2018 Guide to Effective Proxies

2.17.9 Performance metrics | 449 6 TH EDITION | GUIDE TO EFFECTIVE PROXIES COMPENSATION DISCUSSION AND ANALYSIS TSRPerformanceFactor .TheTSRperformancefactor,whichdetermines50%ofthePSUpayout,willbecalculatedbased on the Company’s three-year rolling TSR versus the Company’sPeer Group (see page38). To adjustfor market volatility, the TSR calculations will be based on the average of the 20 trading days immediately before the start of the performance cycle and the last 20 trading days of the performance cycle. To reflect that several members of the Peer Group are primarily listed on foreign stock exchanges and report their financial results in different currencies, the Company will measure the TSRs for those companies by using the price performance of their publicly traded American Depository Receipts(“U.S.ADRs”).TheuseofU.S.ADRswillavoidtheneedtoadjusttheTSRsofnon-U.S.Peerstoreflectcurrency changes, and will increase transparency by enabling shareholders to directly observe such TSRs. The TSR performance factor for the 2018-2020 performance cycle will be calculated relative to the Peer Group in accordance with the following schedule,withlinearinterpolationforresultsbetweenthe25 th and85 th percentiles: PMITSRasaPercentileof PeerGroup PerformanceFactor BelowThreshold Below25 th percentile 0% Threshold 25 th percentile 50% Target 50 th percentile 100% Maximum 85 th percentileandabove 200% In addition to evaluating our relative TSR, if the Company’s absolute TSR for the performance cycle is zero or less, the CommitteewillcaptheTSRperformancefactorattargetorless.Thisapproachwouldlimitrewardsforaperformancecycle inwhichweperformedinlinewith,orbetterthan,thePeerGroup,butshareholdersdidnotrealizeapositivereturn. AdjustedCurrency-NeutralOperatingIncomeGrowthPerformanceFactor .Theadjustedoperatingincomegrowthperformance factorforthe2018-2020performancecycle,whichdetermines30%ofthePSUperformancefactor,willbethecompoundannual growth rate of the Company’s adjusted operating income (excluding currency and acquisitions) as shown below, with linear interpolationforresultsbetweenthepercentagesshown: Three-YearAdjustedOICAGR (excludingcurrencyandacquisitions) Result PerformanceFactor BelowThreshold <4% 0% Threshold 4% 50% Target 7.5% 100% Maximum 11% 200% Transformation Performance Factor. The Board, the Committee and management consider the success of the Company’s RRPstobevitaltotheCompany’slong-termsuccess.Accordingly,theCommitteehasestablishedspecificRRPshipment volume targets that will account for 20% of the PSU performance factor over the 2018-2020 cycle. The Committee established the targets at what it believes are appropriately ambitious levels that reflect the Board-approved three-year plan. PSUVestingMechanics. Attheendofthethree-yearperformancecycle,theCompany’sperformancefactorforeachofthe three metrics will be calculated and then weighted, resulting in an overall PSU performance factor from 0-200%. This percentage willbe appliedto the executive’s target PSU award to determine the number of shares of common stock to be issuedtotheexecutive. The Committee may adjust the PSU performance metrics if appropriate to reflect significant unplanned acquisitions or dispositions. 36• PMI2018ProxyStatement Total of 03 pages in section COMPENSATION DISCUSSION AND ANALYSIS In addition to certifying the IC performance rating, the Committee rated each executive officer’s personal performance during 2017. Individual ratings can range from 0% to 150%. To assure a disciplined, fair and equitable assessment, individualperformanceratingswerecalibratedtoreflecteachexecutive’scontributiontotheoverallresultsoftheCompany. Applicationofthefollowingformulathendeterminedthecashincentiveawardforeachnamedexecutiveofficerin2017. IncentiveCompensationAwardFormula IC Award = Base Salary X Individual Target% (variesby grade) X IC Performance Rating (0%-150%) X Individual Rating (0%-150%) 2018 Incentive Compensation (IC) Awards: For 2018, the Committee retained the six performance metrics used in 2017 – except it changed adjustedoperatingcompaniesincometo adjustedoperatingincome, consistentwithour financial reporting – and it set performance targets for those metrics. Each of the 2018 performance targets reflects the Company’s 2018 budget approved by the Board, with a performance factor of 100 equating to achieving budgeted results. The Committee also established key strategic initiatives to measure our performance. The full range of potential results is reflected in a pre-established matrix that will generate an overall IC performance rating for 2018. In addition to pre-establishing a formula for grading our results against the performance factors, the Committee pre-established the weightsforeachfactor. Long-Term Equity Awards: The Committee establishes the equity award target opportunity for our CEO and each NEO based on Company targets by salary grade, which are unchanged from the levels established in 2014, and the individual’s performance rating for this award. The Committee grants the individual 60% of the award opportunity in the form of performance-basedPSUsand40%intheformoftime-basedRSUs. EquityAwardGrantFormula Equity Award Target Opportunity (60%PSU& 40%RSU) = Base Salary X Individual Target% (variesby grade) X Individual Rating (0%-150%) PSU Performance Metrics : The Committee establishedthree metrics for determining the number of PSUs that willvest at the end of the 2018-2020 performance cycle. The first measure, which is weighted 50%, is the Company’s Total ShareholderReturn duringthe three-year cyclerelativeto the PeerGroupandonanabsolutebasis.Thesecondm asure, which is weighted 30%, is the Company’s currency-neutral compound annual adjusted operating income growth rate over the cycle, excluding acquisitions. The final measure, which is weighted 20%, is the Company’s performance gainst specific RRP volume measures for PMI’s transformation to RRPs during the final year of the performance cycle. The Committee believes that these performance measures are the most appropriate factors in terms of incentivizing senior management to produce results that enhance sustainable shareholder value and strengthen the Company over the long term. TheaggregateoftheweightedperformancefactorsforthethreemetricswilldeterminethepercentageofPSUsthatvestat the end of the three-year performance cycle. Each vested PSU entitles the participant to one share of common stock. An aggregate weighted PSU performance factor of 100 willresult in the targeted number of PSUsbeingvested. Theminimum percentageofPSUsthatcanvestiszero,whilethemaximumistwicethetargetednumber. PMI2018ProxyStatement •35 PHILIP MORRIS INTERNATIONAL, INC. PRUDENTIAL FINANCIAL, INC. COMPENSATION DISCUSSION AND ANALYSIS IC Performance Rating: The Committee employed the following pre-established matrix that assigned a rating of 100 correlating to attaining the targeted performance. Ratings for each factor can range from 0 to 150. The percentages indicated for net revenues, adjusted OCI, adjusted diluted EPS, and operating cash flow represent growth versus 2016 results.Actualresultsareshownintheblueboxes. 2017PerformanceVersusTarget Target Rating: 0 40 ... 60 71 75 79 80 90 100 110 120 130 132 140 150 Measure (a) MarketShare(Top30 OCI (b) Markets) <8 8 10 14 16 18 20 22 24 27 30 NetRevenues (c) <5.7% 5.7% 6.5% 7.3% 7.7% 8.1% 8.5% 8.9% 9.3% 9.4% 9.6% 9.9% AdjustedOCI (d) <6.0% 6.0% 6.9% 7.4% 7.8% 8.2% 8.7% 9.2% 9.7% 10.1% 10.5% 11.0% AdjustedDiluted EPS (e) <7.9% 7.9% 9.0% 9.8% 10.0% 10.1% 10.7% 11.2% 11.6% 12.2% 12.7% 13.2% 13.7% OperatingCashFlow (f) <(2.5)%(2.5)% (1.2)% 1.2% 2.5% 3.8% 4.9% 5.5% 6.2% 6.8% 8.0% StrategicInitiatives <Keyinitiativesmissed> 0-70 <Mostly/allaccomplished> 80-120 <Mostly/ llexceeded> 130-150 (a) Forareconciliationofnon-GAAPtothemostdirectlycomparableGAAPfinancialmeasuresseeExhibitBtothisproxystatement. (b) Numberoftop30OCImarketsinwhichsharewasgrowingorstable. (c) Excludingexcisetaxes,currencyandacquisitions. (d) Excludingcurrencyandacquisitions. (e) Excludingcurrency. (f) Netcashprovidedbyoperatingactivities,excludingcurrency. Our performance rating for each factor was weighted in accordance with the pre-established formula shown below to produceanoverallICperformanceratingof101,whichtheCommitteeroundeddownto100. 2017ICPerformanceRating Measure Performance Rating Weight WeightedPerformance Rating MarketShare(Top30OCIMarkets) 90 15% 13.50 NetRevenues 132 15% 19.80 AdjustedOCI 71 15% 10.65 AdjustedDilutedEPS 79 20% 15.80 OperatingCashFlow 120 20% 24.00 StrategicInitiatives 115 15% 17.25 Based on its performance against the pre-established targets, theCompany earned an IC performance rating for 2017 of: 2015 130 2017 100 2016 110 vs. vs. Basedonitsperformanceagainstthepre-establishedtargets,theCompanyearnedanICperformanceratingfor2017of:2017vs.2016vs.2015100110 130 34• PMI2018ProxyStatement CompensationDiscussionandAnalysis ThefigurebelowillustratestheportionsofourNEO’s2017targettotaldirectcompensationthataredrivenbythevarious performancemetricsunderourincentiveprograms*.Ourprogramsaredesignedtoaligntheinterestsofourexecutiveswiththe interestsofourshareholdersandtolinkthedriversofshort-termandlong-termvaluecreationwithourexecutivecompensation. Long-Term Incentive 54% RelativeROE (Annual Incentive) 12.67% EPS Growth 12.67% EPS vs. Guidance 12.67% Fixed Pay 8% BVUs (Long-Term Incentive) 11% Options 11% AbsoluteROE (Performance Shares/Units) 16% RelativeROE (Performance Shares/Units) 16% 22% ** of Total DirectCompensation is based on Book ValuePerShare Growth, including themandatory deferral of 30% ofAnnual IncentiveAwards 43% of TotalDirectCompensation is affected by Prudential's Stock Price Performance 25% of TotalDirectCompensation is tied to EPS performance, comprised of 2/3 ofAnnual IncentiveCompensation 45% of TotalDirect Compensation is directly linked to Returnon Equity (AbsoluteandRelative) Salary 8% Annual Incentive 38% *Theimageaboveisagraphicalrepresentationofthecomponentsanddriversoftotaldirectcompensation.Theillustrationrepresentstheaveragetarget compensationvaluesforourNEOs. **RepresentsBookValuePerformanceProgram(11%)and30%mandatorydeferralofAnnualIncentiveAwards(equatesto11.4%oftotaldirectcompensation). OurAnnualIncentiveProgramandLong-TermIncentiveProgramshareonecommonperformancemeasure:ourrelative return-on-equity(“ROE”),thatis,ourROEascomparedtotheROEoftheNorthAmericanLifeInsurancesubsetofourpeer group.TheCommitteebelievesthatourrelativeROEisacorevaluepropositionforourshareholdersand,accordingly,that relativeROEperformanceoverboththeshort-termandlong-termmeritsinclusionasaperformancemeasureineachofour incentiveprograms. ANNUAL COMPENSATION-RELATED RISK EVALUATION Wemonitortherisksassociatedwithourcompensationprogram,aswellasthecomponentsofourprogramandindividualexecutive compensationdecisions,onanongoingbasis.Ourcompensationriskassessmentoccursintwoparts:areviewoftheCompany’s compensationprogramsandareviewofcompensationdecisionsandpayments,withafocusonourseniorexecutives.InJanuary2018, ourChiefRiskOfficerpresentedtotheCommitteeareviewofPrudential’scompensationprograms,includingtheexecutivecompensation program,toassesstherisksarisingfromourcompensationpoliciesandpractices.TheCommitteeagreedwiththereview’sfindingsthat theseriskswerewithinourabilitytoeffectivelymonitorandmanageandthatthesecompensationprogramsdonotencourageunnecessary orexcessiverisk-takinganddonotcreaterisksthatarereasonablylikelytohaveamaterialadverseeffectontheCompany.Also,inJune 2017,ourChiefRiskOfficerpresentedastudyofthepayoutsunderthecompensationprograms.TheCommitteeagreedwiththestudy’s findingsthatourcompensationpractices,includingpayouts,adheretobestmarketpracticesanddonotencourageundueorexcessive risk-taking. 42 | NoticeofAnnualMeetingofShareholdersand2018ProxyStatement

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