Adams

     8,963                

Mr. Ferguson(3)

     21,734        26,202         

Mr. Holley

            2,536         

Mr. Lowe

     35,000        26,202         

Mr. McGraw(4)

     873        46,798         

Ms. Ramos

            9,485         

Mr. Tilton

     5,900        26,202         

Ms. Tschinkel(5)

     48,974        8,834         

Dr. Whittington

     2,500        26,202         

Directors and Executive Officers as a Group (16 Persons)

     816,056        451,472        1,503,795  
(1)

Includes RSUs or deferred stock units that may be voted or sold only upon passage of time.

 

(2)

Includes beneficial ownership of shares of common stock which may be acquired within 60 days of March 11, 2020, through stock options awarded under compensation plans.

 

(3)

Includes 21,500 shares of common stock owned by an entity managed by Mr. Ferguson and his wife.

 

(4)

Includes 373 shares held on behalf of the Harold W. McGraw Family Foundation, Inc., of which Mr. McGraw serves on the board, or various trusts for the benefit of various family members of Mr. McGraw and for which trusts Mr. McGraw serves as trustee and has voting and investment power. Mr. McGraw disclaims beneficial ownership of all securities held by the foundation and the trusts.

 

(5)

Includes 171 shares of common stock owned by the Erika Tschinkel Trust.

 

 

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PROPOSAL 4: REPORT ON RISKS OF GULF COAST PETROCHEMICAL INVESTMENTS

As You Sow, on behalf of Amy Devine and Douglas Triggs, owners of 27 shares of Phillips 66 common stock, and the Rita K. Devine Irrevocable Trust, owner of 20 shares of Phillips 66 common stock, notified us that they intend to submit the following proposal at this year’s Annual Meeting. We will furnish the address of the proponents upon request. In accordance with federal securities regulations, we have included the text of the proposal and supporting statement exactly as submitted by the proponent. We are not responsible for the content of the proposal or any inaccuracies it may contain.

As explained below, your Board recommends that you vote “AGAINST” this shareholder proposal.

RESOLVED: Shareholders request that Phillips 66, with board oversight, publish a report, omitting proprietary information and prepared at reasonable cost, assessing the public health risks of expanding petrochemical operations and investments in areas increasingly prone to climate change-induced storms, flooding, and sea level rise.

Supporting Statement: Investors request the company assess, among other related issues at management and Board discretion: The adequacy of measures the company is employing to prevent public health impacts from associated chemical releases.

WHEREAS: Investors are concerned about the financial, health, environmental, and reputational risks associated with operating and building-out new chemical plants and related infrastructure in Gulf Coast locations increasingly prone to catastrophic storms and flooding associated with climate change. Chevron Phillips Chemical Company (CPChem), owned jointly by Phillips 66 and Chevron, is a major petrochemical producer in the Gulf Coast.

Petrochemical facilities like ethane crackers and polyethylene processing plants produce dangerous pollutants including benzene (a known carcinogen), Volatile Organic Compounds, and sulfur dioxide. These operations can become inundated and pose severe chemical release risks during extreme weather events. Flooding from Hurricane Harvey in 2017 resulted in CPChem plant shut downs and the release of unpermitted, unsafe levels of pollutants. Nearby Houston residents reported respiratory and skin problems following CPChem’s releases during Hurricane Harvey.

Growing storms and the costs they bring our company are predicted to increase in frequency and intensity as global warming escalates. Recent reports show that greenhouse gas emissions throughout the petrochemical and plastic supply chain contribute significantly to climate change, exacerbating the threat of physical risks such as storms. Flood-related damage is projected to be highest in Texas, where many of CPChem’s petrochemical plants are concentrated, and Houston alone has seen three 500-year floods in a three-year span. Phillips 66 cited Hurricane Harvey as a major reason for a $123 million decrease in pre-tax income from its chemicals segment in 2017.

Civil society groups have mobilized to oppose the expansion of petrochemical facilities in their communities due to concerns regarding direct health and livelihood impacts from air and water pollutant releases. Such opposition threatens to jeopardize CPChem’s social license to operate in the region. Historically, releases from CPChem’s petrochemical operations have exceeded legal limits, exposing the company to liability. As climate change intensifies flooding and storm strength, the potential for unplanned chemical releases grows.

In spite of these risks, CPChem has accelerated its petrochemical activity in the Gulf Coast, investing heavily to expand in flood-prone areas of Texas. The company has generally disclosed that physical climate-related risks may impact its business and that it has a risk management system to plan for resiliency. The impacts to CPChem’s operations from Hurricane Harvey, however, indicate the company’s level of preparedness is insufficient. While the Company rapidly expands its petrochemical assets in climate-impacted areas, investors seek improved disclosure to understand whether CPChem is adequately evaluating and mitigating public health risks associated with climate-related impacts and the dangerous chemicals it uses.”

Board of Directors’ Response

YOUR BOARD RECOMMENDS THAT YOU VOTE AGAINST THE PROPOSAL.

Chevron Phillips Chemical Company (“CPChem”), a joint venture in which Phillips 66 holds a 50% equity investment, maintains internal processes, procedures and policies relating to project development, health and safety, and risk management and mitigation. These practices are designed to ensure that any potential public health risk of CPChem’s expansion of petrochemical operations and investments can be managed to safe and acceptable levels. CPChem publicly discloses information on its website about its performance and efforts in the following areas: health and safety, resource efficiency, emissions, integrity and compliance, product responsibility, social enrichment and economic performance. Therefore, the report requested by the proponent is not necessary.

 

 

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PROPOSAL 4: REPORT ON RISKS OF GULF COAST PETROCHEMICAL INVESTMENTS

 

CPChem’s strategy includes growing in parts of the world where feedstock is plentiful and competitively priced. North America and the Middle East remain two of the best places in the world for ethane supply, which accounts for up to 80% of CPChem’s feedstock. In North America, the U.S. Gulf Coast has proximity to the Permian basin, export infrastructure, and national grid connections, as well as integration with CPChem’s existing assets.

CPChem has risk identification, mitigation and management practices designed to ensure that potential public health risks of expansions and investments of petrochemical operations can be managed to safe and acceptable levels. Operational and economic advantages of investments are weighed against any potential for environmental, socioeconomic, and health risks as part of project development considerations. The identification of risks in the project development phase allows CPChem to develop measures to avoid, mitigate, or remedy them before making new investments.

CPChem‘s Operational Excellence (OE) Policy provides a framework to manage the health and safety of its employees, contractors, facilities and communities. CPChem uses the framework to manage facility risks, guide the design, construction and start-up of new or modified facilities, and to audit its performance against operational objectives and regulatory requirements. When considering physical risks such as flooding and storms, CPChem uses detailed design reviews and processes, as well as historical experience, to identify potential risks and hazards, and then mitigate them through the design and engineering of new projects.

CPChem also monitors and manages ongoing facility integrity and seeks to continuously improve its weather resiliency and environmental and safety performance. The company maintains disaster preparedness, response, and business continuity plans. CPChem actively participates in local Community Advisory Panels, which share best-practices and the latest information with the community and local officials. CPChem also participates in mutual aid programs with other companies that enable area facilities to help one another to prepare for and effectively respond to natural disasters and incidents by leveraging each other’s expertise, personnel and assets.

Continuous improvement by CPChem includes lessons learned. Following Hurricane Harvey, CPChem and other operators in the region shared best practices for mitigating storm related impacts and for asset resilience improvements.    CPChem already has implemented protections and employed lessons learned at existing facilities and newly completed facilities.    

CPChem reports on OE, health and safety, and environmental performance in its Sustainability Report available on its website at www.cpchem.com. In summary, CPChem’s current processes, programs and policies, as well as existing disclosures, address the concerns underlying the proposal, but without the unnecessary additional resources the proposal would introduce if implemented.

 

 

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ABOUT THE ANNUAL MEETING

Who is soliciting my vote?

The Board of Directors of Phillips 66 is soliciting proxies to be voted at the 2020 Annual Meeting of Shareholders of Phillips 66.

Who is entitled to vote?

You may vote if you were the record owner of Phillips 66 common stock as of the close of business on March 11, 2020, the record date established by the Board of Directors. Each share of common stock is entitled to one vote. As of March 11, 2020, we had 437,837,800 shares of common stock outstanding and entitled to vote. There is no cumulative voting.

How many shares must be present to hold the meeting?

In order for us to hold our meeting, holders of a majority of our outstanding shares of common stock as of March 11, 2020, must be present in person or by proxy at the meeting. This is referred to as a quorum. Your shares are counted as present at the Annual Meeting if you attend the meeting and vote in person or if you properly return a proxy by internet, telephone or mail. Abstentions and broker non-votes will also be counted for purposes of establishing a quorum at the meeting.

What is a broker non-vote?

Brokers are allowed to vote shares held for the benefit of their clients even though the brokers have not received voting instructions from the beneficial owner on how to vote the shares only on routine matters. The ratification of an independent auditor is an example of a routine matter on which brokers may vote in this manner.

Without voting instructions, brokers may not vote shares held for the benefit of their clients on non-routine matters. Non-routine matters include the election of directors, proposals relating to executive compensation, proposals to amend certificates of incorporation and certain other corporate governance changes, as well as shareholder proposals. Shares that are not voted by brokers on non-routine matters are called broker non-votes.

How many votes are needed to approve each of the proposals?

Each of the director nominees requires the affirmative “FOR” vote of the majority of the votes cast.

All other proposals require the affirmative “FOR” vote of a majority of shares present in person or represented by proxy at the meeting.

How do I vote?

You can vote electronically during the meeting or by proxy.

 

To vote by proxy, you must do one of the following:

 

   

Vote over the internet (instructions are on the proxy card).

 

   

Vote by telephone (instructions are on the proxy card).

 

   

If you elected to receive a hard copy of your proxy materials, fill out the enclosed proxy card, date and sign it, and return it in the enclosed postage-paid envelope.

If you hold your Phillips 66 stock in a brokerage account (that is, in “street name”), your ability to vote by telephone or over the internet depends on your broker’s voting process. Please follow the directions on your proxy card or voter instruction form carefully.

This year’s Annual Meeting will be held entirely online. You may participate in the Annual Meeting by visiting the following website: www.virtualshareholdermeeting.com/PSX2020. To participate in the Annual Meeting, you will need the 16-digit control number included on your Notice of Internet Availability, on your proxy card or on the instructions that accompanied your proxy materials.

 

 

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ABOUT THE ANNUAL MEETING

 

How do I vote if I hold my stock through a Phillips 66 employee benefit plan?

If you hold your stock through a Phillips 66 employee benefit plan, you must either:

 

   

Vote over the internet (instructions are in the email sent to you or on the notice and access form).

 

   

Vote by telephone (instructions are on the notice and access form).

 

   

If you elected to receive a hard copy of your proxy materials, fill out the enclosed voting instruction form, date and sign it, and return it in the enclosed postage-paid envelope.

You will receive a separate voting instruction form for each employee benefit plan in which you hold Phillips 66 stock. Please pay close attention to the deadline for returning your voting instruction form to the plan trustee. The voting deadline for each plan is set forth on the voting instruction form. Please note that different plans may have different deadlines.

How can I revoke my proxy?

You can revoke your proxy by sending written notice of revocation of your proxy to our Corporate Secretary so that it is received prior to 5:00 p.m., Central Daylight Time, on May 5, 2020.

Can I change my vote?

Yes. You can change your vote at any time before the polls close at the Annual Meeting, which will void any earlier vote. You can change your vote by:

 

   

voting again by telephone or over the internet prior to 11:59 p.m., Eastern Daylight Time, on May 5, 2020;

 

   

signing another proxy card with a later date and returning it to us prior to the meeting; or

 

   

voting again at the meeting by attending the meeting online and following the instructions at www.virtualshareholdermeeting.com/PSX2020.

If you hold your Phillips 66 stock in street name, you must contact your broker to obtain information regarding changing your voting instructions.

Who counts the votes?

We hired Broadridge Financial Solutions, Inc. to count the votes represented by proxies and cast by ballot, and appointed Jim Gaughan of Carl T. Hagberg and Associates to act as Inspector of Election.

Will my shares be voted if I don’t provide my proxy and don’t attend the Annual Meeting?

For shares held in your name, if you do not provide a proxy or vote your shares at the Annual Meeting, those shares will not be voted.

If you hold shares in street name, your broker may vote those shares for routine matters even if you do not provide the broker with voting instructions. Only the ratification of Ernst & Young LLP as our independent registered public accounting firm for fiscal year 2020, is considered to be a routine matter.

If you do not give your broker instructions on how to vote your shares, the broker will return the proxy card without voting on proposals that are non-routine. This is a broker non-vote. Without instructions from you, the broker may not vote on any proposals other than the ratification of Ernst & Young LLP as our independent registered public accounting firm for 2020.

How are votes counted?

For all proposals, you may vote “FOR,” “AGAINST,” or “ABSTAIN.” If you vote to “ABSTAIN” on the election of directors, it is not considered as a vote cast and, therefore, your vote will reduce the number, but not the percentage, of affirmative votes needed to elect the nominees.

 

 

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ABOUT THE ANNUAL MEETING

 

For the other proposals, if you vote to “ABSTAIN,” your shares are still considered as present and entitled to vote and, therefore, your abstention has the same effect as a vote “AGAINST.”

What if I return my proxy but don’t vote for some of the matters listed on my proxy card?

If you return a signed proxy card without indicating your vote, your shares will be voted “FOR” the director nominees listed on the card; the ratification of Ernst & Young LLP as the independent registered public accounting firm for Phillips 66 for fiscal year 2020; and the approval of the compensation of our Named Executive Officers. Your shares will be voted “AGAINST” the shareholder proposal.

Could other matters be decided at the Annual Meeting?

We are not aware of any other matters to be presented at the Annual Meeting. If any other matters are properly brought before the Annual Meeting, the persons named in your proxy will vote in accordance with their best judgment. Discretionary authority to vote on other matters is included in the proxy.

When will the Company announce the results of the vote?

Within four business days after the Annual Meeting, we will file a Current Report on Form 8-K announcing the results of the vote at the Annual Meeting.

How can I attend the Annual Meeting?

This year’s Annual Meeting will be a completely virtual meeting, which will be conducted via live webcast. You are entitled to participate in the meeting only if you were a holder of Phillips 66 common stock at the close of business on March 11, 2020 or if you hold a valid proxy.

You will be able to attend the Annual Meeting online and submit your questions during the meeting by visiting www.virtualshareholdermeeting.com/PSX2020. You also will be able to vote your shares electronically at the Annual Meeting (other than shares held through our employee benefit plans, which must be voted prior to the meeting).

To participate in the Annual Meeting, you will need the 16-digit control number included on your Notice of Internet Availability, on your proxy card or on the instructions that accompanied your proxy materials.

The meeting webcast will begin promptly at 9:00 a.m., Central Daylight Time. We encourage you to access the meeting prior to the start time. Online check-in will begin at 8:30 a.m., Central Daylight Time, and you should allow ample time for the check-in procedures.

How can I access the Phillips 66 proxy materials and annual report electronically?

This proxy statement, the accompanying proxy card and the Company’s 2019 Annual Report are being made available to the Company’s shareholders on the internet at www.proxyvote.com through the notice and access process. Most shareholders can elect to view future proxy statements and annual reports over the internet instead of receiving paper copies in the mail.

If you own Phillips 66 stock in your name, you can choose this option, and help conserve resources and save the cost of producing and mailing these documents, by checking the box for electronic delivery on your proxy card or by following the instructions provided when you vote by telephone or over the internet. If you hold your Phillips 66 stock through a bank, broker or other holder of record, please refer to the information provided by that entity for instructions on how to elect to view future proxy statements and annual reports over the internet.

If you choose to view future proxy statements and annual reports over the internet, you will receive a Notice of Internet Availability next year containing the internet address to use to access our proxy statement and annual report. Your choice will remain in effect unless you change your election following the receipt of a Notice of Internet Availability. You do not have to

 

 

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ABOUT THE ANNUAL MEETING

 

elect internet access each year. If you later change your mind and would like to receive paper copies of our proxy statements and annual reports, you can request both by phone at 800-579-1639, by email at sendmaterial@proxyvote.com, through the internet at www.proxyvote.com or by writing to Phillips 66, c/o Broadridge Financial Solutions, Inc., 51 Mercedes Way, Edgewood, NY 11717. You will need your 12-digit control number located on your Notice of Internet Availability to request a package. You will also be provided with the opportunity to receive a copy of the proxy statement and annual report in future mailings.

Will my vote be kept confidential?

The Board of Directors has a policy that shareholder proxies, ballots, and tabulations that identify shareholders are to be maintained in confidence. No such document will be available for examination, and the identity and vote of any shareholder will not be disclosed, except as necessary to meet legal requirements and allow the inspectors of election to certify the results of the shareholder vote. The policy also provides that inspectors of election must be independent and cannot be employees of the Company. Occasionally, shareholders provide written comments on their proxy card that may be forwarded to management.

What is the cost of this proxy solicitation?

The Board of Directors has sent you this proxy statement. Our directors, officers and employees may solicit proxies by mail, by email, by telephone or in person. Those persons will receive no additional compensation for any solicitation activities. We will request banking institutions, brokerage firms, custodians, trustees, nominees and fiduciaries to forward solicitation materials to the beneficial owners of common stock held of record by those entities, and we will, upon the request of those record holders, reimburse reasonable forwarding expenses. We will pay the costs of preparing, printing, assembling and mailing the proxy materials used in the solicitation of proxies. In addition, we have hired Alliance Advisors, LLC to assist us in soliciting proxies, which it may do by telephone or in person. We anticipate paying Alliance Advisors, LLC a fee of $15,000, plus expenses.

Why did my household receive a single set of proxy materials?

SEC rules permit us to deliver a single copy of an annual report and proxy statement to any household not participating in electronic proxy material delivery at which two or more shareholders reside, if we believe the shareholders are members of the same family. This benefits both you and the Company, as it eliminates duplicate mailings that shareholders living at the same address receive and conserves resources and reduces printing and mailing costs. This rule applies to any annual reports, proxy statements, proxy statements combined with a prospectus or information statements. Each shareholder will continue to receive a separate proxy card or voting instruction card.

Your household may have received a single set of proxy materials this year. If you prefer to receive your own copy now or in future years, please request a duplicate set by phone at 800-579-1639, through the internet at www.proxyvote.com, by email at sendmaterial@proxyvote.com, or by writing to Phillips 66, c/o Broadridge Financial Solutions, Inc., 51 Mercedes Way, Edgewood, NY 11717. Shareholders sharing the same address can request delivery of a single copy of these materials using the same methods described in the preceding sentence. If a broker or other nominee holds your shares, you may continue to receive some duplicate mailings. Certain brokers will eliminate duplicate account mailings by allowing shareholders to consent to such elimination, or through implied consent if a shareholder does not request continuation of duplicate mailings. Because not all brokers and nominees may offer shareholders the opportunity to request eliminating duplicate mailings, you may need to contact your broker or nominee directly to discontinue duplicate mailings to your household.

 

 

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SUBMISSION OF FUTURE SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS

Under SEC rules, if a shareholder wants us to include a proposal in our proxy statement and form of proxy for the 2021 Annual Meeting of Shareholders, our Corporate Secretary must receive the proposal at our principal executive offices by November 22, 2020. Any such proposal must comply with the requirements of Rule 14a-8 promulgated under the Exchange Act.

Under our By-Laws, and as SEC rules permit, shareholders must follow certain procedures to nominate a person for election as a director at an annual or special meeting, or to introduce an item of business at an annual meeting (other than a proposal submitted under Rule 14a-8). Under these procedures, shareholders must submit the proposed nominee or item of business by delivering a notice to the Corporate Secretary at the Company’s principal executive offices at the following address: Corporate Secretary, Phillips 66, 2331 CityWest Blvd., Houston, Texas 77042. We must receive notice as follows:

 

   

We must receive notice of a shareholder’s intention to introduce a nomination or proposed item of business for an annual meeting not less than 90 days nor more than 120 days before the first anniversary of the prior year’s meeting. Assuming that our 2020 Annual Meeting is held on schedule, we must receive notice pertaining to the 2021 Annual Meeting no earlier than January 6, 2021, and no later than February 5, 2021.

 

   

However, if we hold the annual meeting on a date that is not within 30 days before or after such anniversary date, and if our first public announcement of the date of such annual meeting is less than 100 days prior to the date of such meeting, we must receive the notice no later than 10 days after the public announcement of such meeting.

 

   

If we hold a special meeting to elect directors, we must receive a shareholder’s notice of intention to introduce a nomination no later than 10 days after the earlier of the date we first provide notice of the meeting to shareholders or announce it publicly.

As required by Article II of our By-Laws, a notice of a proposed nomination must include information about the shareholder and the nominee, as well as a written consent of the proposed nominee to serve if elected. A notice of a proposed item of business must include a description of and the reasons for bringing the proposed business to the meeting, any material interest of the shareholder in the business and certain other information about the shareholder. You can obtain a copy of our By-Laws by writing the Corporate Secretary at the address above, or via our website under the “Corporate Governance” caption.

 

 

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AVAILABLE INFORMATION

SEC rules require us to provide an annual report to shareholders who receive this proxy statement. Additional printed copies of the annual report to shareholders, as well as our Corporate Governance Guidelines, Code of Business Ethics and Conduct, charters for each of the committees of the Board of Directors and our Annual Report on Form 10-K for the year ended December 31, 2019, including the financial statements and the financial statement schedules, are available without charge to shareholders upon written request to Phillips 66, 411 S. Keeler, Bartlesville, Oklahoma, 74003 or via the internet at www.Phillips66.com. We will furnish the exhibits to our Annual Report on Form 10-K upon payment of our copying and mailing expenses.

 

 

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Appendix A

NON-GAAP FINANCIAL MEASURES

The discussion of our results in this proxy statement includes references to our “adjusted EBITDA”; after-tax ROCE as used in “absolute ROCE” and “relative ROCE”; and “adjusted controllable costs.” These measures are not measures of financial performance under U.S. generally accepted accounting principles (GAAP) and may not be defined and calculated by other companies using the same or similar terminology.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure because it adjusts net income to exclude depreciation and amortization, net interest expense and income taxes, as well as certain items of expense or income that management does not consider representative of our core operating performance. Management uses this measure as a factor in its assessment of performance for the purposes of compensation decisions. A reconciliation of adjusted EBITDA to net income, the most directly comparable GAAP financial measure, is set forth below.

 

YEAR ENDED DECEMBER 31, 2019

  

MILLIONS OF
DOLLARS

 

Net Income

   $ 3,377  

Plus:

  

Income tax expense

     801  

Net interest expense

     415  

Depreciation and amortization (D&A)

     1,341  

EBITDA

     5,934  

Adjustments:

  

Impairments

     853  

Impairments by equity affiliates

     47  

Pending claims and settlements

     (21

Lower-of-cost-or-market inventory adjustments

     65  

Asset dispositions

     (17

Proportional share of selected equity affiliates income taxes

     79  

Proportional share of selected equity affiliates net interest

     178  

Proportional share of selected equity affiliates D&A

     945  

EBITDA attributable to Phillips 66 noncontrolling interests

     (391

Certain tax impacts

     (90

Adjusted EBITDA

   $     7,582  

 

 

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Appendix A

NON-GAAP FINANCIAL MEASURES

 

ROCE

We believe after-tax ROCE is an important metric for evaluating the quality of capital allocation decisions, measuring portfolio value, and measuring the efficiency and profitability of capital investments. Management uses this measure as a factor in its assessment of performance for the purposes of compensation decisions. After-tax ROCE is a ratio, the numerator of which is adjusted earnings plus after-tax interest expense, and the denominator of which is average adjusted total equity plus total debt.

Our calculation of after-tax ROCE as used in the PSP, and its reconciliation to ROCE prepared using GAAP amounts, is set forth below.

 

           

ROCE

MILLIONS OF DOLLARS

(except as indicated)

 
   

Average

2017-2019

           2019     2018     2017  

Numerator

          

Net Income

      $        3,377       5,873       5,248  

After-tax interest expense

               362       398       285  

ROCE earnings - GAAP

         3,739       6,271       5,533  

Adjustments(1)

               581       (45     (2,837

ROCE earnings - as used in PSP

                     4,320       6,226       2,696  

Denominator

          

Average capital employed(2) - GAAP

         38,622       37,925       35,700  

In-process capital and other

               (2,292     (1,634     (2,293

Average capital employed - as used in PSP

            $        36,330       36,291       33,407  

ROCE (percent) - GAAP

    13.9        9.7