Status Update

May 10, 2018

Slides

Welcome to ExxonMobil Shareholder Audio Webcast. This webcast is being recorded. Your host today will be Jeff Woodbury, Vice President, Investor Relations and Secretary and Randy Powers, Manager, Executive Compensation, Benefits and Policy. The format of today's call will include prepared remarks from Mr. Woodbury and Mr. Powers, followed by a question and answer session. Questions can only be submitted via the webcast. During the webcast, you will be able to submit questions using the box at the bottom of your screen labeled Ask a Question. Type your question in the text box and then click submit. You may send in a question at any time during the presentation. At this time, I will turn the webcast over to Mr. Woodbury. Please go ahead, sir. Thank you. Ladies and gentlemen, good morning, and welcome to today's shareholder webcast. As you heard over the next hour, Randy Powers and I will cover key highlights of our executive compensation program and briefly touch on the 4 shareholder proposals that are in the proxy. We realize that this is a very busy time of year for you, so we would like to thank you in advance for taking the time to participate in this meeting this morning. As in prior years, the webcast is part of our broad shareholder outreach effort. As shown by the agenda, we will leave time at the end of the prepared remarks for your questions. And in this regard, please feel free to submit your questions via the Internet at any time during the session. The next slide is our cautionary statement. And I'll note the compensation related terms and footnotes are included at the end of this presentation for your reference. Briefly moving to shareholder engagement on Slide 4, we believe ongoing engagement with our shareholders is vitally important and keeping our shareholders informed on relevant business matters is a very much priority for the company. Company connects with shareholders through a variety of venues. We engage directly throughout the year to address matters of interest and we strive to respond to all shareholder inquiries. Now, of course, the Annual Shareholders Meeting is a time when we interface with many individual and institutional shareholders. Our corporate website, company publications and webcasts such as this one are other ways that we communicate with you and provide important information about our company. I'll also note the Board also has long established procedures for shareholder communications directly with individual directors, including the presiding director, our board committee members or the non employee directors as a group. More information about the process for communicating directly with our Board members may be found in the proxy statement. Our key message here is that we welcome and we value input from all shareholders and this input is taken seriously by the company and it's considered in the company's deliberations. I'll now turn it over to Randy, who will review our executive compensation program. Thank you, Jeff. I'd like to start today's overview by reflecting on the strategic design priorities in our executive compensation program. These priorities underpin our goal of achieving sustainable growth and shareholder value. Specifically, our compensation program is designed to link executive pay to business performance and tie executive pay to the experience of long term shareholders. I will review how these two design priorities work, how our shareholder engagement process continues to result in improvements in our program and disclosure, how we paid our CEO in 2017, and I will finish up with a short review of our governance practices. Before I move into the details of our compensation program, I'd like to share with you an important feature that I will emphasize throughout the discussion this morning. Specifically, ExxonMobil's incentive program incorporates performance criteria at grant versus vest, which creates a strong linkage between performance and pay, while at the same time allowing for longer restriction periods versus alternative designs. By applying the performance criteria at Grant, we eliminate the constraint inherent in alternative programs that involve short term target setting. The constraint is that performance and restriction periods in these alternative programs must be shorter, 3 years or less in order to maintain line of sight to develop credible and achievable targets. These shorter performance and restriction periods do not align with the ExxonMobil business model. Conversely, applying the performance criteria to the determination of the number of shares at Grant eliminates this short term line of sight constraint and it allows for longer restriction periods and therefore true alignment with the experience of our long term shareholders. Given the significant performance hurdles designed into our program at Grant, which I'll describe in greater detail in a few slides, combined with restriction periods that are 3 times longer than most comparative companies, the ExxonMobil program has a very strong pay for performance basis. Let me turn to the next slide. This slide contains 3 key messages. 1st, our compensation program links executive pay to company performance. As the first bullet point indicates, in 2017, the performance share awards for our CEO and other NEOs were reduced. This is because our 10 year total shareholder return was not leading the average of industry peers even though we led in all other performance metrics. This decision is also consistent with the commitment the committee made to shareholders over the years. The process followed by the committee to make this decision will be explained in more detail in a moment. At the same time, company earnings increased in 2017, which resulted in a higher annual bonus versus 2016. Also, as the 4th bullet point indicates, over the last 10 year period, the sum of realized plus all unrealized compensation for our CEO position is at the 44th percentile of the compensation benchmark company CEOs. Now as indicated by the 2nd circle on this chart, executive pay is tied to long term shareholder experience. Because the majority of senior executive pay is delivered in performance shares with long restriction periods, CEO compensation is ultimately tied closely to share price at vest, which achieves alignment with the experience of long term shareholders. That is the program puts executives in the shoes of the long term shareholders. Regarding the 3rd circle, I'd like to reiterate a point that Jeff made earlier. Shareholder engagement is very important to us, including the feedback we received through our engagement process as well as this webcast. This year, we have made a number of changes to our program and disclosure based on that feedback, which I will outline as we go through this presentation. As indicated on the chart, the main items of shareholder feedback to which we responded in our disclosure and with our program were as follows: 1st, a request for more granularity regarding the time period over which business performance is measured, which we have delineated as 10 years in this year's disclosure. 2nd, a suggestion that we decouple the performance metrics of the short term bonus program from the long term performance share program, which the committee did in 2017. And 3rd, a request for more clarity on how the compensation committee determines the size of annual share grants. A detailed flowchart was included in the disclosure this year in the executive compensation overview on Page 2 and in the proxy on Page 30 for this purpose. And 4th, a suggestion that we provide more specificity regarding our relative company performance against peers. This information is disclosed on Page 1 of the executive compensation overview as well as Pages 67 of the executive compensation overview and Pages 29, 34 and 35 of the proxy. Let me turn to the next slide at this time. Performance against 5 pre established metrics over investment lead times of the business forms the basis for determining awards in the performance share program. As indicated on this slide, the confirmation in our disclosure and as discussed on the prior slide, the confirmation in our disclosure of 10 years is the time period the compensation committee uses to assess performance as well as more granular disclosure of relative company performance and key metrics are the direct result of shareholder feedback. Looking now at how we performed. Performance is measured against companies within the oil and gas industry of similar scale and complexity. And industry leadership over the preceding 10 year period is required to achieve a maximum performance share award. 10 years approximates the investment lead times of our business. We continue to lead on workforce safety performance for both our employees and contractors. Regarding return on average capital employed, ExxonMobil is a balanced and highly competitive portfolio of resources, assets and products resulting in industry leading return on capital over the business cycle. As mentioned, our 10 year TSR was not leading the average of industry peers and on this basis 2017 performance share awards were reduced for the CEO and named executive officers. Now you will also note that the compensation committee replaced the free cash flow metric with cash flow from operations and asset sales, which not only encourages cash generation, but is neutral to the uses of cash. While we still lead industry peers in both metrics, cash flow from operations and asset sales is a better metric for driving the right executive behaviors. Also in the past, we have used shareholder distributions yield as a metric. While we continue to lead in this metric, it was removed this year as the TSR metric already reflects the value of dividend growth and share buybacks over time. Additionally, distribution yield metrics could inappropriately benefit from reductions in share price and vice versa. We have disclosed our relative performance on these 2 eliminated metrics on Page 44 of our proxy, so that shareholders can still see our leading position on these metrics over the relevant time period of 10 years. These changes in the metrics do not in any way diminish our strong commitment to the dividend and dividend growth, which remain a very high priority for the company. And finally, we experienced strong performance in achieving our strategic objectives and our business results and project execution were also strong. Now as shown in the last two bullets on this chart, when assessing company performance, the compensation committee does not allow outstanding performance in one metric to cancel out poor performance in another. And if we determine that another executive would make a stronger contribution than a current executive officer, a succession plan is implemented and the incumbent is reassigned or separated. This reinforces the performance orientation of the program. And finally on this chart for more granular detail on relative company performance against each metric in our industry peers, please see our executive compensation overview on Pages 67 and the 2018 proxy on Pages 3435. Let's go to the next slide. On this slide, which is also in response to shareholder feedback, We are providing more granularity and clarity on how the compensation committee determines the size of annual performance share awards, which currently make up over 60% of CEO pay. Let me walk you through the sequence of the decision making process. First, maximum award levels are set by determining the competitive orientation of total pay against our compensation benchmark companies. 2nd, the compensation committee then assesses relative company performance against the 5 pre established performance metrics we discussed on the previous slide versus our peers in the industry. Then in steps 34, the committee grants performance shares based on that assessment of company performance and the market orientation of total compensation. So in effect, the committee looks to find the right balance between these two data points, whereby market orientation is key to the retention of senior executives and measuring business performance is key to maintaining alignment with shareholder priorities. For example, in the case of the 2017 performance share awards, the committee decided to put downward pressure on the future market orientation of the CEO position by reducing the number of shares at Grant as a result of TSR performance that was not leading the average of industry peers over the 10 year period through year end 2007. This process combined with stock price performance has resulted in a 44 percentile market orientation for our CEO position over the last 10 year period, the period that aligns as I indicated earlier with the investment lead times of our business. Let's go to the next slide. Finishing up our discussion of the performance share program, it is important not to underestimate the impact of long term restriction periods on the number of performance shares that our executives are required to hold through the business and commodity price cycles. Given the long term nature of the oil and gas business, it is crucial that executives are unable to monetize performance shares before significant downturns in the commodity cycle. With restriction periods of 5, 10 years and longer on performance shares, ExxonMobil executives will experience the full impact of the commodity price cycle similar to our long term shareholders. I've often said that the best way to explain our compensation program is to explain the alternative and how it would work in a particular business model, in this case the ExxonMobil Business Model. The example on this page appears in our executive compensation overview on Page 3 and 2,000 and then the 2018 proxy on Page 31, where it shows that an alternate formula based program with short term target setting and 3 year vesting would allow monetization of performance shares at a much faster pace than the ExxonMobil program. For example, in 2013, on the eve of a greater than 50% decline in crude price, only 8% of awards granted in the ExxonMobil program had vested versus an alternate program in which 58% would have vested, I. E. 7 times more than the ExxonMobil program, which would in effect would have removed a substantial portion of the commodity price risk for executives in the alternative program. The compensation committee simply feels or believes that that's not right given that our long term shareholders do not have that benefit. Through the design feature of long restriction periods, ExxonMobil executives must hold their shares to the commodity price cycle and must take a long term view in making business decisions. Furthermore, this helps hold executives accountable for project success many years after making initial project investment decisions. Let's go to the next slide. Now as we move to the annual bonus program, I'd like to reemphasize that we have now decoupled performance metrics for this program from the long term performance share program as requested by shareholders. This change to the program is in fact to repeat myself, it is in fact in response to shareholder feedback. Our annual bonus program ties executive compensation to annual business performance. Over the size of the annual bonus pool, which is determined by a formula, is deliberately kept as a small percentage of total compensation, so that we do not undermine the long term orientation priority of the overall program. This bonus program has been applied consistently in each of the last 16 years, including years in which earnings declined. To determine the bonus pool size, we multiply the percent change in annual earnings by 2 thirds. The result is the percent change in the bonus pool from the previous year. 2 thirds factor is intended to help recognize the realities of the commodity price swings in any given year in either direction. Because of the increase in earnings from 2016 to 2017, the overall bonus program for 2017 was increased. However, even with this program increase, this 2017 program is still nearly 50% lower than the 2012 bonus program. To determine individual bonus grants, we apply the formula shown on this slide as well as changes in the executives pay grade. In addition, the compensation committee can apply negative discretion for individual performance concerns. Half of the annual bonus is delivered at grant in cash, while the other half is delayed until cumulative earnings per share reach a certain specified level. The EPS threshold for paying out the deferred portion is $6.50 per share and that threshold was not reduced during this period of lower commodity prices. We want to be clear that this delay feature is unique to ExxonMobil and is considered secondary to the primary performance metric of annual earnings. The delay feature increases the performance orientation of the short term bonus program by putting half of the annual bonus at risk of forfeiture during the delay period. Let's turn to the next slide. I'd like to finish this section by highlighting this chart, which illustrates the scale of ExxonMobil and each business section business segment, excuse me, on the basis of 2017 revenue. All three business segments on a standalone basis would rank among other large companies based on revenue. The primary factor in determining compensation levels by the compensation committee is business and individual performance as we have discussed and is measured across the 5 pre established performance metrics previously covered. However, the committee also believes that the compensation program should recognize that our senior executives are responsible for managing a larger investment on behalf of shareholders relative to that of most other large publicly traded companies. And as such, the size and complexity of ExxonMobil are considered among several factors. Let's turn to the next slide. Let me now focus on CEO compensation. The design objectives and features that we have been discussing translated into a 36% decline in reported pay to our CEO position from 2016 to 2017 from $27,400,000 to $17,500,000 respectively. Some of that difference is the result of having a new incumbent in the role as our philosophy requires our executives to grow into their roles over time as they gain experience. However, as we discussed, there was also a decrease in the performance share award based on our relative 10 year TSR performance, which also contributed to the difference in year over year reported pay for our CEO position. These impacts more than offset the increase in the bonus program. As I said, the bonus program is intentionally a small proportion of compensation committee's continuing emphasis on long term compensation to match the nature of our business model and the experience of long term shareholders. Let's go to the next slide. Now looking at reported pay in isolation, is not the most complete way to assess compensation. For this reason, we've also disclosed CEO realized and unrealized pay, and we've received positive feedback from our shareholders on the additional perspective it provides. In fact, on average, our CEO's realized pay is 47% of reported pay for the 'eight to 'seventeen period. When you compare realized pay to our compensation benchmark companies over the same period, pay for the ExxonMobil CEO position is at the 20th percentile, which ranks 10 out of the 13 companies. Finally, when you add unrealized pay to this analysis, which is the unvested portion of compensation that has been previously granted and valued at 2017 year end stock prices of both ExxonMobil and the benchmark companies. ExxonMobil's CEO pay is at the 44th percentile of benchmark companies over the time period 'eight to 'seventeen and that ranks 8 out of the 13 companies. We believe that this in-depth analysis provides a more balanced and accurate perspective on how ExxonMobil's CEO compensation compares to that of our compensation benchmark companies. Let's go to the next slide. Our program is also underpinned by sound governance practices based on a desire to discourage inappropriate risk taking. Our long restriction periods on performance shares far exceed typical 3 year vesting that is common across most industries and are strongly integrated with our business model and the interest of our long term shareholders, which is particularly important in an industry with significant exposure to volatile commodity prices as I described earlier. The very nature of these long restriction periods by design result in required stock ownership that far exceeds typical stock ownership guidelines at our compensation benchmark companies. For example, our CEO has 36x base salary in performance shares compared to the typical 6x base salary guideline among our compensation benchmark companies. Shares earned in the performance share program are restricted even beyond retirement. And unvested shares remain at risk of forfeiture for resignation or detrimental activity as does the delayed portion of the annual bonus. To be clear, restrictions are not accelerated due to retirement. Additionally, we do not use employment contracts, severance agreements or change of control arrangements for the CEO and other named executive officers and we do not adjust annual bonus or stock grants to balance changes in the value of prior grants. Let's go to the next slide. In closing, I'd like to say that on behalf of your Board of Directors, we recognize your vote is important and we encourage you to carefully consider the information provided today and vote for the advisory vote to approve executive compensation. In summary, the compensation program links executive pay to long term company performance. 2nd, executive pay is tied to the long term shareholder experience through restriction periods that are 3 to 5 times that of competitors in companies and other industries. And third, shareholder feedback continues to result in program and disclosure improvements. With that, Jeff, I'd like to turn it back to you. Thank you, Randy. Next, I'll highlight our 2018 Energy and Carbon Summary, which was included in our proxy materials. We've had as we've talked to many of you, we've had substantial engagement with our shareholders on this important topic, both before and after release of the new report. This disclosure addresses feedback from our shareholders, including the 2017 shareholder proposal, which received majority support at last year's shareholder meeting, that being the report on impacts of climate change policies. The recent Energy and Carbon Summary includes enhancements that were in fact suggested by our shareholders as part of our engagements. These include things such as demand sensitivities, including impacts from electric vehicle and renewable energy penetration, potential 2 degree scenarios and what that could mean to our business. Importantly, how ExxonMobil has been positioning for a low carbon energy future and additional perspective on our pursuits in lower carbon energy technology, we would encourage you to review the webcast of an Energy and Carbon session that was held as part of our March analyst meeting. And that webcast is available for replay in the Investors section of our corporate website. Now I'd like to turn to the shareholder proposals. And once again, we do appreciate the opportunity to engage with our shareholders. Each year, the corporation does receive a number of suggestions from shareholders, some of which are in the form of proposals to be presented at the annual meeting. I'll note that we always seek a dialogue with the proponents and co filers and often we're able to reach alignment and exclude the proposal from the proxy. This year, we reached a resolution on nearly half of the shareholder proposals received. For the remainder of the proposals, we are generally in agreement on the objectives or the principles, but we differ on the approach. Nonetheless, we are firmly committed to maintaining constructive dialogue to work toward resolution. So as I just mentioned, many times ExxonMobil and its shareholders are able to agree on objectives, but occasionally we cannot align on approach to reach those objectives and the shareholder proposals that I will cover on the next four slides are examples of this. So first, regarding the independent Chairman proposal, we agree with the importance of a strong and independent Board dedicated to representing the interest of shareholders and providing oversight of company management, including the CEO. We simply do not agree that a combined Chairman and CEO position hinders this objective. All of our directors, including the presiding director, are independent except for the CEO. Likewise, our audit, board affairs, our compensation and our public issues committees are fully independent as shown in the proxy. The Board believes it should retain flexibility to select the best leadership structure that will best serve the long term interest of the shareholders and therefore recommends against this proposal. Next on the proposal regarding special shareholders meetings, it's important to emphasize that ExxonMobil shareholders currently have the right to call special shareholders meetings. This requires at least 10% of outstanding shares consistent with the proposal and a showing of good cause to disclose purpose and intent to all shareholders. We do not believe that this is an onerous requirement and it demonstrates legitimate purpose to all of our shareholders. Therefore, the Board recommends against this proposal. Turning now to the Board Diversity Matrix proposal. Let me say that we fully agree that diversity of experience, background, gender and ethnicity are critical to the composition and the confidence of our Board and that shareholders should know that our Board benefits from the perspectives that this diversity brings. However, we do not agree that a prescribed matrix format is imperative in conveying this information. Instead, we provide detailed biographies in the proxy in our website on each individual director as well as a summary of the collective competencies and diversity of the entire Board. Let me just say diversity remains a key emphasis for the Board as demonstrated by its current composition. Here again, the Board recommends a vote against this proposal. On the 4th and final shareholder proposal requesting a report on lobbying, we again agree with appropriate transparency and disclosure of lobbying policy, activities and expenditures, and we fully comply with both the spirit and letter of all federal and state laws on lobbying. Detailed information is available online, including key issues and the company's position thereon, as well as lobbying activities and expenditures. This includes costs incurred in trade association lobbying. For these reasons, the Board recommends against this proposal. So this concludes our prepared remarks. We'd now like to address some questions that have been submitted. So the first one, Randy, is related to executive compensation. I'll turn it over to you to respond. Maybe you can go ahead and state the question first and then I didn't see the question. Here it is. I'm sorry. Here's the question short. Thank you, Jeff. Well, better than peers the question is, well, better than peers, safety and operations integrity appear to be flattening and the gap is narrowing. How does the compensation committee assess improvements as well as relative performance. Safety performance is assessed against a petroleum industry benchmark that is available from the API, the American Petroleum Institute. The committee recognizes the historically strong safety performance of ExxonMobil against its benchmark and the annual results are factored into their company performance assessment. In addition to the API benchmark, the committee also includes operations integrity items as referenced in the question, including sustainability in the overall assessment of operations integrity. I think the in terms of the substance of the question, the other thing I want to emphasize that the committee also puts a strong emphasis on the objective to continuously improve in the area of safety, not just the relative performance. And the company continues to through new programs and initiatives continues to up our game and work toward continuous improvement as well as leading our competitors. Yes. Maybe I'll just add that it is clear that committee considers both relative and absolute performance. I mean currently, as you can see, our performance is well ahead of what the industry average is and the rate of improvement at such low levels is less. But the committee is very mindful of that improvement or should the case be a detriment. I mean, the committee would seriously consider the impacts on the compensation program if we had a major change in our trend of safety performance. 2017 was a very strong year. The committee considers the full range of key metrics that we think about on safety. And rest assured, there is a clear intent and objective that we are going to continually get better and really meet our fundamental mission that nobody gets hurt. And I believe that is the extent of the questions that we have. So we'll go ahead and close the webcast now. We do very much appreciate your engagement either directly or through this webcast. You've heard us say it before, and I'll say it again, that your vote is important to us, and we encourage you to review the proxy materials and reach out with your questions or suggestions. These are important matters, and we want to sufficiently address them. So once again, thank you for your time, and we look forward to the ongoing engagement with our shareholders.